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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.
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19 comments
It would seem to me that the wealth effect was filling most State Treasury's with every new home refinance and with all the extra auto purchases that filled this last decade. In part it's a political lack of will that had revenue in the local economies. Budgets for most States had revenue increases but not any corresponding tax adjustments to match the markets wealth.
A financial crash and gas shock caused a general disavowed SUV's as the auto of choice from 2008, and before 2008 few in the economy new that general private incomes were on a slide to negative increase for the decade.
The failed wealth effect left all States without needed tax support. This is really a California apologist's only defense. Our State's Legislature, is a politically dysfunctional body that has shot itself in the foot.
I’d like to see these numbers broken out to show the difference between wage growth and wage + benefit growth. I suspect the biggest culprit is the health care system–the government simply raises health care benefits in line with the pace of health care inflation. So I bet vigorous health care reform might end up solving that problem.
“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.”
Maybe private sector wages dipped too low, rather than public sector wages being too high? If the private sector had a greater proportion of workers dip below the poverty line, I can’t see why anybody would want government to replicate that.
I suspect that part of the trend is also accounted for by more and more of the lowest-paid government jobs being outsourced to the private sector, driving the average wages further apart.
The lines actually show that inflation adjusted wages were growing in the private sector, though not as fast.
Another way of looking at that graph is to say that private wage stagnation goes back to even before the economic crisis — worker productivity greatly rises over this period. Only public sector employees are reaping benefits of increased work output. All the other gains are being trapped by investors and financial haircuts…
Increased production should lead to real wage increases. The economy wasn’t struggling back in 2004 when wages began stagnating. Most of the gap you are so concerned about was run up between 04 and 07, i.e. pre-crisis. Everything was apparently between fine and great depending on how close you were to housing bubbles scamming, productivity increasing, but wages stagnating. I just find that graph to be very uncompelling as an argument against the public sector.
[...] Public Sector Pay Outpaces Private Pay (Mandel on Innovation and Growth via Marginal Revolution) [...]
[...] Public Sector Pay This Chart says it: [...]
A few thoughts. My guess is that, for the most part, the level of education of public sector workers is higher than the private sector as a whole. Consider the fact that these numbers probably include public university employees, teachers, staff scientists in agencies such as environmental science, energy, public health, etc., plus all the support staff. It also includes sanitation workers (where not privatized), but a recent speech by Mayor Blumenthal highlighted the fact that NY sanitation workers require a high school degree or GED. It is not uncommon for police officers in many metro areas to have bachelor degrees or better. In addition, I believe that the prior comments hit the nail on the head with respect to the stagnation of private sector wages and benefits. I also agree with respect to health care costs. Finally, good or not, the public sector is probably the last bastion of defined benefit pensions. They are a fairly costly benefit.
@Matt – You have to remember that public sector wages are paid for with tax money extracted from private sector wages. If private sector wages fall then public sector wages gave to fall as welll, or you’re going to have a problem.
Not really Thom. GDP is still growing, it’s only wages that are stagnating. Taxes to pay for public sector wages can be gained from non-wage sources of private income as well.
Besides, it’s not a 0 sum game… the government tends to spend more and take in less during a downturn…
It’s not as cut and dry as you would like it to be. GDP growth was negative for much of the steep decline in wages. State and local government tax revenue is largely derived from wages, whether they be received through sales taxes (primarily paid with wages), property taxes (primarily paid with wages), or income tax (a tax on wages). It makes sense that tax revenue will decline in a recession.
Governments should expect to spend more and take in less during a downturn, but they should also expect to take in more than they spend during an upturn. Unfortunately, instead of saving for a rainy day many state and local governments chose to pass excess tax revenues on to their employees in the form of wage increases. Realistically, this compounds the crisis once it occurs.
The chart unfortunately normalizes both to 100 at 2001 while what is actually needed is a comparison of levels. Was government pay lower or higher in 2001? I expect higher actually since it is large, labor intensive, with many layers of management, rewarding credentialism and tenure, but while the overall pay is probably higher, it is probably also flatter with more middle management but less at the actual top where perks rather than pay dominate than the private sector. Government would use the same excuse executives make, don’t you want to attract the best workers in to these areas? It is likely entirely health and pension which is the only area that grew over the last decade.
Interesting, graph,. However, it is difficult to interpret without information about how the job mix has evolved in each category. There was a huge push to outsource gov’t services in recent years. Janitorial, security, food service are typically easier to outsource than management and that would lead to a divergence in average wages.
Also, wages have diverged for high school vs. college educated workers in both sectors. If, as PAC notes above, the public sector has more educated workers, then average wages in that sector would expect to diverge from the private sector.
With out more information, we don’t know if your inferences are due to the fallacy of composition, true policy differences, or some combination of these factors.
[...] } Michael Mandell provides a nice illustration regarding public and private sector compensation: The chart shows that public [...]
Several comments echo my thoughts — the mix of professions, the portion going to health care, etc. might reveal a lot.
Certainly there was a time when teaching could not compete with the private sector for wages, so it fell to dedication and decent benefits to bridge that gap, poorly at best — I have a hard time believing that much has changed in that regard. Neither would I want my fire chief and police to have their wages cut down simply because so much of the private sector has been pushed into retail clerking and truck driving — I would prefer attacking the structure of the economy.
In the meantime, perhaps governments need to recognize that in a service economy, services cannot remain immune from taxes, and the public needs to understand the presumptions behind payment for their public services and what has shifted. In my own experience, property values plunged but property taxes still went up; however the materialistic over-consumption of imported goods seems to have dropped a bit and it amazes me that there was no contingency planning for that. It could be the wave of the future, particularly with an aging population that will eventually slow the upgrading of kitchens and the wearing out of tires and cars with commuting.
I would be hard pressed to believe that education has anything to do with the divergence. If this were the case, a similar divergence would have been seen prior to 2004.
But let’s not delude ourselves. The divergence would be far greater if job losses were taken into account. Not only does the public sector pay more, it has kept far more employees on during this downturn, neither of which it can afford to do.
“Since January 2009, employment has decreased in the private sector at an average rate of 0.3% each month; this is 6 times faster than employment decreased in government.”
http://mercatus.org/publication/public-vs-private-unemployment
“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.”
Yes, the arithmetic IS very clear. Just eyeballing that graph, virtually all of the difference comes from stagnation in private sector pay between 2004 and Q1 2008. The recession started in December 2007 by most measures.
This graph doesn’t show higher wages for public workers “while the private sector struggles;” it shows the private sector sticking it to private sector workers.
Is this anything more than just a normal cyclical pattern?
The data goes back to 1982 and when you look at the growth of the entire series it appears that public compensation growth just follows private compensation growth with a one or two year lag. Maybe we should wait a year of two and see if the pattern reverses before we get too excited about this.
“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.”
Government workers also pay taxes.
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