Why are state and local governments so bankrupt? Public sector workers continue to enjoy pay raises, while private sector wages are stagnant. Mandel reports:
In times of crisis and economic struggle, government workers should not be getting bigger pay increases than the private sector. The domestic private sector has really been struggling for a decade, both in terms of job and pay. But the public sector kept paying higher compensation.
The arithmetic is very clear. State and local governments can’t keep funding higher wages and better benefits for their workers, while the private sector struggles. As a wise man once said, you can’t wring blood from a stone. And you can’t ask troubled taxpayers to pony up bigger pay gains for government workers than they are getting themselves.
A few months ago Alex Tabbarok reported:
Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.
That's a government worker getting paid 50% more than their private sector equivalent for doing the same job.
Bear in mind that the federal workers are paid by the private sector workers. We can't all be insiders.
###
Paul Kedrosky notes John Mauldin's rightful anger over the Greek financing:
It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can't tell you how outraged that makes me.
What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.
I don't think I signed on for that duty. Why should my tax money go to help European banks? This is just wrong on so many levels and there is nothing seemingly we can do.
50% more? I don’t see the 50%.
And aren’t higher wages a way for the government to get higher quality employees than the private sector? IMO, we shouldn’t mind high wages, we should mind low labor productivity per dollar.
P.S. Your first sentence seems to imply that real wage growth is the source of government budget deficits. That’s not true, right?
I went as far back as the data goes (1982) and the growth of public sector wages is only a little faster over that time period. (Public wages only outpaced private wages by a net of 10% over 28 years.)
I think the comments on the original article add a lot of analysis worth reading.
It may be a bad thing that government workers are paid more than private sector workers for “the same” jobs, but that’s not why state and local governments are “so bankrupt.” State and local government budgets are running deficits — some of them huge — because during a recession their tax receipts plunge at the same time their expenditures on safety next increase. Raises to salaried workers are a tiny factor in this. Most local government expenditures are for education, and teacher salaries and benefits certainly do go up every year, but few people think lowering public school teaching salaries to those of private school teachers is a good idea.
One of the major reasons for the slow economic recovery is the anti-fiscal expansion policies of states. Because many state and local governments are prevented by law from running deficits, during a recession they reduce spending and slash jobs — exactly the opposite of sound fiscal policy. Meanwhile, tax adverse citizens prevent local and state governments from creating sufficient “rainy day” funds. Voters are their own worst enemy in these areas.
At $67,000, a government worker is paid 10% more, not 50% more than a private sector worker with an “equivalent” job who is paid $60,000.
“Why should my tax money go to help European banks?” The naivety of this statement boggles the mind.
Whoops — I forgot to include this key paragraph:
That’s how you get to 50%.
Not *the* source, no….
Yes, I only see 13%.
I agree with your point on productivity. Along those lines, I would only add that the government should not automatically increase employees grade and step just for the length of their tenure.
Add in unemployment extensions (http://bit.ly/byZwCt) and you have even more tax payer-subsidized issues.
Why have public sector wages and benefits risen? Easy. Because of collective bargaining and the increased unionization rates of public sector employees. Unionization has plummeted in the private sector because unions exist for one reasons: To secure higher economic rents for themselves. This lowers rents to capital, decreases investment, and creates a disadvantage vs non-unionized competition. Further, there is only so much in raises you can negotiate before your employer goes out of business.
Enter the genius: Public sector unions. No competition, unlimited revenues (potential tax raises), management has little incentive to say ‘no’ to requests.
Cato institute has a good podcast on it.
http://www.cato.org/dailypodcast/podcast-archive.php?podcast_id=1140
And yes, wages and benefits do have a big say in budget deficit. They are called ‘unfunded liabilities’. Guaranteed 6 figure pensions for retired school teachers for life.
Thanks for ruining America, Unions! Collective bargaining should be illegal within the public sector (I believe VA already does this).
Has it been your experience that USPS workers are more productive than UPS? Thank you. So much for the better worker line. Tenure is a bad idea in any industry.
And even more subsidies (waste, fraud, etc) out of the taxpayer pocket (http://bit.ly/ba6nUF). Wonder how many I’ll find today…hmm.
The public sector jobs are frequently undervalued by their job titles making this an apples to oranges comparison. An accounting analyst position in the public sector for example, will require years of experience in very specific roles and locations whereas in the private sector companies are more apt to take a fresh college grad with no experience.
I have been looking for a federal job for some time now and seen that if you go by job description alone (not job title) I would be paid less in the government.
If I were to take my same job title with me to the government then I could get a good 30% boost to my salary.
Private sector employment is very risky, and will likely remain so for the remainder of the century…
Unions are a democracy within a dictatorship.
