Do governments pay efficiency wages? Evidence from a selection of countries

The issue of how much to pay government employees without risking a drop in their public service motivation (PSM) levels is a complex one. On one hand, it is argued that government employees are generally less motivated by high wages than their private sector counterparts. Governments too are constrained in their ability to offer high wages to their employees. There is also the proposition that high wages, particularly performance-based wages, can reduce or ‘crowd out’ intrinsic motivation. On the other hand, it is common knowledge that most people do not seek employment without expecting some sort of remuneration for their effort. Wages can satisfy both lower-order and higher-order needs, and can be used to indicate achievement and recognition for one’s effort. This paper argues for the significance of ‘PSM-adjusted wage’, the level which ensures high effort without undermining PSM levels in the public sector. It draws upon the efficiency wage theory and the PSM literature to construct a model for PSM-adjusted wage, which is then piloted on the 2005 ISSP dataset of fifteen countries that include USA, Great Britain, and Australia.