The Research Paper focuses on the determination of relation between total public expenditure on all items and lines and public expenditure on wages and salaries of employees of state governments. The study is based on panel data relating to time series of total public expenditure and salary expenditure of states. Dickey-Fuller test of unit root shows time series of salary expenditure and total public expenditure to be stationary at first difference. Besides, the time series of public expenditure on employees’ salaries and total public expenditure approximate normal distribution and both the series are nominally skewed and marginally concentrated. Total public expenditure and expenditure on salaries of public employees of 30 states and union territories increased at statistically significant high annual compound rates of growth. The positive trend coefficient of the ratio of salary expenditure to total public expenditure is significant for 8 states/UTs while the negative trend coefficient of the ratio is significant for Bihar. Thus, 21 trend coefficients of the ratio are not significant. Ten non-significant negative trend coefficients of the ratio of salary expenditure to total public expenditure suggest that the ratio has remained constant, and hence, pay commissions’ recommendations do not seem to have been affected by the spatial units. Public employees’ salaries and wages are determined by the lagged salaries and current total public expenditure, but the adjustment of observed to the desired level of salaries- wages is spread over about 5 to 7 years. However, the short run equilibrium is found generally to converge towards long run equilibrium.

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Keywords: Pay Commission, Impact, Public Expenditure, Public Employees, Wages & Salaries.