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PARLIAMENTARY BUDGET OFFFICE PARLIAMENT OF KENYA

Title of the Policy Brief: A Comparative Study Differentials in Kenya A Report By:

on

Public-Private

Sector

Wage

Kenya Institute for Public Policy Research and Analysis (KIPPRA)

Source: Joash Kosiba (Fiscal Analyst) Parliamentary Budget Office (PBO) Telephone: +254 020 2133074 E-mail: pbo@parliament.go.ke Nairobi

Policy Brief on A Comparative Study on Public-Private Sector Wage Differentials in Kenya

1. Summary The Salaries and Renumeration Commission (SRC) was established by Article 230(1) of the Constitution of Kenya, 2010 and is mandated by Article 230(4)(a) to set and regularly review the renumerration and benefits of all State Officers and Aricle 230(4)(b) to advise the national and county governmnets on the renumeration of all other public offiecrs. To ensure fairness in the determination of salaries, the SRC, in articulating its constitutional mandate, contracted KIPPRA to conduct a study that would inform the Commission on the state and magnitude of publicprivate wage differentials in Kenya; the impact of such differentials on employee retention, morale and productivity in the public sector; and the effect of differentials on economic growth and the cost of labour in the economy. 2. Introduction Wage differential can be defined as different rates of pay for the same general type of work, the variations resulting from differences in working conditions, performance standards and
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types of workers. Wage differences both within the public service and between the public service and the private sector result in loss of productivity and lack of morale in the public sector, and increase the cost of labour generally in the economy. Wage differentials in favour of private sector may impose severe implications on overall productivity in the public sector and the capacity of the sector to make and implement policies and reforms. The following are some of implications of wage differential in between the public and private sector: (a) Massive brain drain: - It may lead to massive brain drain from the public sector to the private sector, thereby incapacitating the public sector in its mandate of making and implementing sound policies. (b) Low Morale:- Substantial wage differentials result in low morale among public sector workers, thereby leading to diminishing productivity and low output. (c) Agitation for higher pay:- In most cases, the perceived wage differentials have led to agitation among public workers for higher pay, as evidenced by strikes organized by various professionals. (d) High Incidences of Corruption:- In light of the increasing cost of living,

corruption could increase in the public sector if the wage differentials are not addressed. This means that public governance, both in terms of management of public time and resources will suffer.
There has been no economic studies undertaken to establish whether wage differentials exist in Kenya, the nature and size of their effects and how the differentials could be addressed without undermining macroeconomic stability. The objectives of the study were: (a) To examine the remuneration components and levels obtained in the public and private sectors. (b) To determine the magnitude of private-public wage disparities in Kenya by the different cadres of employment, taking experience and education into account. (c) To evaluate the extent of public staff turnover caused by wage differentials. (d) To examine whether wage differentials have introduced wage distortions in the public sector, the extent to which this has impacted on morale and productivity of the
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workers and its general impact on the economic growth and cost of labour in the Kenyan economy. (e) To make recommendations on the management of wages, including the levels of wage differentials among public and private sector workers. 3. Study Approaches

The public sector employment accounts for a significant portion of wage employment in developing countries (Terrell, 1993; Van der Gaag and Vijverberg, 1988). Therefore, the ability and capacity to attract and retain highly skilled personnel remains one of the necessary but not sufficient requirements to increase the ability of governments to produce and implement good policies, which include wage determination policy. One of the key issues of public debate and attention is public-private wage differentials that have made it difficult for the public sector to attract and retain talent. Wage determination processes within the two sectors are distinct and have the potential to give rise to differentials in pay rewards between comparable workers in the two sectors (Hyder and Reilly, 2005; Mizala, et al., 2011; Ramoni-Perazzi and Bellante, 2007; Skyt Nielsen and Rosholm, 2001; Van der Gaag and Vijverberg, 1988). While surveys from
According to economic survey reports; the total wage bill for the entire public service, in Kenya including military and local authorities, in absolute terms, increased from Ksh. 166 billion in 2004 to 291.5 billion in 2010/2011. Central government wage bill as percentage of GDP increased from 9.2 percent in 2007/8 to 11.7 percent in 2010/2011. The wage bill to GDP ratio is an indicator of the public service personnel cost share of the total economy. Public wage bill increased by 7.3 percent in 2005 and 11 percent in 2008, before declining by 7 percent in 2010. The changes in the public wage bill are, however, expected to be on an upward trend owing to the various reforms in government, including implementation of the Constitution of Kenya (2010) and the envisaged full implementation of devolution.

