September 26, 2011
Government Workers and Fiscal Problems
Government Workers and Fiscal Problems-Becker
Posner's results are consistent with findings of little connection among the richer countries between their per capita incomes and the share of incomes spent by the government. Unfortunately, causation is hard to determine from such regressions. For example, as Scandinavian countries got richer, they raised government employment, partly by taking over much of the child-care services traditionally supplied by families. This helps explain why women in Scandinavia are much more likely than men to work for the government. A further problem with using government employment as a measure of government's impact on an economy is that many regulatory agencies, such as the EPA (Environmental Protection Agency), the Fed and other central banks, and labor departments often have large effects on an economy through regulations that require few employees.
Public employees in Greece, Italy, in state and local governments of the United States, and government workers elsewhere are in the news in recent months not so much because of links to productivity, but rather because of connections to fiscal difficulties. Private companies typically adjust to financial problems partly by reducing employment and earnings of their employees, although such adjustments are harder in countries with strong unions and stringent labor protection legislation.
Both employment and wage adjustments are much harder for governments in difficult fiscal situations. Many of their employees are protected from being laid off by union contracts and civil service rights. It is also usually extremely difficult to cut their earnings, again partly due to restrictions imposed by unions and government rules. Government workers also take many of their benefits in the form of early retirements, and generous health benefits and incomes after retirement. These inflate current government spending when many past employees are receiving retirement benefits. In addition, as Posner indicates, votes of government employees can influence election outcomes if they are aroused by what they perceive to be unfair treatment from an incumbent political party.
Government workers in countries like Greece and Italy frequently retire in their fifties after only 20 or 25 years of government employment, while private sector employees are more likely to work into their sixties. Yet, even though they have generous retirement benefits as well as early retirements, their salaries are on a par with or exceed those of comparable private sector workers. This explains not only why lay off rates are low among government workers, but also why quit rates are lower than in the private sector. Why quit a government job if one is likely to earn less, and have less generous benefits, when working for private employers?
These benefits of government employment may be tolerable, and also extremely difficult to reduce, when economies are growing robustly, and government tax receipts are in balance with government spending. But they become a serious problem when tax receipts fall in a recession, and governments begin to run sizable deficits, and have problems funding their domestic, and especially their foreign, debt. Governments then come under pressure to cut spending, including spending on employees. Yet this adjustment is hard when government workers make up a sizable fraction of all workers-their share is over 20% in Greece- and when many government employees have tenure, fixed wages, and generous retirement benefits.
The state of California hired many employees and paid them well while times were good during most of the period from 1990-2007. Then the Great Recession led to huge holes in the state's budget, which in turn forced confrontations with teachers and other unions as California tries to bring its bloated spending in line with sharply reduced revenues. A liberal Democratic recently elected mayor of Chicago, Rahm Emmanuel, has been staring down the teachers union (and other government unions) as he tries to get teachers and other government employes to work longer hours as he confronts a very serious budget deficit.
Greece's problems are well chronicled: it borrowed heavily from French, German, and other banks during the good times of the early 2000s when its government ran sizable (although disguised) deficits. Greece is now under pressure to cut government spending during what will be a prolonged austerity period as it adjusts to the new economic realities. The government's overpaying of employees is not the only problem it faces, but this is surely a significant one.
I have no doubt that for various reasons government employees are on average less efficient than private sector workers doing comparable work. Yet since many other variables are also important I am not surprised that correlations are weak between the share of workers employed by the government and income per capita, or even with the growth in per capita incomes. Nevertheless, overpaid and underperforming government employees are a drag on productivity, and especially on fiscal outlooks when economies are weaker. This helps explain why many state and local governments of the US, and governments in countries like Greece, are encountering serious obstacles to improving their fiscal houses as they respond to the Great Recession.
