Gauri Mishra has an article on the front page of Business Standard today that I disagree strongly with.
The title is Boom sidesteps govt wages: Govt salaries remain pegged at 1996 levels. Her bottom line: The demand for a 6th Pay Commission to revise government salaries may not be totally out of place.
A more careful reading of the evidence is required. I think she has missed out the main story. The main story is simultaneously that while GOI employees at the top are incredibly underpaid - by market standards - the bulk of GOI employees (roughly 98% of them) are incredibly overpaid by market standards. Example: the full cost of a driver at the Ministry of Finance was estimated by me to be four times bigger than the cost of an unorganised sector driver. Not 4% higher, not 40% higher, but four times higher.
Going from anecdote to data, see Wage differentials between the public and private sector in India by Lokshin & Glinskaya, World Bank, 2005. The paper uses data for 1993-94 and 1999-00. They find on average, the public sector premium ranges between 62 percent and 102 percent over the private-formal sector, and between 164 percent and 259 percent over the informal-casual sector, depending on the choice of methodology... The wage differentials in India tend to be higher in rural as compared with urban areas, and are higher among women than among men.... There is considerable evidence of an increase in the wage differential between 1993-94 and 1999-2000.
The right principle to adopt is: At all levels, GOI should pay the lowest possible wage at which an adequate candidate can be hired. That's it. Wages should be high enough to get the right candidate for the job. The huge queues of unskilled labour clamouring for junior level government jobs proves that the wages there are too high. And at the top, the wages paid by GOI are 5x less than what they should be.
Sometimes I have heard the argument In the last 10 years, GDP has grown by 50%, so shouldn't GOI employees get a pay raise of 25%? This is using the wrong benchmark. It is not correct to compare the growth of GOI wages against the growth of private wages. What is required is to compare prices - at all levels - against prevailing market rates. GOI does this for everything else - GOI pays market prices for the steel that it buys or the paper that it buys. There is no reason why purchases of labour should be different.
Business Standard had a sensible edit on this on 3 February 2006.