IS IT TIME TO FREEZE GOVERNMENT WAGES?

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, says Josh Barro, a Senior Fellow with the Manhattan Institute.

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 percent faster than private sector compensation over the last three years, says Barro:

* Since the end of 2006, hourly total compensation (wages plus benefits) has risen 6.5 percent for private sector workers, essentially keeping pace with inflation; but state and local government workers saw their hourly compensation rise 9.2 percent.
* Federal civilian workers (about 10 percent 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 percent over the same period.

Why have public sector wages grown so fast, asks Barro?

* 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 percent 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 percent 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, says Barro.

Source: Josh Barro, "It's Time to Freeze Government Wages," Real Clear Markets, January 19, 2010.

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