Sunday, February 20, 2011

Public Employee Cost Driving Discontent

Wisconsin seems to be ground zero in the debate on public employee cost versus private sector employees. The issue has moved to the forefront due to most states needing to deal with significant budget deficits. And these deficits have been magnified due to the persistently high unemployment rate experienced even as the economy has come out of the last recession.

As the below chart shows, the salaries of state and local government workers, as well as benefits, have grown out a faster pace than for the private sector.

From The Blog of HORAN Capital Advisors

In a severe economic slowdown like recently experienced, the rate of growth in government sector pay and benefits is not sustainable; hence, the debates taking place in many states like Wisconsin. Additionally, the unemployment rate differential between the public and government sector continues to remain wide. The issue then becomes, who pays for the government sector employees if private sector employment levels remain stubbornly low. At the federal level, the government can print more currency (not without risk however), but at the state and local level, currency printing is not a viable option.

From The Blog of HORAN Capital Advisors

At the end of the day, the issue of public employee cost versus the private sector will need to be addressed. Also, this is not simply a short term problem between public and private sector wages/benefits. As more and more baby boomers enter retirement, the cost associated with entitlements as currently structured, like social security and Medicare, is not sustainable and will need to be adjusted. This will likely put an additional spotlight on the benefit differences between the public and private sector.


Zack said...

As a long-time reader and fan of this blog I was surprised to see this kind of misinformation in one of your posts. It is true that federal employees are generously compensated for their service but, as you can read about in a report from Jeffrey Keefe of Rutgers, state and local employees most certainly are not. You can read his report here:

The information that you have sited in your article seems to lump federal employees together with state and local employees, which helps to make your case but has the unfortunate side-effect of skewing the data. Furthermore, it is probably worth noting that, although the federal government has not engaged in mass lay-offs, states and local governments have. In fact, were it not for the mass lay-offs impacting public employees on the state and local level, the unemployment levels in the country would have improved substantially in the past year. I understand that many conservatives have a bone to pick with unions but it seems like the anger directed at public employees has nothing to do with economics or with state and local finances but rather with politics and fundraising.

David Templeton, CFA said...

Zack, it isn't just compensation that has become an issue. The level of growth in the cost of current and future benfits has become a significant drag on state and local finances. As a recent Bloomberg article notes, "U.S. local and state government employees enrolled in family health-insurance plans paid on average 17 percent of premiums in 2009, according to the Agency for Healthcare Research and Quality, part of the U.S. Department of Health and Human Services. Private-sector workers paid on average 30 percent, according to data compiled by the department." At issue is the public employees share of this increase in cost has lagged the growth in the cost increase.