Public sector retrenchment programmes can generate significant savings of public expenditure. Governments are, however, often reluctant to embark upon such programmes due to concerns for social costs. As a contribution to the understanding of the welfare implications of public sector retrenchment, this paper presents an expost evaluation of the earnings of former Ghanaian civil servants before and after their lay-off. Earnings functions for the current period are compared with earnings functions for the time the individuals were in the civil service, with controls for selection into current employment.
The returns to human capital are found not to differ before and after retrenchment; earnings simply shift down, and the amount of that shift depends only on the redeployee's location before redeployment and the sector in which he or she currently works. Average earnings for those redeployees currently working fell by 48% of earnings at the time of employment in the civil service. That number falls to 27% if an income stream equal to 10% of severance pay per year is added to current earnings. Those individuals who have found wage employment—20% of those currently employed — had a much smaller reduction of earnings. The estimates indicate that their income in terms of earnings plus return on severance pay actually increased.