State Employee Wages Grow Faster than Private Sector
State government in Ohio is getting bigger, not smaller, despite 6 years of a Republican governor and 1 ˝ years of a conservative legislature. Despite recent successes in slowing its rate of growth, state spending is still increasing at twice the inflation rate and about 1 percent faster than the personal income growth rate. Many politicians and political pundits point to the growth in Medicaid, education spending, and federal mandates for this growth. But another, less visible factor is also driving record spending by the State: Public employee pay.On average, state employees (not including those in education) earned $32,276 per year in 1994, 24.9 percent more than the average worker in the private sector. This translates into an annual employment pay “premium” of $6,428 for state government employees. This “wage premium” is higher than a decade ago. In 1986, the wage premium was only $1,078, or 5.4 percent. On the local level, in contrast, public employees earn less than private workers. In 1994, local government workers’ (non-education) average pay was $25,230, about 2.4 percent lower than private-sector workers.
When inflation is considered, state employee wage gains relative to the private sector are even more apparent. State government employee wages grew by 54.1 percent from 1986 to 1994. Meanwhile private-sector wages grew by only 30.1 percent. Since prices rose by 35.2 percent during this period, private-sector workers saw their living standards fall while state employees moved significantly ahead.
Ohio is not that much different from other states in this respect. A 1994 study by the American Legislative Exchange Council (ALEC) found that state government workers fared better than their private sector counterparts in 48 states. Ohio’s wage premium for state employees was in the middle compared to other states. This could change, however. Ohio’s rate of growth from 1980 to 1991 for state employee wages (compared to the private sector) ranked 6th out of the 50 states.
Why do public employees earn so much more? One reason is governments typically determine pay using administrative procedures, not market rates. In some cases, state employees are paid “prevailing wages.” In Ohio, this means union wage rates. Unions are often able to use collective bargaining laws to limit competition for workers and garner higher wages, thus inflating government compensation.
A second reason is government insulation from competitive market forces. Private businesses are constrained by market forces which limit the ability of workers to be overpaid. State government, however, is not faced with similar competition. All in all, the public-employee wage premium translates into added costs of about $411 million, more than twice the amount the state will spend to shore up low-wealth school districts over the next two years. This is also nearly 10 percent of the income taxes the state expects to collect this year.
What can be done? An important step in fiscal responsibility is ensuring public sector pay mirrors competitive market rates. This can be accomplished by doing two things. First, state policymakers must abandon the prevailing wage doctrine for setting wages. Pay must be based on competitive market wages not artificially high wage scales.
Second, competitive contracting and other forms of privatization can help bring public wages in line with competitive market rates. State governments often save between 10 percent and 20 percent by instituting a truly competitive bidding process. State policymakers complain that tight budgets are preventing them from enacting deeper tax cuts. It’s time for them to take another look at the spending side of the fiscal equation and at Ohio’s public employee wages and salaries.
Greg Delemeester, Ph.D., is a research advisor with The Buckeye Institute, the McCoy Professor and holder of the Milton Friedman Chair in Economics at Marietta College.
