Chapter 4


Retrenchment results in a direct loss of job and income to those concerned. Although the loss
of income may be cushioned by redundancy payments, these offer, if paid at all. at best a
temporary relief by helping to bridge the period until a new job is found. Under conditions of
general underemployment (a typical feature of many developing countries which is likely to
be reinforced during the period of macro-economic adjustment, as a result of a devaluation
and investment decline), alternative job opportunities are, however, rare. This refers
specifically to the low paid unskilled labour in urban areas. Households belonging to this
category are most seriously affected if they lose the jobs: they have had little chance to
accumulate savings or assets on which they can live for a while, redundancy payments are
relatively low (if granted all), and they enter an already tight labour market. As a result, they
are likely to fall under the poverty line and to be exposed to food insecurity.

There are further indirect effects of public sector wage and employment reductions:

* The amount of remittances from public sector employees to their families will go down,
 affecting all those households for whom such transfers from a family member constitute
 a significant share of the household income.

* The labour market in formal and informal sectors is further constrained by the
 additional number of job seekers, with a likely negative effect on alternative income
 sources and wage levels, reinforcing tendencies induced by other adjustment policies
 such as a currency devaluation (see section 3) or public investment reductions (see next
 paragraph).

* The reduced income resulting from falls in public sector wages and employment has. via
 a decline in demand for consumer goods of (former) public sector employees, negative
 multiplier effects on other spheres of the economy. The reduced of demand for food and
 other commodities affects the food crop farmers and all people engaged in informal
 sector activities who derive their income from the sale of goods and services to public
 servants.

Reductions in public sector employment and wages may be limited for political reasons.
Government workers are often organised in unions which defend their interests and
vigorously oppose any measures in this direction. For this reason, the reductions may by and
large be confined to natural wastage and a wage freeze. If, in this case, the budgetary savings
are minimal, public expenditures need to be reduced more substantially in other fields, for
example, by a cut in public investments.

4.3 Reduction of public investments

Cuts in public investments are a common feature of many adjustment programmes.
Governments are inclined to favour this approach to public expenditure reduction as the
results are not immediately felt and it is likely to raise the least political opposition.
Nevertheless, it has substantial impacts in the short-term as well from a long-term
perspective.


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