4 They do not adequately complete their assigned tasks or complete them more slowly or at higher cost than optimal. Fifth, because government is the wage leader of the modern sector, government pay and employment distortions negatively affect private labor markets.

The mechanisms by which these imbalances are induced and maintained are well-known; this paper focuses on the efficiency costs of public sector policies. Public sector wage setting and indexation, job guarantees, lifelong employment security, and fringe and nonwage benefits may all distort the price and supply of labor. Minimum wage regulations set a floor below which wages cannot fall, even when the market-clearing wage would do so. Because workers cannot be offered a lower wage, some are dismissed and some must find jobs in the informal sector, where wages are lower and flexible and labor laws are not enforced. Thus, formal sector workers keep their jobs at the expense of workers in the informal sector, and tle equity consequences can be severe. Although economywide wage dispersion may increase, the range of public sector wages is compressed, resulting in disincentives for skills training on the part of providers and beneficiaries (see for example, World Bank, 1990). In particular, across-the-board minimum wages without special provisions for young people who are either unskilled or in on-the-job training programs -- a subminimum wage -- represent a substantial disincentive to hiring these job-seekers.<sup>2</sup> Public sector wage indexation may promote inflation and lessen or change the distributional effects of policies that cut or change expenditure. By raising the cost of public sector labor, indexation alsu transfers the burden of labor market adjustment to those not covered by indexation and the unemployed. Employment security regulations may severely impede labor market flexibility by raising significantly the time and costs of dismissing unproductive or surplus workers -- making labor a quasi-fixed factor of production. Similarly, guaranteed employment schemes for secondary and university graduates can severely restrict the ability of the public sector to control employment. The schemes also can affect the demand for education, encouraging students who might otherwise opt for vocational or technical training to attend a university, often in a general, rather than a scientific or technical field (ILO 1990:20).

Government pay scales with automatic seniority increases lead to a growing wage bill even in the absence of wage increases, and are a built-in impediment to restricting spending on wages, forcing the real wage or the level of employment to adjust. The costs of job security -- implicit or expiicit -- may be passed on to the employed in the form of lower wages, and to job-seekers in the form of private sector employer reluctance to hire new workers in an expansionary period because of the difficulty of shedding labor in a downturn. A large part of the compensation package in many civil services consists of deferred wages -- such as pensions and severance packages, or nonwage benefits, like travel and expense allowances or housing subsidies. Fringe benefit systems are usually opaque in execution, often corrupt, and result in horizontal inequity as workers at the same level tend to receive different total compensation (Lindauer, Meesook, and Suebsaeng 1988:23).