Reforming the Structure for Public Sector Pay

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Last Saturday, the New York Times published a sad story of another Californian town heading for bankruptcy under the weight of unaffordable pensions and salaries. The figures should astonish even the politically jaded. In a town where the median household income is less than $32,000 the average pay and benefits for a member of the police department exceeded $177,000.

Rich public employee compensation schemes create public tragedies. First, poor people suffer the injustice of overpaying people richer than themselves. Second, when the bubble bursts, a city can no longer afford needed services, leading to higher crime rates and worse educational results. Those with most to lose live in high crime areas and low performing school districts. So the poor take a double hit.

Often the reaction is to blame” greedy” public employees. But this sentiment is wholly inappropriate. These people were just operating rationally within a structure of bad laws. The real question is what can be done to prevent similar tragedies in the future. Here are three suggestions:

First, reduce the legal privileges of public employees, like any right to strike, to require government to engage in collective bargaining, and to collect union dues by coercion. As Max Schanzenbach and I have discussed, public sector unions are not like those in the private sector. In the private sector, negotiations over wages are genuinely two sided with management vigorously representing the interests of shareholders. By contrast, in the public sector the real party in interest—the citizens of the city or state—are generally not well represented at the bargaining table. The elected officials cannot be counted on to negotiate effectively because they want the campaign contributions and political muscle that unions can bring. The recurring dilemma of democratic politics is that politicians often benefit by giving away benefits to such concentrated groups at the expense of the rest of us. Privileges for public sector unions exacerbate this fundamental problem rather than diminish it.

Second, make the salaries, pensions, and health benefits of public sector employees transparent so that citizens can compare them with their own. By law citizens should receive annual summaries of compensation and hours worked by the civil servants who work for them. While most people do not pay much attention to politics, many are likely to agitate when they discover that government workers get more benefits for similar or less work than they do.

Third, privatize public services where possible and prudent. Private companies have every incentive to hold down pay to the market wage. To be sure, privatization risks sweetheart deals with companies rather than with unions. But public contracting laws can temper this problem. Moreover, while private companies can influence politicians with campaign contributions, unions wield two weapons—both resources and an organization that can deliver its members’ votes on election day.