While it is generally agreed that wage policy has an effect on corruption, there is still controversy on the magnitude of this effect. An IMF Working Paper explores this issue in developing countries, using a new methodology. Wages had in fact never been studied empirically. What this study aims to present is an estimate of the effect of civil service wages on corruption. A new set of data on civil service and manufacturing wages in developing countries is used, together with an existing index of corruption. The results are then checked against the implications of the two main theories on the subject: the shirking and the fair wage models.
According to both models, corruption is negatively related to civil service wages. However, several differences exist:
- According to the shirking model, civil servants try to achieve the greatest benefits for themselves by balancing rewards from corruption with the penalties if caught; the fair wage model assumes a satisficing rather than maximising behaviour in civil servants who may leave opportunities for corruption unexploited if they feel they are treated fairly.
- In the shirking model, raising wages to the level required to eliminate corruption can be prohibitively expensive when the level of bribes is high, while in the fair wage model, corruption can be eliminated at a low wage level by equalling wages with fair wage.
- The number of corrupt acts under satisficing is less than under maximising, for any given wage.
- A higher probability of detection is associated with higher corruption in the fair wage model and with lower corruption in the shirking model.
- The definition of a fair wage differs among countries, and if expectations are very high, the fair wage approach can also be costly.
- The two models have equal implications only in cases when there are low wages and low bribe levels, as in developing countries.
The study suggests that the relationship between civil service wages and corruption is strong and that wages that can eliminate corruption are lower than predicted by the shirking model. Therefore, an active wage policy can help in fighting corruption. In particular:
- An increase of one to two points in the relative pay creates an improvement of one point in the corruption index.
- Civil service wages also have an indirect effect on corruption, by improving the quality of the judiciary and society’s policing actions.
- Eradication of corruption requires relative wages three to seven times the manufacturing wages, which is inconsistent with the fair-wage model.
- Stronger external and internal controls contribute to the eradication of corruption.
