Government workers probably aren’t overpaid, and even if they are, we shouldn’t care. This is Paul Krugman’s message in a recent blog post that takes on the critics of government pay. He is wrong on both counts.
The Heritage Foundation has written extensively about public-private pay disparities, and we have found consistent evidence that government workers are overpaid, even after controlling for skill differences between the private and public sectors. Federal workers receive both wages and benefits above market levels. State and local workers receive sub-market wages, but they make up for it (and then some) with excessive benefits.
Krugman focuses on state and local workers, whose compensation is a bit tricky to compare to private workers. Some analysts calculate total state and local benefits using yearly government contributions to retirement and health funds. However, some states are currently underfunding the pension plans. In other words, what state and local governments pay for these benefits may greatly understate what their employees must eventually receive.
Krugman writes: “The fact that state and local governments haven’t been making large enough contributions to pension funds says nothing, one way or the other, about whether workers are overcompensated.” But of course it does. It means that the way we calculate state and local employee compensation—i.e., including only the funded portion of their benefits—grossly underestimates their actual compensation. Consider the full value of promised benefits, and the public sector suddenly looks well compensated indeed.
This pension shortfall could be $3 trillion or more, but Krugman says this is no big deal: “A ‘trillion dollar liability’ needs to be placed in context: state and local governments spend $2.8 trillion per year.” It still sounds like a lot to me, since $3 trillion could cover all police, fire, court, and prison services at the state and local level for the next 10 years.
But cutting public-sector pay is important for another reason as well. Government officials at the federal, state, and local levels are facing difficult and painful decisions about spending cuts and tax hikes. Getting excessive government pay under control is an excellent means of reestablishing fiscal credibility with economic forecasters, business owners, and—most importantly—voters. It will give long-term budgetary reform a fighting chance of passing.
In an upcoming article for the September issue of The American Spectator, Andrew Biggs and I go into more detail about the importance of the government pay issue. In particular, we cite an IMF study that evaluated when attempts to balance budgets in the industrialized world are ultimately successful. One of the best predictors of success was cutting the government wage bill. Congress should take this lesson to heart.
