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On "Costless" Benefits for Public Workers

Posted By Jason Richwine On September 28, 2011 @ 7:15 pm In Economics | Comments Disabled

In our work on public sector compensation, Andrew Biggs of the American Enterprise Institute and I have routinely counted enhanced job security as a benefit for public workers, and we have tried to quantify just how valuable it can be. Some critics have argued that public workers actually have no extra job security, but this is demonstrably untrue [1]. A more interesting criticism comes from a recent letter [2] to the editor in the Columbus Dispatch:

While job security usually is considered a benefit for public-sector employees, it should be included in the analysis only if it results in a cost to the employer.

It can be argued that reduced employer flexibility because of union restrictions (i.e., firing an employee, assigning new job responsibilities, etc.) is a cost to the public sector, but measuring such “costs” related to job security is no easy task. But Biggs and Richwine use a model to determine the job-security factor which has nothing to do with the cost to the public sector.

It should be emphasized that of course job security comes at a cost to employers. In the public sector, job security prevents governments at every level from quickly changing and adapting their workforces to meet evolving public needs.

Imagine, for example, a government agency that wants to cut costs by switching to a computerized record system, a school district that wants to hire more effective teachers, or a park service that needs skilled workers to operate new equipment. All of these innovations require replacing some existing workers with new employees who have more applicable skills. Preventing that replacement from happening, as excessive job security does, is a clear cost to taxpayers.

Nevertheless, job security does not necessarily cost employers the same amount that it benefits employees, so let’s assume for argument’s sake that the letter writer is correct that job security is, at least to some extent, a “costless” benefit enjoyed by public workers. In that case, should public–private comparisons really consider only employer costs for employee compensation rather than employee benefits?

Emphatically no. Employee benefits are what matter, and employer cost is irrelevant. To see why, let’s go to an extreme case. Forget job security for a moment and imagine that a magic genie appears before a state legislature and says that it will automatically double the salaries of every public worker in the state. For every dollar the legislature allocates to public-sector salaries, the genie will magically add another dollar.

In this case, knowing it has the genie’s help, how much should the state pay its workers? The correct answer is half the market rate. The genie will double the salaries to fair market levels, and then taxpayers can enjoy the savings. The money saved by the genie’s presence could be used for other spending priorities or tax relief. If the legislature continued to pay market levels as if the genie did not exist, then public workers would receive an undeserved windfall, taxpayers would not receive any savings, and the genie’s gift would result in no public benefit.

The “genie” in this story is, of course, any benefit to public workers that is costless. Even if such costless benefits exist, compensation is fungible. Employers can reduce compensation in costly areas (such as wages) in order to balance increased benefits in costless areas (such as, allegedly, job security). Thus, when comparing compensation, ignoring “costless” benefits to public workers leads to as much waste of taxpayer money as ignoring costly benefits does.


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URL to article: http://blog.heritage.org/2011/09/28/on-costless-benefits-for-public-workers/

URLs in this post:

[1] untrue: http://blog.american.com/2011/09/do-public-employees-actually-have-more-job-security/

[2] letter: http://www.dispatch.com/content/stories/editorials/2011/09/24/employee-compensation-study-seems-out-of-whack.html

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