MPs’ Salaries in Ukraine: Would Paying Politicians More Lead to Better Performance?

MPs’ Salaries in Ukraine: Would Paying Politicians More Lead to Better Performance?

The recently published e-declarations of Ukrainian top politicians and civil servants have revealed the glaring gap between their official and real earnings. In this light, the decision to block the raise of the MP remuneration in Ukraine might seem justified. However, this country needs qualified and public-spirited individuals to enter the political arena and displace inefficient and corrupt politicians. Ensuring decent salaries for MPs and other politicians could be a step in the right direction.

On October 20, 2016, Ukrainian MPs voted to double their salaries – up to 36,000 UAH ($1400). This decision caused massive outrage among the public and criticism by some high-profile politicians. They argued that this move was not timely as the economy failed to accelerate and as the disclosure of declarations by high-ranking civil servants revealed their vast wealth. Legislators swiftly reverted their earlier decision. However, a debate is still ongoing on what the just salary of politicians and civil servants should be.

This article aims to contribute by focusing on the influence that salaries of politicians can have on their performance. In the end, it is the ability and willingness of politicians to reach important social objectives that should be the main determinant of their remuneration. It appears that higher salaries could provide a much-needed opportunity to attract more qualified and more motivated professionals to Ukrainian politics.

MP Salaries and Salary-Setting in Ukraine and European Parliaments
The salaries of Ukrainian MPs are often compared with the salaries of their colleagues in other countries, e.g., using the ratio of MP salary to the average salary in the economy.

Parliamentarians are paid more than “the average citizen” in all EU countries. The largest difference is reported in Italy and Lithuania. In these countries, the ratio of the MP salary (with no additional allowances taken into account) to the average salary in the economy is equal to 4.5 and 4.3 respectively (as of October 2013).

Figure 1. The ratio of the MP salary to the average salary in European countries

In Ukraine, this ratio became one of the lowest among European countries after Ukrainian MPs decreased their salary by three times in 2014 (to about $280). Currently, it remains at the average level. Had the recent MP salary rise been supported, the ratio would have been much larger than in any EU country.

However, despite being a good starting point, such a comparison is lacking in many respects. First, unlike in Ukraine, legislators of most European parliaments are allowed to have jobs outside parliament. Second, the gap between wages in the capital city and other regions is larger in Ukraine than in other European countries. Before April 2016, the salary of Ukrainian MPs was lower than the official average salary in Kyiv (80-90% of its level), while it is about twice as high at the moment. If the rise had not been reverted, the ratio would have ranged from 3.5:1 to 4:1. Importantly, official Ukrainian statistics underestimate the real size of the average salary, since many companies report lower salaries in order to pay less tax. Finally, some also argue that it makes more sense to compare the MP pay with the salary they could earn if they took on other jobs with similar requirements to experience and qualification.

Part of the public outrage can be attributed to the fact that it was MPs themselves who tried to lift their salaries. Legislators determine their salaries on their own in 58% of countries (in 17 from 27 EU parliaments). In 10 of these countries, parliamentarians are constrained by some mechanism. For instance, in Germany, the MP pay is linked to the salaries of top civil servants, while in Bulgaria it cannot be higher than 3 times the average salary. In Austria, the annual increase of MP pay is capped by the inflation adjustment coefficient. Only in four EU countries, the responsibility for setting MP pay lies with independent bodies. Salaries are somewhat higher in those countries where MPs have more freedom in setting their remuneration.

The establishment of independent salary-setting bodies does not necessarily lead to lower MP pay. In the UK, an independent committee received the power to set the salaries of legislators in the wake of the parliamentary expenses scandal in 2009. As it turned out, a number of MPs routinely spent public money, e.g. to pay for their meals during vacations or to re-design their houses. Contrary to the expectations, the committee found the salary to be just and increased it.

The Impact of the Remuneration of Politicians on their Performance
Theory alone cannot establish the direction and degree of influence the politicians’ pay has on their quality and efficiency. On the one hand, a fixed MP salary turns highly qualified candidates away because flexible market salaries are better able to reflect their level of skill. If the salary rises, the gap between it and the market salary falls, which encourages more qualified candidates to compete for political positions. Moreover, if MPs are paid better, holding a seat in the parliament becomes more valuable to them. In theory, this should prompt politicians to work more efficiently, in order not to lose their job.

Other studies note that higher salaries can on the contrary attract less qualified candidates or those who are not prone to work in the public sector. Some politicians are ready to accept lower than market wages since they are motivated by the political activity itself, e.g. by the chance to contribute to solving socially important issues. If wages grow, some of the new candidates might react only to the financial stimuli, which may have negative impact on their willingness to act in the best public interest. Moreover, higher salaries might attract many unqualified candidates. It can be difficult for voters to discern and discard them.

The most informative empirical studies come from the local level in Brazil and Italy. In these countries, the pay of politicians in each region is fixed according to the size of its population. It turns out that higher salaries attract more qualified legislators in local councils in Brazil (proxied by their educational and occupational background). In addition, local legislators with higher salaries initiate more bills and reach a higher level of the infrastructure development in their municipality.

Similarly, in Italy, mayors with higher salaries were more successful in decreasing the size of the local government and increasing the efficiency of local bureaucracy. They were better able to reach important social goals in the analyzed period. The study also claims that this effect on performance was mostly driven by the selection of more competent politicians, rather than by the incentive to be re-elected. Higher salaries attracted candidates that had more alternatives in the private sector and a better educational level. This result conforms to other studies that argue that political selection is especially important because it can be difficult to control politicians once they are elected.

