It's Time to Freeze Government Wages

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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.

Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute.

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