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The growth in the wage bill has remained high above growth in GDP, a situation of concern. It should follow that a rise in growth of GDP may be accompanied by a rise in growth of public wage bill and vice versa. A wage bill of 11.7 percent in 2011 is too high for an economy like Kenya, and should be reduced to a level of no more than 10 percent. An international comparison shows Malaysia (5%), Egypt (7.1%) and Mauritius (5%) have wage bill to GDP ratios below 10 percent. There is urgent need to stimulate economic growth and similarly reduce the wage bill to accommodate the process of devolution. It should be noted that the Kenyas economy has continued to recover from the economic downturn encountered in 2008 when the country recorded a low GDP growth rate of 1.7 percent down from 7.0 percent in 2007. In 2011, the economy grew at 4.3 percent up from 2.6 percent in 24 2009. High employment growth in the informal sector compensates for formal employment stagnation. General unemployment and underemployment and declining real wages are among the factors that have contributed to the numerous strikes witnessed among public sector employees in the recent past. For instance, in September 2012 there was a nation-wide university staff and primary and secondary school teachers strikes over remuneration, paralysing learning institutions across the country. Over 7,000 university lecturers and support staff were demanding higher salaries and allowances, owing to their perception that their salaries are too low and have not been reviewed in the last three years. The doctors in public health facilities were also on strike demanding a 400% salary increase, amongst other things. Despite the fact that the various professionals in the state office have been demanding salary increments by issuing strike threats, and in some cases unions have actually implemented the strikes, the government response has been adhoc, contributing to widening wage and remuneration differentials within the public sector. Similarly, non-factual evidence suggests that differentials between the public and private sector have widened, even though this context has not been studied.
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The current public wage bill to GDP ratio (11.7%) in Kenya is deemed too high and may become unsustainable if not contained. It is expected that the implementation of state offices for the county governments is likely to worsen the wage bill to GDP ratio, if the status quo remains. The study utilized both qualitative and quantitative method; using data from primary sources and administrative data from secondary sources which included the public sector wage data for the period 2010, various issues of governments annual economic surveys, PriceWaterHouseCoopers Limited report, and data from the National Human Resource Survey Report. Primary data was collected using two instruments, namely (i) a structured interview schedule administered on the heads of public and private sector institutions, and (ii) a structured questionnaire for individual public and private sector employees. 4. Key Results of the Study The findings of the study confirmed the existence of wage differences between the private and the public sectors in Kenya. The main counter-intuitive finding is that generally there is a wage differential premium in favour of the general public sector. However, when civil service basic salary is compared to private sector, the wage premium is in favour of private sector. On average, the magnitude of the differential is about Ksh. 7,150 per month for basic salary in favour of the private sector for individuals with similar education and years of experience. However, when allowances are included in the basic salary, the gap is in favour of civil service by a magnitude of Ksh. 7,032. The differential is in favour of State Corporations, constitutional offices and local government sub-sectors when both basis and gross wages are compared with those of the private sector. A comparison of public and private sector wages using broad occupation categories reveals major disparities. Legislators, administrators and managers enjoy a wage premium for all the public offices compared to the private sector. Similarly, professionals, technicians and associate professionals enjoy a wage premium for both basic salary and gross salary in public
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sector, excluding the civil service (of government ministries). The wage differential in the respective basic salary is an average of Ksh. 6,394 (professionals) and Ksh. 3,592 (technicians). The highest differential in favour of private sector is among technicians and associates when compared with the equivalent labour force in the local government (Ksh. 14,641). 5. Conclusion and Policy Actions This study has examined whether individuals working in the public sector suffer a wage penalty as commonly viewed. The study further investigated the effect of wage penalty on turnover in the public sector, economic growth and labour cost in the economy. The findings show existence of wage differences between the private and public sector in Kenya. The report proposes the following policy actions to be undertaken by government: (a) All public sector agencies should establish their objective measures of productivity against which to remunerate employees (b) Review the current wage structures in the public sector to address wage differentials (c) Increase basic pay for low wage earners and redesign the scope of allowances. The proportion of basic pay should be no less than 75-90 percent of the total salary. (d) Rationalize the remuneration levels at the higher levels of the wage distribution (e) Prepare and implement Public Sector pay policy and pay reform strategy for the Country (f) Public sector pay should be based on performance, qualifications and responsibility (g) Reform public sector career advancement (h) Strengthen the Integrated Payroll and Personnel Database (IPPD) system in the country by institutionalizing a sustainable human resource information system at county and national levels

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