The Ninety-Five Reforms

It seems on first inspection that the trade unions miscalculated by announcing their concessions on public sector reform before the pay cuts were certain not to have been instituted. By going public, they cannot avoid either complying or suffering serious public disdain.

The ‘concessions’ would have the effect of hugely improving the quality of public service provided to Irish tax-payers, and create incentives to eliminate the culture of mediocrity which has subsisted for so long.

If Taoiseach Brian Cowen miscalculated the manner in which to reveal the inevitability of the public pay cuts, we may yet not see the public sector refrom promised during negotiations. Indeed, it is looking increasingly likely that this will be the outcome. And not getting these reforms through will have a severely negative effect on our quality of life.

The government’s response can likely be explained by risk-aversion. In the current environment, they can’t afford to slip up and saddle the economy with spiraling costs in years to come. Thus, although public sector reform may have delivered substantial savings – enough apparently to close the budget deficit which necessitated the announced pay cuts, some trade unionists facetiously claim – there is substantial risk and uncertainty associated with the degree of saving and efficiency gains. Pay cuts, meanwhile, provide certain savings despite the other certain costs.

Let’s analyse the exact nature of these concessions. The most important reform to my mind relates to promotions, by making them competitive and merit-based rather than due to seniority as previous. Although seemingly innocuous, the current (thoroughly disgraceful) policy has far-reaching effects on the culture in the civil service.

Why do civil servants protect this practice so fervently? Their long-held fondness of seniority-based promotions is probably due to the structure of public pensions, and the degree of representativeness in trade unions. Because your pension is related to your final pay level rather than pay levels over your entire career, civil servants have strong incentives to collude and not compete with each other. In this way, they can maximise their pension with limited effort.

Everyone gets the most overly-generous, guaranteed public pension possible through such collusion. Merit-based promotions would thoroughly upset such an arrangement, and pension reform would threaten entrenched groups of older civil servants. Older workers are those most likely to control trade unions, and they have a lot to lose from revision of either practice.

What are these costs of this promotion policy? They manifest in the uncompetitive, inefficient culture within the civil service. Because promotions are not merit-based, workers don’t have much incentive to prove themselves or try to stand out. Ambition is stifled at an early stage in the individual’s career.

Obviously, there are still talented people who will work well regardless. Many workers are also imported into the civil service through recruitment at a high level, thus bypassing such restrictions. But to the extent that excellence in work requires real effort, this mostly goes unrewarded and will thus be under-produced. The rational response on the individual level is to not go the extra mile, to not do any work over the weekend, to not stay late after work, and so on.

If these organisations were competing in the private market, these practices could not subsist. Either workers would lose their jobs, reform work practices, or the firm would go out of business. But the current public environment manages to avoid all such undesirable outcomes for lazy public workers. They cannot lose their jobs, although public pay levels aren’t lower than private equivalents to reflect this security.

Instead, we are left with public services that either operate under scandalous administration costs (health-care being the primary examples here) or provide low-quality, inefficient service to the consumer at the front-line (any government office being the primary example here).

But is it any wonder that public services are this bad? They have no competitors, and (until recently) enough control over politicians to weather any complaints from tax-payers. Senior civil servants themselves have strong incentives to collude over promotions. That leaves the average public worker no incentive whatsoever to excel in his field. And as we all know, there’s no arguing with incentives.

© The Free Marketeer 2009