As a public employee for local government I’d say that it’s the cost of PERS and historical medical benefits available to retirees. Historical because most bargaining units (unions or associations) gave up long term benefits for short term Cost of Living Adjustments to salary ranges. But these long term costs that grow faster than wages kill budgets.
But governments need to pay higher wages to attract talent. When you are in a position, you have a known ceiling to your income. You are basically making a work life long commitment to being at a certain class.
The other problem created by this decision, and one definitely caused by the unions, is the seniority factor. Without the fear of pay for performance, and when there are cuts it is the lowest on the totem pole who goes, you keep the higher salaried, less performing personnel.
Pay tied to performance metrics should be used and hire/fire decisions made at management level vs. union negotiators.
Mandel’s chart is disturbing because it’s misleading. It compares real compensation of state and local government workers with the real compensation of all private sector workers.
And I’ll take Alex Tabarrok’s figures cited from USA Today (!) with a bucket of sea salt.
The comments on his Department of Yikes post were far more enlightening than the post itself, and I’m glad I read Kaln’s, posted Mar 5, 2010 6:55:29 PM, because it saved me some trouble.
From the memorandum to the President on general schedule locality-based comparability payments in the Annual Report of the President’s Pay Agent:
“In keeping with this statutory requirement [section 5304 of title 5, United States Code], this report shows the adjustments that would be dictated for January 2011 if the methodology and rates required by current law were to be implemented. Given the current national emergency, however, we believe it would be unwise to allow the locality pay increases shown in this report to take effect in January 2011. You do not need to make a decision on the 2011
rates at this time.” [emphasis mine]
Here are the docs of the report.
Here are tables of pay disparity for each pay locality, according to which the average remaining disparity is 22.13%.
Not sure about US, I think another big contributor to global budget deficits is farm subsidies (including the privilege of tax free farm income) that normally don’t go to the average farmer that sweats it out, but to the organized crooks that just own farm houses and have plowed only their profits back into their Balance sheets.
Contra Mauldin, the US only has a 17% interest in the IMF. Not sure if it changes his underlying point, but it changes the magnitude.
Hey Ben-
Big fan of your blog but I think you got this one wrong.
I’m 3rd generation government and run GovLoop.com – the largest social network for those in government (30,000+)
This information is often misrepresented because you are comparing apples to oranges. Government has outsourced most of their work in the last decade (especially the lower level work) so the people left have higher education and skills than average private sector (which includes a lot of lower level service jobs at places like Wal-Mart).
Ask any government worker in DC (especially in IT) and they can tell you they work side by side with government contractors who are making 25-50% more than them for similar work.
-Steve Ressler
Founder, GovLoop.com
Greece should go bankrupt. The current ‘solution’ just prolong the pain. Yes, there will be pain all over – globally – if Greece declares bankruptcy, but how else can Greece get out of this mess quickly?
Steve,
Thanks for the comment, but the USA Today stat was looking at the same job,
not average….
– I always feel uncomfortable when I read that government workers are paid by private sector workers. Private sector workers are paid thanks to global consumption, so by everyone. Government workers are paid thanks to taxes, so by everyone. Government workers pay taxes that will found other government workers, and they buy stuff that will found other private sector workers. And vice versa.
Real questions are: are all government workers useful?
Which government jobs could go private?
Is it possible to get the same work done for less money?
What would be the consequences on global consumption with a major decrease in public sector wages? etc.
-The US could try to be self-sufficient. But as long as it decides to trade with the world, it needs to get an insurance. This insurance is the IMF. Yeah, it’s always the healthy that pays for the sick, but Greece going banckrupt => euro plunges => no more european importations => longer crisis in the US.
Don’t want to pay the price? Be self-sufficient!
Sadly this public sector money is not even being spent on education in my state (Arizona).
I work for a state University. I can assure you that there is no money flowing into the public sector here. We are going on several years of budget cuts and furloughs. My salary is falling behind my private sector colleagues.
My main problem with this is that it generalizes and mis-characterizes a large scale problem as being caused by one factor. A questionable factor at that. You paint with a broad brush when you use the term ‘Public Sector’. If you had bothered to research the original data, you would have noticed that in the same statistics it shows STATE workers are paid LESS than comparable private industry workers. Also, doesn’t age and experience effect wages? my experience has been that the private sector routinely purges older more qualified (aka higher cost) employees and rehires younger less costly replacements; which would also skew the sample. I don’t see any reference to those points, I assume because it doesn’t support the rationale of your post. Also, in explaining the difference in benefits, the BEA states that part of the reason positions in the private sector have little or NO benefits. Posts like yours and Tabarrok’s lead to an ill informed public and lower the standard of of bloggers who take posting seriously.