Tag: government workers

Unions and Government Worker Pay

Yesterday, USA Today examined the average pay advantage of state and local government workers over workers in the private sector. The article found, for example, that government workers in California earned an average $71,385 in compensation in 2009, or $7,977 more than the average for private sector workers in that state.

Are these government worker pay advantages related to union shares in the states? I performed a simple regression analysis to find out. The answer is “Yes”—states with more unionized government workforces tend to have a higher government compensation advantage.

The chart below shows the regression results, including the raw data (one blue dot for each state) and the regression-fitted line (pink dots). As the union share increases, the pink line indicates that the average government pay advantage increases. In particular, the pink line indicates that for every 10 percentage point increase in a state’s union share, the average government worker pay advantage increases by $765 annually.

Let’s apply these results to Wisconsin, which has a union share of about 50 percent in its state and local workforce. Suppose that Wisconsin makes legal reforms resulting in the union share falling to 10 percent. The regression indicates that the decline would save Wisconsin taxpayers about $3,060 annually for every state and local worker, or about $872 million in total annual workforce costs for the state. (The state has 285,000 state/local workers).

(The regression was statistically significant at the 95% level, with an F-statistic of 5.9 and a T-statistic on the union share variable of 2.4. The R-square was 11 percent, which indicates that union share explains only a modest portion of the overall government pay advantages between the states).

Furor over Government Employees

Concern about the pay, benefits, and performance of government employees seems to be growing. Chris Edwards’s articles on how government pay is outpacing private-sector pay have generated media attention, cartoons, and angry rebuttals from the head of the federal Office of Personnel Management. Steven Greenhut has a new book, Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation, and is writing lots of newspaper articles on the high costs of government unions, also the topic of a recent Cato Policy Analysis. New Jersey unions are not finding much sympathy as they try to hold on to their raises, benefits, pensions, and work rules in the face of Gov. Chris Christie’s attempt to cut the budget. Liberal journalist Mickey Kaus is running for the U.S. Senate, trying to warn California’s voters and the Democratic Party about the excessive power and destructive influence of public employee unions.

And now Saturday Night Live. The zeitgeist-riding comedy show had a truly harsh sketch this weekend about the “Public Employee of the Year Awards.” It touched every element of popular resentment toward government workers: “people with government jobs are just like workers everywhere – except for the lifetime job security, guaranteed annual raises, early retirement on generous pensions, and full medical coverage with no deductibles, office visit fees, or copayments” – “retirement on full disability” by an obviously young and healthy worker – “Surliest and Least Cooperative State Employee” – “3200 hours [a year] on the job, all of it overtime” – New York school janitors living in Florida – employees with two current jobs and full disability – an entire workday at the DMV without serving a single customer – no-work contracts –  surprisingly early closings – and “he’s on break.”

Time for unions to start worrying?

Wednesday Links

  • Federal judge dismisses charges against Blackwater guards over the killing of 17 in Baghdad. David Isenberg: “The fact that the Blackwater contractors are not getting a trial will only serve to further increase suspicion of and hostility towards security contractors. It is going to be even more difficult for them to gain the trust of local populations or government officials in the countries they work in.”
  • New report shows state and local government workers have higher average compensation levels than private workers.
  • Podcast: “Televising and Subsidizing the Big Game” featuring Neal McCluskey. “Everybody should watch the National College Football Championship because whether you’re interested or not, you are paying for it,” he says.

State Budgets and Employee Compensation

Today, Cato released a report on employee compensation in state and local governments. As states struggle to balance their budgets in coming months, they should look to find savings in employee compensation, which represents half of all state and local spending.

The particular issue of excessive state pensions is being probed by newspapers across the nation. Over at Reason, Nick Gillespie discusses the problem in his home state of Ohio. That state’s newspapers teamed up to pen a series of articles on government pensions, which are representative of the growing pension problems in many states.

There has been a parallel series of articles across the nation on “pay-to-play” state pension scandals. These scandals involve Wall Street firms bribing public officials to get a slice of the government’s financial business. There is pay-to-play corruption in California and pay-to-play corruption in New York and many other places.

The solution to both of these problems is the same: moving the nation’s 20 million state and local workers from defined-benefit to defined-contribution pension plans. That way, governments wouldn’t have to hold giant pools of pension investments, the benefit structure of government workers would be more transparent, and policymakers could more easily cut compensation to balance state budgets.

