Public Sector Shock – by Daniel Vaughan-Whitehead

Photo: informatique, Creative Commons 2.0

Fuelled by the economic crisis, budget deficits have plunged the public sector in Europe into an unprecedented wave of ‘adjustments’, leading to significant cuts in expenditure, jobs and wages.

Motivated by these massive and un-precedent adjustments, Daniel Vaughan-Whitehead and a group of high-level national experts have studied the ‘Public Sector Shock’ and produced a collective book. In doing so, they have explored and responded to a number of questions.

First, what different types of reforms have been carried out in the public sector?

Obviously our research shows a great diversity in public sector adjustments in Europe. Such differences might be explained by whether the individual country has already experienced significant public sector adjustments in the past, like the Netherlands or Sweden.

The scale of adjustment may also depend on whether it takes place in countries with large-scale public sector employment or not. One key factor in diversity also comes from the vulnerability to the economic crisis, and the budgetary situation of each country. The higher the debt is, the higher the public sector adjustments are. Such is the case in Greece, Ireland, Portugal and Spain. Countries that had consolidated earlier, like Sweden, were under less pressure to carry out adjustments. Similarly, those having implemented public sector adjustments earlier – such as Germany or the Netherlands- were not under so much pressure.

To what extent were these current adjustments guided by budgetary pressures?

Beyond this diversity our research also shows that the immediate and urgent pressure to make savings and reduce public expenditure in most European countries led most policy makers in Europe to favour quantitative adjustments, mainly cuts in expenditure, but also jobs and wages in the public sector. Employment security is thus no longer the norm in the public sector, where an increasing number of employees are hired under a temporary work contract. Wage cuts have beenimplemented in various ways, either through a basic wage freeze or cut in Estonia, Ireland, Latvia, Lithuania, Romania and many others, or through the abolition of bonuses previously enjoyed by public sector employees, such as the thirteenth month payment in Hungary and the thirteenth and fourteenth month payments in Greece. For the first time the minimum wage was cut by 22 percent. While in some cases these adjustments could efficiently complement structural reforms in the public sector (like better wage-fixing systems and more efficiency), they can also limit the effects of these institutional reforms and even halt them. This is what happened in Portugal and Romania.

What is the evidence so far on the impact of such adjustments?

The wages and working conditions of public sector employees are obviously being modified by the magnitude of the changes involved. In a number of countries, public sector employees have lost the wage premium they traditionally had over the private sector, which was empirically justified by higher education levels in the public sector. In Romania, for example, the premium over the private sector fell from 40 percent in 2010 to a penalty of -15 percent in 2011. What’s more, such dynamics may now lower skills and human capital levels in public sector occupations. In a number of European countries the public sector has stopped attracting the quantities of young qualified graduates which hitherto have been its lifeblood.

At the same time, uniform wage cuts along the wage scale have increased inequality and hit lower grades harder, thus plunging many workers below the poverty threshold. As a result, working poor in the public sector is a new phenomenon in Europe.  In Hungary, this concerns more than 50 % of public sector employees below secondary education level.

This has also led to increased migration of public sector employees. We document in our book the massive wave of emigration among doctors and nurses, but also teachers from Hungary, the Czech Republic and Poland. As protests spread in southern Europe – especially in Greece, Spain and Portugal – against austerity measures, more and more people hit by the crisis are also moving to northern countries in search of decent jobs. Public workers are not an exception, as shown by this story of a middle class woman from the Portuguese public administration who decided to live in Switzerland and work there as a cleaner in order to get a better salary and be able to cover all her expenditure: “From public sector worker in Portugal to cleaner in Switzerland“.

Gender inequality has also been fuelled by public sector adjustments, as a result of the traditional importance of the public sector for women’s employment, access to higher positions and more flexible time, work and family arrangements.

Job losses in the public sector have also contributed to increasing the workload of the remaining public sector employees and their working hours, while payment rates for overtime have been reduced or even frozen in a number of countries. The simultaneous reduction in expenditure has also reduced the human and material resources available for carrying out services, which generally remain the same or even increase – as in health and education.

At least, has there been sufficient communication around public sector adjustments?

The neglect of social dialogue in the reform process and the abolition of a number of provisions that encouraged collective bargaining have contributed to lowering working conditions in the public sector. The sector has also lost its role as a model employer with job security, collective bargaining, employees’ participation in decision-making, good pay and working conditions, instead converging with private sector practices. These changes and the way they have been implemented have triggered a wave of demonstrations and strikes by public sector employees – often joined by other social groups – throughout Europe. Beyond the immediate economic costs of such protests, the worsening social climate in the public sector must be seen as ringing an alarm bell concerning the future.

Will the quality of public services be lowered in the future?

All these changes – especially when resulting in a greater mismatch between increasing demand and falling supply – cannot be neutral for the future quality of public services. From individual case studies we provide evidence in education and health care – on such simple indicators as a lower ratio of teachers/students in classes and the waiting lists for admission to hospitals – but also in public administration.

While the public sector reform process continues in Europe it will be important to continue such monitoring, especially since it will be possible to evaluate the effects of the current reforms in more detail only as more data become available in the course of time. A number of conditions can already be highlighted, however. First in terms of method, the evidence provided highlights the need to use social dialogue as a reform tool and to involve workers’ representatives in this process more closely. Second, in terms of timing, it also points to the need to consider more gradual and progressive adjustments rather than carrying out all employment and wage adjustments over one or two years. Third, in terms of the nature of the adjustments, this work points to the need to promote a more balanced combination between quantitative adjustments and structural reforms in the public sector, but also a better mix between fiscal and other important considerations, such as equality, social dialogue, employment prospects, working conditions and the future efficiency and quality of public services. Only under these conditions could public services in Europe continue to provide an important source of both social cohesion and economic growth.

Public Sector Shock – The impact of policy retrenchment in Europe (D. Vaughan-Whitehead (Ed.), Edward Elgar-ILO), will be published in 2013. A conference on this topic was organized in Brussels on 21-22 June, 2012, with participation of government, employer and worker representatives from 30 European countries.

Daniel Vaughan-Whitehead is responsible for wage and working conditions at the International Labour Office (ILO); he is also Professor at Sciences-Po in Paris, and founder and co-Chair of the Fair Wage Network.

See also ‘Global labour trends: Do social policy developments come from outside Europe?‘ by the same author.

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