Government Dependency

Public Sector Pay Outpaces Private Pay

May 3, 2010

Innovation and Growth - We all know that state and local government finances are a mess. This chart helps explain why.



The top line tracks the real compensation of all state and local government workers–wages and benefits, adjusted for inflation. The lower line tracks the real compensation of all private sector workers. The data comes from the Employment Cost Index data published by the BLS.

The chart shows that public and private sector pay rose in parallel from 2001 to 2004. Then the lines diverged. Since early 2005, public sector pay has risen by 5% in real terms. Meanwhile, private sector pay has been flat.

This one fact explains much of the fiscal stress at the state and local level—why states such as New York, New Jersey, and California are in such a mess. State and local governments pay more than $1 trillion in compensation annually (actually, that’s an astounding number–I had no idea it was that high). If compensation is 5% higher than it should be, that’s $50 billion in excess pay costs for the state.

And lo and behold, that $50 billion would roughly cover the total size of the state budget gaps. For example, in February a survey found that the combined budget gap of all 50 states was $55 billion for the 2011 budget year and $62 billion for the 2012 budget year . (The survey was done by the National Governors Association and the National Association of State Budget Officers)

Now, I’m not anti-government, by any means. But this trend is disturbing. 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.

It's Time to Freeze Government Wages

January 19, 2010

RealClearMarkets - There’s a recession going on, but you wouldn’t necessarily know it by looking at public employee earnings. If you work for the government, you’re far less likely than your private-sector counterparts to have been laid off in the recession, and you probably also saw relatively fast wage growth.

As states and localities continue to fight budget crises, they have an opportunity to close gaps by freezing employee wages. Because public employee compensation rose too fast over the last three years, they should be able to do this while retaining quality employees at least as well as they could back in 2006.

During the recession, public employees have done better than private ones on two measures: total employment and hourly compensation. Over the last two years, private payrolls shed 7.3 million jobs, but public sector civilian employment actually grew very slightly, adding 98,000 jobs.

This makes sense: public-sector layoffs cause anti-stimulative ripples through the economy, and governments might even capitalize on a recession as a good time to hire employees cheaply.

The trouble is, that’s not what they’ve been doing. Instead, they’ve been retaining employees expensively.

In a recession when wages are stagnating, you would expect governments to capitalize on the loose labor market by holding the line on employee compensation. But public sector compensation (as measured by the Department of Labor) rose 42% faster than private sector compensation over the last three years.

Since the end of 2006, hourly total compensation (wages plus benefits) has risen 6.5% for private sector workers, essentially keeping pace with inflation. But state and local government workers saw their hourly compensation rise 9.2%.

Federal civilian workers (about 10% of the public sector civilian workforce) are excluded from the above measure, but they did even better, receiving Congressionally-approved wage rises totaling 9.9% over the same period.

Why have public sector wages grown so fast? In some cases, it’s because employees are receiving scheduled raises under contracts negotiated before the economic crisis. New York public employees will see a 4% pay increase in April, under a contract negotiated in the middle of the last decade.

But in other cases, governments have agreed to pay increases during the recession, or been forced into them by arbitrators. Transit agencies in New York and Washington, D.C., have seen their budget crises exacerbated by arbitrator-mandated pay increases, leading to service cuts. And Congress just approved another 2% pay increase for federal workers, effective this month.

If states and localities had kept pace with private sector wage growth over the last three years, state budget gaps would be approximately $36 billion less than they are today. Or, put differently, the last three years’ excess growth in public sector compensation necessitates an extra $36 billion in annual tax collections or program cuts.

Given the magnitude of state budget crises, it’s hard to imagine that outstripping private sector pay in a loose job market is the best use of limited fiscal resources.

Fortunately, some states are belatedly figuring this out. California Governor Arnold Schwarzenegger has proposed a significant cut in public sector salaries. And after two years of increases that outpaced the public sector, the Employment Cost Index for state and local employees was flat in the third quarter of 2009 -- meaning that two years after the recession began, states and localities have frozen pay, on average.

But while public sector compensation was flat on average in the third quarter, many governments (including the federal one) haven’t yet gotten on board the wage freeze train. And it will take an extended period of flat-line public sector compensation before the private sector catches up, as private sector pay growth remains anemic.

Those states can follow California’s lead (even in less draconian form) and put significant dents in their budget gaps. A recent report from the Empire Center for New York State Policy, which I co-authored, estimates that New York State could save over $800 million annually from a three-year employee wage freeze, while localities could save billions more.

It’s also a good time for states to revisit union-friendly bargaining laws, particularly binding arbitration, which have deprived lawmakers of the ability to manage employee compensation costs.

Or, states and localities can continue to hand out expensive employee wage and benefit hikes, while raising taxes or cutting services used by taxpayers. That would be good for public employees, but not much good for anybody else.

Private Paychecks Drop to Lowest Level Ever in the U.S. as Government-Provided Benefits Rise to Historic Highs

May 25, 2010

USA TODAY - Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says.

"This is really important," Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries.

The Bureau of Economic Analysis reports that individuals received income from all sources — wages, investments, food stamps, etc. — at a $12.2 trillion annual rate in the first quarter.

Key shifts in income this year:

• Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.



• Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism.

"People are paid for being rather than for producing," he says.