Since March this year Czech politicians (among other legislators) are exempt from paying social and health insurance on some compensation and thus their salaries are de facto increased (iDNES.cz 2013). Unsurprisingly, such change was met with some disagreement of general public (iDNES.cz 2012). While negative reception is quite understandable, especially given the low trust and widespread disillusionment with politicians in the last few years, it could be rooted in the general belief that politicians should be selfless individuals in the service of public. However, politicians should be viewed as self-interested as any other economic agents. Taking this fact into consideration, is it possible that higher salaries of politicians lead to increase in public welfare?
Politicians are self-interested agents, so it should not be surprising that they are motivated by the amount on their paycheck. However, they are also driven by a wide range of other various motivations such as non-monetary allowances (car, secretary, housing, etc.), respect of their peers, hunger for power and fulfillment of their ideology. Furthermore, their salaries might be only a small fraction of their income if they are prone to accepting bribes and extracting rents. Their behavior might also be significantly altered by their need to stay in office – to be re-elected.
When individuals consider their career, their future income plays considerable role. If a salary in public sector is sufficient, they might choose this path over career in private sector. Higher salaries should attract better candidates. If we assume that the political office is associated with high responsibility, stress and risks, similarly to a managerial position in private sector, it could come as surprising that significant wage differential between public and private sectors can often be observed. For example, Besley (2004) notes that while “the Governor of California is paid $165,000 to preside over a budget of $150 billion (including Federal funds) with a population of roughly 34 million, the Governor of Montana is paid around $84,000 to preside over a budget of $3 billion and a population of just 900,000 and the average pay of a U.S. Governor in 2000 was $105,000 … the median CEO compensation package for the Mercer/Wall Street Journal Survey of the 350 biggest publicly held companies is around $6.1 million.” However, this significant difference might support the hypothesis that politicians are motivated by a wide range of different factors when choosing their path in public sector. This could imply that increase in salaries might not be as significant an incentive in attracting more qualified candidates as we assumed.
Given the uncertainty about the significance of increase in salaries as an incentive for attracting better candidates for political office, we turn our attention towards empirical evidence. For example, Gagliarducci and Nannicini (2008) explored data of Italian municipalities from 1993 to 2001 and found that “wage increase attracts more candidates employed in high-skilled occupations, such as lawyers, professionals, or entrepreneurs. This translates into more educated and high-skilled elected mayors.” Similar conclusions could be found in Ferraz and Finan (2009) who explored data of Brazil’s municipal governments from 2000 to 2004 and claimed that higher salaries improved quality measured not only by education, but by the type of previous profession, and political experience in office, as well. Furthermore, Dal Bó, Finan, and Rossi (2011) also note that higher salaries attracted „a better candidate pool both in terms of quality and motivation. In the places that announced a higher salary, the average applicant was smarter, had better personality traits, higher earnings, and a better occupational profile.“
Even though the empirical evidence suggests that more qualified candidates are attracted by higher salaries, it does not necessarily translate into improvement of public welfare. Because in the absence of effective monitoring even more qualified candidates might not be motivated to make the extra effort. If it is possible for voters to differentiate the more active and successful ones, politicians might be motivated to improve their performance in order to get re-elected. But the differentiability i.e. monitoring is hindered by the difficulty of measuring politicians’ efficiency in reaching government goals. Furthermore, the ambiguous nature of the very goals makes it even more difficult. It might be possible to monitor performance of ministries to some degree by introduction of performance-based contracts to ministers (and their subordinates). However, the study by Binderkrantz and Christensen (2012) of agency performance and executive pay for the heads of Danish central government agencies introduce evidence to the contrary, since they find neither relationship between performance and bonus paid to executives, nor their full salary. The responsibilities and goals of PM members are even more ambiguous and at least in Czech conditions it is very difficult to find meaningful ways to measure their performance.
On the other hand, Ferraz and Finan (2009) in their research of Brazilian municipalities found that higher salaries increase performance of politicians in office measured by number of submitted and approved bills (though their conclusion should be taken with caution since the number of passed bills does not necessarily mean improved public welfare). Gagliarducci and Nannicini (2008) also stated that “better paid politicians lower the size of the municipal government, by reducing taxes, tariffs, and current expenditure, as a result of an improvement in the efficiency of the municipal organization. Results also show that this performance effect is due to the selection of more skilled mayors, rather than the incentive to be reelected.”
Answering the question whether increase in salaries of politicians also increases public welfare proves rather difficult. Though the empirical evidence suggests that higher salaries do attract better candidates for public offices (despite the wide range of politicians’ motivations), translation of this effect into the increase in public welfare is not straightforward. It is hindered by the difficulty of measuring the activity of politicians and presence of suitable monitoring device. Empirical research on this topic is divided. Nevertheless, since the increase in Czech politicians’ salaries was relatively negligible, neither of those effects can be expected.
Besley, Timothy. 2004. “Paying Politicians: Theory and Evidence.” Journal of the European Economic Association 2 (2-3): 193–215.
Binderkrantz, Anne Skorkjær, and Jørgen Grønnegaard Christensen. 2012. “Agency Performance and Executive Pay in Government: An Empirical Test.” Journal of Public Administration Research and Theory 22 (1): 31–54.
Dal Bó, Ernesto, Frederico Finan, and Martın A Rossi. 2011. “Strengthening State Capabilities: The Role of Financial Incentives in the Call to Public Service.” UC Berkeley. http://businessinnovation.berkeley.edu/williamsonseminar/finan101311.pdf.
Ferraz, Claudio, and Frederico Finan. 2009. Motivating Politicians: The Impacts of Monetary Incentives on Quality and Performance. Working Paper. National Bureau of Economic Research. http://www.nber.org/papers/w14906.
Gagliarducci, Stefano, and Tommaso Nannicini. 2008. Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection. Working Paper. IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. http://ideas.repec.org/p/igi/igierp/346.html.
iDNES.cz. 2012. “Přihrál poslancům tisíce. Voliči reagují negativně, přiznává člen ODS – iDNES.cz.” iDNES.cz. http://zpravy.idnes.cz/rozhovor-k-pojisteni-z-nahrad-dkk-/domaci.aspx?c=A121219_142856_domaci_jj.
———. 2013. “Poslanci si polepšili o tisíce korun. Z peněz na důchody a nemocné – iDNES.cz.” iDNES.cz. http://zpravy.idnes.cz/politici-dostali-vyssi-platy-d21-/domaci.aspx?c=A130307_132321_domaci_hv.