Republic of Lebanon : Economic and Labor Force Impact of the Change in the Wage Structure of the Public Sector

Amid uncertain growth prospects and shrinking fiscal space, the government's initial decision to significantly increase public sector employees' salaries is raising significant challenges. While the cost of living increase aims to offset the erosion of real wages over time, the change in the structure of salary scales is not accompanied by a similar structural revision of tasks and efficiency of public sector employees. At the macro-economic level, the overall increase in wages would weaken the Lebanese economy through the return of unsustainable debt dynamics, pressures on the peg, lower economic growth, and increased unemployment. Introducing revenue measures will reduce these negative impacts but would lower resilience to shocks and impede the use of counter-cyclical fiscal policies. Reforming the pension system will further reduce the negative impact, but such reform cannot be separated from the need for strengthening social safety nets.