Too Many Government Workers?—Posner
Much of the concern with government deficits in countries as unlike as the United States and Greece focuses on public employees, viewed as overpaid parasites who, being paid by the government, contribute directly to the public debt. And there are indeed good economic reasons to expect the public sector to be less efficient than the private sector. The principal reasons are four: the incentive provided by the profit motive is absent; public agencies tend to be monopolies; public employees are voters; and public employers tend to substitute nonpecuniary for pecuniary emolumens, such as tenure and generous retirement benefits, because the public notices and reacts adversely to high government salaries.
Therefore one might think that the larger the fraction of public employees in a nation's workforce, the less efficient the nation's economy, and so the lower per capita GDP would be. (Commonly for international comparisons GDP is translated into U.S. dollars on the basis of estimates of purchasing power parity, and I will do that.) I decided to examine that question empirically, with respect to 27 countries, including the United States and Canada from the Western Hemisphere, Australia, New Zealand, Japan, Taiwan, and Singapore from East Asia, Israel, and all the countries of Western, Northern, Central, and Southern Europe, plus Poland. The countries were not chosen at random, but instead selected as being at least roughly comparable to the United States in their economic system and political culture.
The percentage of public employees in the workforces of these countries ranges from 6.35 percent in Singapore to 33.87 percent in Sweden. Indeed the three lowest countries, and the only ones with fewer than 10 percent public employees, are Japan, Singapore, and Taiwan. The highest countries after Sweden are Denmark (32.3 percent) and Norway (29.25 percent). The remaining Scandinavian country, Finland, is fifth with 26.31 percent. In fourth place, just below Denmark, is Hungary. The other countries with public-employee percentages above 20 percent are Greece (22.3 percent), Canada, and Poland, Greece being the lowest in this group of eight countries, despite all the negative attention its public-employee workforce has received lately.
The rest of the countries in my list (that is excluding the above-20 percent and below-10 percent countries), are grouped pretty tightly between about 12 and 19 percent. The United States is in approximately the middle, with 16.42 percent. Surprisingly, it is well ahead of Israel, Spain, Italy, Germany, France, and Portugal. The European countries with the lowest percentage of public workers are the Netherlands and Austria, but Portugal is only slightly above the Netherlands.
Per capita income, in purchasing power parity terms, ranges from $17,537 in Poland to $53,748 in Norway; interestingly, both have very high percentages of public employees. Regression analysis reveals no systematic correlation between percentage of public employees and per capita GDP, except that the Scandinavian countries as a group exhibit a statistically significant positive correlation between those two variables, if the Asian countries are treated as a separate variable—Singapore has the second highest GDP per capita after Norway, yet the lowest percentage of public employees.
The upshot is that there does not appear to be a relation between a country's prosperity and the number of public employees it has. (Or between population and the percentage of public employees, though one might expect that, given fixed costs of government, the percentage of public employees would be higher the smaller the population. Singapore is a dramatic refutation of the point, as it has a population of only 4.6 million, one of the lowest of the 27 countries, yet it has the lowest percentage of public workers.)
A more sophisticated analysis would cover more countries (there are 195 countries in the world) and correct for more variables; obviously there is much that affect a nation's prosperity besides the percentage of its public employees. I am nevertheless surprised that my crude analysis should yield no correlation between per capita GDP and percentage of public workers in a nation's workforce. The critical omitted variable may be the jobs the public employees do. Are they teachers? Bank examiners? Revenue agents? Food and drug inspectors? Air traffic controllers? Police officers? Medical workers? Or are they railroad workers or other employees of business enterprises owned by the government, politicians' relatives, licensing officials taking bribes from small business, or beneficiaries of a spoils system of public employment? It does seem significant, though, that the Scandinavian countries should be as prosperous as they are (though Norway, with a very small population and huge oil reserves, may be a special case) despite having such a high percentage of public workers, and it is equally striking that the East Asian countries (though my sample of them is very small) should be so prosperous despite having such a small percentage of public workers. Perhaps the relation between a nation's economy and the percentage of its public workers is determined by a political and social culture that determines what tasks are assigned to government, what incentives and constraints are placed on public workers, and who is attracted to public service. Maybe, with the right conbination, public service can be as economically productive as private enterprise.