In Finland, an increase in the MP pay led to a higher share of highly educated female MPs. One possible explanation is that the gap between outside wages for men and women is larger for highly qualified candidates. Therefore, a given increase in salary can have more influence on the career choices of female professionals.

The connection between pay and quality of politicians is not always constant and positive. For instance, in Italy, political profession has become very profitable, which led to crowding out of some of qualified and motivated politicians. In 1948-2006, real annual wage of Italian MPs grew by 9.9 on average, while the GDP per capita rose at an average annual rate of 3.2%. MP are now paid 1.8 times more than managers in the private sector. However, they are less educated and have fewer attractive alternatives in the private sector than before. The number of financially motivated politicians, who view the public character of their work as secondary, is larger even among the highly qualified MPs. This leads to lower effort and higher absence rates.

A study from Denmark has arrived at similar conclusions. It points to the connection between the personality type and proclivity to corruption. If the salary is too high, it may attract financially motivated, and less honest, candidates, which would crowd out more “public-spirited” candidates.

However, Denmark is one of the richest and least corrupt countries in the world. Studies from Mexico and Zambia can be more relevant for Ukraine. In Mexico, applicants to the public sector positions had their IQ, personality, and proclivity toward public sector work tested. It turned out that higher pay attracted candidates that were both more qualified and more prone to civil service.

Therefore, higher salaries usually lead to better performance by politicians, mainly thanks to attracting more competent and motivated candidates. If the salary is very high, financially motivated politicians might crowd out those who are more public spirited. Yet the official remuneration of politicians is far from being too high in Ukraine.

Outside Jobs of Legislators
If raising wages of politicians might appear out of place in the current political situation, an alternative decision could be to allow them to keep their outside jobs (“to moonlight”). Currently, Ukrainian MPs have no right to have a paid job outside parliament (with the exception of research, teaching etc.). At the same time, MPs have the right to moonlight in 76% of countries. 88% of German MPs, 84% of Finnish MPs, and 69% of Dutch MPs have outside jobs.

Some observers are wary of the possibility that those MPs can put the interests of their employer above public interest or/and exert less effort in parliament. These questions have received relatively little attention from academic studies.

It is clear though that the ban on moonlighting in no way prevents MPs from abusing their powers. Moreover, it was revealed in a number of scandals that those MPs who were bribed into amending legislations were never pressured to do so by their employers. Finally, in Ukraine, the formal ban blocks an entry into politics for some potential candidates, but fails to stop many extremely wealthy legislators from continuing to run their businesses.

Some studies show that allowing MPs to moonlight increases the quality of legislators (measured by the level of income before an election). On the other hand, having an outside job can have negative impact on the effort of legislators in the parliament. For instance, in Italy, moonlighting MPs miss votes more often than those MPs who only work in the parliament. Yet there are some ways to mitigate the problem. In Germany, MPs face wage cuts up to 100 for each recorded vote session they miss. As the result of this measure and of well-established political norms, moonlighting has no negative influence on the attendance. The number of group initiatives and oral contributions by moonlighting deputies is only slightly lower in Germany.

Moreover, some highly qualified candidates that are attracted by the possibility of moonlighting are especially motivated by political work. Such politicians do not lower their effort in the parliament because political work brings them additional motivational rewards.

The influence of moonlighting on the effort of politicians also depends on the political mechanism of their selection. For instance, those MEPs who were elected in the countries with fewer barriers to entry into politics exert more effort. Yet if such barriers exists, e.g. due to the tighter control of political parties over the pool of candidates, the result can be even negative. Therefore, the right to moonlight can help increase the quality of politicians while having no significant impact on their effort, but this effect is conditioned by political competition on the ground.

Concluding Remarks: Can Higher Salary Improve the Performance of Ukrainian MPs?
The disclosure of e-declarations by Ukrainian civil servants served to underline how much Ukraine needs more honest and qualified politicians. The option of increasing the salaries of politicians in Ukraine should not be discarded. Most studies show that higher salaries or the right to moonlight leads to better performance by politicians in very different political systems.

Certainly, higher salaries alone would not magically transform corrupt politicians into honest and efficient professionals. Doubling or tripling salaries would probably not stop those politicians who routinely abuse their powers when making decisions on the use of millions of dollars. First and foremost, higher salaries could help attract more qualified candidates that are interested in political work and view the official wage as their only or main source of income.

If an MP is satisfied with less than the market wage, he is either eager to serve the society and has accumulated some savings before going into politics or intends to abuse his power in exchange for illegal benefits. Should we expect that underpaid politicians would indeed work in the best public interest and sacrifice their own welfare? It is more probable that low official pay is not a problem to those politicians who plan to use their powers in their own interest or in exchange for bribes.

Moreover, some incumbent MPs can simply be not qualified enough. Low and unpredictable wage and the ban on moonlighting repels those qualified professional who would like to work in politics, yet do not agree to give up other professional activities or higher salaries in the private sector. Low remuneration thus serves as an effective barrier to entry for potential politicians and favors less honest and less qualified candidates.

Allowing MPs to have outside jobs might become a partial alternative to a large increase in their remuneration. It could attract qualified politicians without increasing public expenditures.

The remuneration of politicians is one of the many determinants of the quality of state institutions. Therefore, increasing wages or allowing MPs to moonlight might have no immediate impact. However, it is worth seizing any opportunity to increase the performance of the government. The urgent need of profound reforms in Ukraine makes it even more obvious how badly this country needs competent and motivated politicians at its helm.