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From the demonstrations in Wisconsin against Gov. Scott Walker’s efforts to reduce public employee compensation to President Obama’s own two-year pay freeze on federal workers, the power of public sector employee unions has become a new center of debate.
But whether we should limit public sector pay and benefits and public employees’ right to collectively bargain for them hinges on whether government employees are overpaid to begin with. That remains an open debate, depending upon how the question is asked and which employees are analyzed. At the federal level, there is little doubt among academic economists that salaries are higher than those paid to private workers with similar education and experience–the 1999 Handbook of Labor Economics lists a number of peer-reviewed studies showing a salary premium of 10-20 percent. At the state and local level, salaries tend to be somewhat lower, but benefits and job security usually make up the difference. A recent raft of studies from left-leaning think tanks argue that state and local employees are underpaid even after benefits are considered, but these studies generally undercount government pension benefits and omit often-generous retiree health coverage.
Indeed, it would be ironic if unionization didn’t increase public sector pay. After all, isn’t that what a union is for, to get workers better compensation than they could get on their own?
In the end, overcompensation for public employees isn’t just about collective bargaining; it’s simply that the public sector is different from the private sector. In the private sector, there is a constant pressure on businesses to get pay right: Employers that pay too much go out of business, while those that underpay lose staff to competitors. While private labor markets are messy, the process more or less works: Since 1970, the ratio of employee compensation to total national income has remained at about two-thirds, despite all the changes in pay structures, health costs, pensions, and so forth.
In the public sector, none of this really applies. First, unlike private sector workers, public employees have a strong say in who their bosses are. In the 2010 election, in fact, the American Federation of State, County, and Municipal Employees was the largest single campaign contributor, spending over $90 million, with other unions kicking in more. Public employee unions spend this kind of cash for the same reason any special interest does: to elect candidates who agree with and will support them.
Second, those public-employee-friendly candidates, once in office, face a much looser budget constraint than in the private sector. There are no measures of profit or loss by which to gauge public employee pay, and, as recent events have shown, it is only when government budgets enter crisis mode that the hard questions start being asked.
Banning collective bargaining would reduce pay somewhat, but the larger institutional factors pushing compensation upward would still exist. That’s one reason so many governments have sought to outsource certain activities, to take advantage of the competitive forces in private markets.
In the end, the only private sector workers who get the same package of pay, benefits, and job security as government employees are workers at large, unionized companies. Should the public sector be governed by the same salary, benefits, and job rules that caused so many problems at General Motors? Personally, I think not.
Andrew G. Biggs is a resident scholar at AEI.
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