Perceptions of Government Pay

A new poll by Rasmussen finds that the general public has an accurate assessment of government worker pay.

Compared to the average government worker, most Americans think they work harder, have less job security and make less money.

In fact, 59% of Americans say the average government worker earns more annually than the average taxpayer, according to the latest Rasmussen Reports national telephone survey. Just 15% don’t believe that to be true, while another 26% are not sure.

Among those who have close friends or relatives who work for the government, the belief is even stronger: 61% say the average government worker earns more than the average taxpayer.

Feeding that belief is the finding that 51% of all adults think government workers are paid too much. Only 10% say they are paid too little, while 27% say their pay is about right.

Bureau of Labor Statistics data indeed shows that government workers work fewer hours in a year and have much higher job security than private sector workers. And I’ve argued that they are generally overpaid, and by increasing amounts.

For more, check out:

Government and GDP

The expansion in government and poor state of the economy got me thinking about how government growth is reflected in measured gross domestic product. So here is a wonky look at the treatment of government in the Bureau of Economic Analysis GDP data.

Data notes: By “government,” I mean total federal, state, and local. For 2009, I’m using the average of second and third quarter data. All data from BEA Tables here.

GDP measures total production. In 2009, government production was 20.7 percent of U.S. GDP.  Government production is roughly the sum of government value-added (the stuff it produces itself) and government purchases. The first item, government value-added, was 12.4 percent of GDP and mainly consists of employee compensation. For example, the Pentagon produces output by adding together fighter pilots, which it hires, and fighter jets, which it buys.

A more commonly cited measure of government is total government spending. In 2009, that was 38 percent of GDP. The difference between this number (38 percent) and the production number (20.7 percent) is 17.3 percent, and represents the sum of government interest payments and transfer payments to individuals and businesses.

Figure 1 shows how the three measurements of government size have changed over time. Government production has remained fairly stable as a share of the economy, but total government spending has soared. The growing gap between these two lines mainly represents the massive growth in transfer (or subsidy) programs, such as Social Security.

12-10-09 edwardschart

How Does Government Growth Affect Measured GDP?

Consider how the recent rise in government spending might have affected measured GDP. First, let’s look first at the production part of government spending. The important thing here is that we don’t know how much government workers actually produce because their output is generally not sold on the market. As a consequence, the BEA measures their output as the sum of their compensation amounts. Also, we know the dollar value of the things the government buys, but we don’t know how much those intermediate goods actually produce when in the hands of the government. So the government production portion of GDP seems kind of shaky, despite the superb efforts of the BEA to assemble all the data.

Anyway, let’s say the government adds a new worker with pay of $100,000, the BEA measures GDP being boosted by $100,000. But it might be that the worker doesn’t actually produce anything useful, and he adds zero to the economy’s actual output.

If the government hires that worker away from the private sector, private GDP would go down by about $100,000. As a result, overall measured GDP would be unchanged. But that would be incorrect because the economy’s actual output fell by $100,000.

So let’s say the government spent $100 billion to hire a million new government workers. Let’s say half of those workers produced as much value as their salaries, but the other half produced nothing of value. The result of this government expansion would be that the BEA would overestimate U.S. GDP by $50 billion. (I am assuming that the government’s hiring doesn’t change the unemployment rate. I’m also ignoring the distortionary effects of higher taxes).  

Now let’s look at the transfer or subsidy portion of government, which equals 17.3 percent of GDP.

Let’s say the government increases transfers by $100 billion, perhaps by increasing Social Security benefits, and funding it by higher taxes on wages.

If there are no behavioral responses among taxpayers and benefit recipients, measured GDP would be unchanged, which would be the correct answer.

But of course there would be behavioral responses. The higher taxes would induce people to work less and the higher Social Security benefits would induce people to save less and retire earlier. The results would be that output would fall, and that would be accurately reflected in measured GDP.

In sum, my purpose here was not to explore how a growing government affects the economy, which is a huge subject. Instead, it was to explore whether measured GDP accurately reflects changes in the size of government. The answer appears to be that the transfer part of government spending (17.3 percent of GDP) would be accurately reflected in a shrinking GDP, but that the production portion of government spending (20.7 percent of GDP) may not be. If workers produce less output when they work for government than when they work in the private economy, the latter portion of measured GDP will be overstated.