Myth Buster: The public sector did NOT bear the cost of recession in Romania

Last week the president of Romania came out asking the parliament to increase public salaries to the 2010 level. He saw it as their duty to do it.  A week later the ruling coalition, supporting the president, decided to go ahead with the increase. Then the prime minister, “independent” supported by the ruling coalition, endorsed it. As of today on June 1st this year public sector wages will return to their 2010 level.

 

I made my view clear on this subject last week, albeit in Romanian. However, there is too much BS going around in support of this increase not to come back to the issue.  I am very bothered by one particular reason put forward by the President, Prime-minister and the ruling coalition, to justify the wage increase: the public sector has “paid” the bill from the Romanian recession.

NOT TRUE.

 

This statement is simply not true.
Let’s start with an overall view at the labor market. In 2001 the economy was employing 4.4 million people. Today this number has dropped to 4.2 million. In 10 years Romania did not manage to add new jobs instead it killed 200 thousand jobs.(more on this later)

Graph 1: Total employees in the economy (thousands)

Now, let’s look at how these employees were distributed in the economy. At the end of 2004 the public sector was employing a little over 800 thousand people while the private sector 3.6 million people. Then, the “golden age for Romania” started with average real economic growth around 5%. At the end of 2008 Romanian economy was employing 4.8 million people, 400 thousand jobs were created between 2005 and 2008. But here comes the kicker: none in the private sector.  At the end of 2008 the public sector was employing 1.4 million people, 600 thousand more than in 2004, while the private sector was employing 3.4 million people, 200 thousand less than in 2004. The economic boom was entirely “confiscated” by the public sector.

Graph 2: Public sector vs. private sector employees

And now let’s move to the 2009-2011 period, the recessionary growth period. In 2011 the number of public employees is 130 000 less than in 2008 at 1.27 million. In the same time by 2011 the private sector has lost 470 thousand people relative to 2009, four times as much as the public sector.

Graph 3: Percentage of public and private sector employees of total employees

 

To conclude, over the business cycle the public sector added 400 thousand jobs while the private sector lost 670 thousand jobs. This means that the now the public sector employees represent 30% of the work force relative to 18% in 2004.

 

It should be clear now that the public sector benefited from both boom and recession while the private sector has been shrinking. Does the wage increase for the public sector seem fair anymore Mr. Prime Minister?

9 thoughts on “Myth Buster: The public sector did NOT bear the cost of recession in Romania

  1. There are 3 “human nature” principles:
    1. Humans are 2 times more motivated not to lose something than to gain the same thing. They fear 2 times losing something than gaining an equivalent thing.
    2. If someone becomes comfortable with a level of success for long enough, his self concept completely adapts to the new level of success. This happens regardless if he truly made his success or not. His mind makes him believe that he deserves all the good results.
    3. People tend to think too much short term. They do not think in terms of years.

    In this situation, the public sector increased substantially during this period. Millions of Romanians consumed like there was no tomorrow. They thought that it will last forever, that it was their own merit.

    When Basescu cut their salaries, they were really negative and critical – not realizing that they probably didn’t deserve even half of their previous salary.

    The private sector jobs died in obscurity. No one talked with these people. These people didn’t come to the national television to cry. They emigrated or joined the black market and adapted to the new situation.

    ***

    Imo, working only in the public sector can be a really bad experience. That’s because the wage variations don’t really match what happens actually in the economy. You don’t see both the ups and downs. So it’s pretty hard to develop an accurate assessment of what’s going on actually.

  2. A very good demonstration of what we already knew.
    But i think there’s more.
    Why would a country like Romania need over 1.2 million jobs
    in the public sector ?!!!!
    I mean unfortunately i don’t know how they are distributed but to me it looks like a very big number anyway.
    Don’t you think 500.000 would be enough ?
    And it doesn’t have to be fair because it wasn’t fair in the first place when they got in.
    Most of them dit not get that job for being very good professionals but for having the right eye color or something like this.

    1. @alex
      I do not think that we should stick to a number. First we need to reverse the situation and allow the private sector to create jobs. It is ludicrous that public sector’s share of total employment almost doubled in less than 10 years while we speak of fiscal consolidation and public sector reform. At this pace in 10 yrs the public sector will employ half the workers in Romania.

      But there is another more structural issue that no one is touching: we have less employee in the economy today than in 2001. Are we more productive?. I doubt that. Our economy is not growing is shrinking, and most of our products are imported, that is why we do not need to employ more people.

      Unfortunately, the “opposition” cannot come out and say what I am saying because they want to be elected also.

  3. There is no ethics component in the decision to increase public salaries. It is just a matter of boosting consumption in an election dominated year. If this was not 2012, the social contributions would have been the most probable decision taken.

    And if we are to leave personal grievance asside, if they would have really wanted to make an impact on the economy, only salaries bellow a certain threshold should have been increased. A public worker with a 670 RON net revenue (and there are a lot of them with such a salary) will most likely spend the aditional ~100 RON it will receive from this increase. A public worker with a salary of 3000 RON will not spend the entire amount, thus the impact on the real economy will be smaller. But again, this is not an ethical, nor a 100% economic decision, but more of a government aproved electoral bribe to public workers.

    The worst part in all this story is that most of the people in this country cannot differenciate between usefull and useless public workers. We like firefighters, teachers and people who care for abandoned children. We don’t like the people drinking coffee at the local tax office, who could easily be replaced by computers. And yet we place them in the same basket case and complain that there are too manny of them. And when we decide to cut their numbers down, guess what? The ones we need get fired and show up in fancy graphs and charts as economies made to the public budget.

    1. @ddr
      What you are talking about is a TRUE reform of the public sector. We have not seen this yet. If you take a look at the numbers you will see that personnel expenditures have increased for the state budget and decrease only for state owned companies that used own funds.

      1. To be even more precise, the difference comes from personnel expenditure at local administrations. Even though this seems odd, in some local administrations the only entity hiring people during 2009 – 2011 was the government. And not hospitals or public works agencies, but mayor’s hall, prefecture administration and so on, because they have personnel budgets which are not under the direct scrutiny of the IMF. The exact numbers are unfortunatelly not available to us since INS bundles this information when it provides its reports.

  4. TRUE reform of the public sector is kind of impossible now because there are at least two things missing:
    -a political party/organization or at least a political leader who would understand the real need and would also want to do it because that’s not gonna be easy
    -and someone to vote for that reform.

    When Emil Boc cabinet said it’s going to cut public sector jobs i did not belived it would really do it because it was unthinkable at that time.
    Unfortunately, looking at what happens now when the President always says on tv shows: oh, don’t worry to much about Romania’s economy, now we are a lot better than before and we’re pretty much fine, nothing more to do; and the P.M. that recently said he wants to cut taxes “when it would be possible” ;
    i think real reforms will be again unthinkable for some time.
    This was a start, now they give it away because elections are comming. Looks like romanian football.

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