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”Strategic Hiring”: How The Scramble For Government Funds Results In An Overstaffed Public Sector

Competition for money among government-funded agencies may lead to excessive public sector employment, according to new research by economists Dr Sebastian Kessing and Professor Kai Konrad, published in the January 2008 issue of The Economic Journal. The phenomenon of ”strategic hiring”, which is driven by competition for funds, may explain why the public sector is typically more labourintensive than the private sector.

Public bodies – such as universities, public theatres and opera houses, and regional branches of public services – compete with each other for shares of the public budget. Kessing and Konrad argue that the chief administrators of these organisations hire employees strategically to improve their position in future budget negotiations.

By employing excess staff in advance of budget negotiations, managers can argue for a higher share of the budget. If every manager does this, each agency will be overstaffed and other budget lines will suffer.

This ”strategic hiring” approach will not work in the private sector. It is typically easier to detect overstaffing in divisions of a private company as profits will be consistently lower than expected. Moreover, it is normally easier to fire workers in the private sector, so strategic hiring will result in job losses elsewhere.

Kessing and Konrad also provide empirical evidence of such strategic hiring incentives based on a survey conducted among professors at a major German university. Public universities in Germany are characterised by extremely high employment protection. The professors are civil servants for life and cannot be fired even if the whole department or the whole university is closed.

The researchers asked questions about how vacated professorships are filled, the most important form of hiring in the university system. More than four out of five of the respondents said that their department can influence the replacement of a professor. And more than 95% of them said that the replacement decisions are of strategic importance for the future development of the department and the courses offered. This suggests that respondents are aware of the strategic role of tenured hiring decisions for the department and its future resources.

The researchers analyse how and why strategic hiring happens, and why it may cause an unpleasant outcome. Suppose a chief administrator manages to hire a considerable number of tenured staff. A public opera house may, for example, sign long-term contracts with top-rate singers or dancers. When future budget negotiations are coming up, its administrator can argue that the house has to honour these contracts.

Moreover, he can argue that these artists will unfold their productivity and provide good performance only if complementary inputs (such as stage equipment, adequate stage designs, directors, proper heating, etc.) can also be financed by the institution”s budget. The government has a significant incentive to increase the agency”s budget.

If many or all public agencies follow a similar behavioural pattern, the outcome is rather unpleasant for all of them, as the total governmental budget does not grow with the strategically inflated needs. None of them receives an increased budget share, but they will all be overstaffed and perform below par.

If the division head of a private company adopts this strategy, it will typically not work. Job tenure is lower in the private sector and employment will be adjusted more readily to the company”s current needs. In addition, the division would incur losses if the policy worked, and the division head would ultimately bear the cost of these losses and would probably be fired.

This shows that job tenure in the public sector, and a difference in the objectives of public administrators and company CEOs are important. Empirically, the public sector is typically more labour-intensive than the private sector, and strategic hiring may be one of the reasons.

”Time Consistency and Bureaucratic Budget Competition” by Sebastian Kessing and Kai Konrad is published in the January 2008 issue of The Economic Journal.

Sebastian Kessing

Social Science Research Centre Berlin and the Free University Berlin | +49-30-25491-424 | kessing@wzb.eu

Kai Konrad

Social Science Research Centre Berlin | +49-30-25491-401 | kkonrad@wz-berlin.de