Public administration labor cost forecasting and wage distribution. An exploratory analysis

Journal of the Academy of Business and Economics, Jan, 2004 by Francesco Felici, Tiziana Bartolucci, Giuseppe Venanzoni

ABSTRACT

The Maastricht Treaty constraints imply a continuous control of the Public Administration (PA) deficit: so there has been an increasing demand for an efficient and effective public expenditure management, especially regarding PA wages (about 12% of Italy's GDP). The Ministry of Economy and Finances (MEF). PA Model forecasts wage dynamics on the basis of economic and normative hypotheses. The labor cost higher increments correspond to the wage settlement years, there is however a background dynamic pattern--more evident in the no wage settlement years--arising from decentralized wage bargaining, personnel seniority, promotions and professional qualifications changes. A homogeneous balanced panel extracted from the PA personnel yearly survey allows an in-depth study on wage distribution levels and dynamics. An important feature of such a study is the information synthesis on each observation average wage by two index numbers--a quantity index of Laspeyres type and a price or wage index of Paasche type--so defined as to jointly measure levels and dynamics of two observation-specific effects. a share, based on the personnel qualifications structure (weighed with a given average national wage), a shift, based on average wages dynamic (weighed with observation-specific personnel qualifications structure).

1. INTRODUCTION

Since the Maastricht Treaty constraints imply a continuous control of the Public Administration (PA) deficit, there has been an increasing demand for an efficient and effective public expenditure management, especially regarding PA wages (about 12% of the GDP). The PA model developed at the Ragioneria Generale dello Stato (RGS; Ministero dell'Economia e Finanze) simulates wage dynamics on the basis of the last realized levels and a set of economic and normative hypotheses (expected inflation, wage settlements, etc.; Venanzoni e Zaghini, 1992). The narrow model dimensions do not permit subnational forecasts; local wage dynamics, not always checked by the Central Government, may however vary over time and influence the General public deficit, which is a Central Government's competence. Moreover the model is mainly based on institutional factors and relations; it is therefore difficult to identify the effects of systematic forecasting errors by model's past performance. The likely clash between centralized constraints and decentralized dynamics is doomed to grow as a consequence of fiscal federalism and public functions decentralization.

Such features are especially relevant for the National Health Service (NHS), due to its intrinsic institutional complexity (Venanzoni, 1994) and the sub-national segmentation of the operational units (local health authorities, hospitals, etc.). The importance of the NHS labor costs (19% of the total Public Sector and over 2,2% of the GDP) requires monitoring and forecasting models, in order to process the mass of accounting and administrative informations brought forth by the system itself.

The NHS labor cost higher increments correspond to the wage settlement years: 1990-91, 1996-97, 2000-01 (Fig. 1). It is however possible to observe a background dynamic pattern--more evident in the years with no wage settlement effects (e.g. 1992-95)--which arises from various sources: decentralized wage bargaining, personnel seniority and promotions, professional qualifications changes, etc. Such factors affect average wages in a locally differentiated way: they can only be identified by a disaggregated data analysis. However, in order to be useful for the national monitoring and forecasting purposes, such analysis results have to be synthesized by means of a limited number of indicators. This approach can be applied to the RGS data set SICO (SIstema COnoscitivo del personale dipendente delle Amministrazioni Pubbliche) which collects from 1997 data on employees, monthly installments and wages paid in each public board. This set contains very disaggregated NHS data (more than 100 different contractual entries for roughly 80 different professional qualifications), although not for individual employees; so a true analysis of the wages size distribution is not possible, unlike the case of the PA departments (e.g. Ministries) for which SICO collects individual informations.

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2. PANEL CONSTRUCTION AND ANALYSIS

A homogeneous balanced panel (323 units over the period 1998-2000, for 969 observations overall) can be extracted from the SICO data set (344 autonomous boards in 1997, 324 in 2000); gross data errors have been corrected in a preliminary analysis, so that the ultimate panel allows us to make a reliable in-depth study. The boards high turn-over--particularly marked in Lombardia due to the NHS reorganization--and their final migration from financial to economic accounting, suggested us to discard 1997 data. Such a short time span restricts the panel analysis; it will be next extended with the 2001-02 data. The survey has no data processing quality control. The preliminary analysis--carried on with a view to the possible administrative and collection errors--found 20 outliers (out of 323 boards) with anomalous standard deviations of monthly per-capita mean wages (total wages divided by total installments); 16 boards have subsequently rectified their original data. To such effect, let's observe the three 1998-2000 non parametric interpolations (histogram with Epanechnikov kernel; Silverman, 1986) of the logarithm of the average per-capita wage (Fig. 2). The distribution, shaped like the normal one (corresponding to a lognormal distribution of the original variable), is rather stable over the three years, apart from a natural translation to the right. However, one could observe a sensible asymmetry, non random irregularities in the tails and a possible multimodality, which suggests the presence of mixtures of distributions.