Higher government wages may reduce corruption

Jakob de Haan, Erik Dietzenbacher, Văn Hà Le 16 June 2013

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Defined as the abuse of public office for private gain, corruption is found to have bad effects on economic development, weaken the institutional system and create cynicism in the political life (Rose-Ackerman 2004). Quite a few economists have been troubled with the question of whether government wages should be used as a means to reduce the ‘gains’ from corrupt activities, and thus, breaking the vicious circle of high corruption and economic stagnation. However, there is very little agreement on the actual impact of government wages on corruption.

The theory

Theoretical studies such as Van Rijckeghem and Weder (2001) and UlHaque and Sahay (1996), among others, argue that higher government wages reduce corruption. Higher government wages will raise the cost of job loss due to corruption and make government employees feel that they are being ‘fairly’ treated, both of which decrease the incentive to be corrupt. Furthermore, higher government wages attract better employees to the government and prevent qualified government workers moving to the private sector, thus improving the government’s ability to control corruption. At the same time, studies such as Besley and McLaren (1993) and Macchiavello (2008) suggest that higher government wages should not be used to combat corruption in poor countries because it is very costly to do so or because selfish, corruptible agents will crowd out highly motivated employees.

The empirics

Empirical research on this issue also yields mixed results. Van Rijckeghem and Weder (2001) report that countries paying higher government wages are less corrupted, but other studies find that such a negative relationship is either not robust or does not exist. Treisman (2007) suggests that a lack of reliable data is the main reason for this controversy. Empirical evidence on this issue has thus far relied on small datasets from the late 1980s or 1990s. Most studies use an indicator of relative government wages that is based on macro data. For instance, average government wages are imputed by dividing the total government wage bill by total government employment, and a relative government wage indicator is defined as the ratio of government wages to the average wages in the manufacturing sector or the level of GDP per capita. Such an indicator aims at capturing relative wages of government employees while avoiding the difficulty of comparing monetary wages across countries.

What’s new?

In new research (Le et al. 2013) we investigate the issue using a new worldwide micro-based database of wages. The sources of this database are household micro surveys, which can provide unbiased estimates for relative government wages. The database covers a large number of developing countries for which data on government wages at the macro level are often not available.

Using this new database, we construct a relative government wage indicator as the ratio of government wages to the average wages in the manufacturing sector and estimate the relationship between corruption and this indicator, controlling for other variables that previous studies found to be related to corruption. When the impact of government wages on corruption is assumed to be linear, as previous studies do, we find that one unit increase in the wage indicator, which is equivalent to raising government wages by the average of wages in manufacturing reduces corruption, measured on a scale from zero to six, by only 0.35. This result suggests that using government wages to combat corruption is rather costly, similar to the conclusion by Van Rijckeghem and Weder (2001).

However, the nature of corruption might be different at different levels of economic development. In low-income countries, corruption often consists of petty corruption, which involves tiny amounts of money, appears in a rampant manner and is easy to detect. Road bribery in India, where traffic policemen openly collect bribes from passing trucks (Bardhan 2006), or the extra payment to obtain a birth certificate in Cambodia (Feinberg 2009) are typical examples. In high-income countries, petty corruption is less common because wages are above subsistence level. Corruption in these countries, if present, involves more secret deals, brings about larger payoffs, and is more difficult to detect. Government wages will arguably be less effective to combat the latter form of corruption.

By including an interaction term between government wages and economic development, we allow the impact of government wages on corruption to vary with the level of economic development. Controlling for a large number of other determinants of corruption and country specific effects (which in our view are important because corruption changes very slowly and appears to be country specific), we find that the estimated coefficient of government wages is negative but the coefficient of the interaction term is positive. This suggests that the role of government wages in reducing corruption decreases as countries become richer.

Figure 1 shows the estimated conditional marginal impact of government wages on corruption. The vertical axis presents the change of corruption when relative government wages change by one unit. The horizontal axis represents the level of GDP per capita in 2012 purchasing power parity prices (measured in natural logs). The solid line is the estimated marginal impact while the dashed curves are the upper and lower bounds of the 95% confidence interval. The figure shows that government wages have a significant negative impact on corruption when income is $8,842 or less. Above this income level, no significant relationship can be established. As shown by the figure, the impact of government wages on corruption is moderated by the level of income per capita. The poorer a country is, the stronger the negative impact of higher government wages on corruption is.

Figure 1. The marginal impact of government wages on corruption

Policy implications

Our study offers some important policy implications for controlling corruption. Poor countries should offer their government employees sufficiently high wages to reduce corruption, thus creating favourable conditions for economic development. However, as the economy grows and living standards improve, it is important to focus on other measures affecting corruption such as improving the rule of law, transparency, and better mechanisms for detecting and punishing corruption.

References

Bardhan, P (2006), “The economist's approach to the problem of corruption”, World Development 34, 341-348.

Besley, T, Mclaren, J (1993), “Taxes and bribery: The role of wage incentives”, Economic Journal 103, 119-141.

Feinberg, G (2009), The epidemic of petit corruption in contemporary Cambodia: Causes, consequences and solutions”, Crime Prevention and Community Safety 11, 277-296.

Le, V H, de Haan, J, Dietzenbacher, E (2013), “Do higher government wages reduce corruption? Evidence from a novel dataset”, CESifo Working Paper No. 4254,

Macchiavello, R (2008), “Public sector motivation and development failures”, Journal of Development Economics 86, 201-213.

Rose-Ackerman, S (2004), "Corruption. The Encyclopedia of Public Choice” in Charles K Rowley and Friedrich Schneider (eds.), Kluwer Academic Publishers, 67-76.

Treisman, D (2007), “What have we learned about the causes of corruption from ten years of cross-national empirical research?”, Annual Review of Political Science 10, 211-244.

Ulhaque, N, Sahay, R (1996), “Do government wage cuts close budget deficits? Costs of corruption”, IMF Staff Papers 43, 754-778.

Van Rijckeghem, C, Weder, B (2001), “Bureaucratic corruption and the rate of temptation: Do wages in the civil service affect corruption, and by how much?”, Journal of Development Economics 65, 307-331.

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Topics:  Politics and economics

Tags:  Corruption

Head of Research, De Nederlandsche Bank (DNB); Professor of Political Economy, University of Groningen

Professor in the Faculty of Economics and Business, University of Groningen

PhD student at the University of Groningen