Yglesias gets it right on the question of whether workers are overpaid.
The more I think about this question, the less sense I think it makes. In a competitive labor market, nobody is “overpaid.” If one restaurant pays its line cooks more than another restaurant, it’s presumably trying to get privileged access to higher quality workers. The question is whether or not public agencies are purchasing unduly high-quality labor. And that’s not a question that it makes sense to ask in general. Baltimore probably should be investing more in obtaining the best police officers possible than Bangor. Doing statistical controls ends up sort of further obscuring this.
There are certain issues people seem to have a lot of trouble with – even economists. This is one of them. As Matt alludes to, are you say labor markets work or not. If you are saying labor markets basically don’t work then that’s a major statement and we should really talk about it more in depth.
Otherwise, what you are saying is that firms – public or private – are sampling from an inappropriate labor pool. They are attracting workers that are too high quality, in the “overpaid” case and workers that are too low quality in the “underpaid” case.
I think that this has a hard time getting through because salaries are so riddled with moral implications. The notion that buying people is something different in degree but not in kind from buying apples is hard to swallow.
I see the same thing going on in monetary policy. Matt and Krugman have had some recent posts on how hard monetary policy is. Indeed, early in my study of economics I brushed off monetary economics as unserious because it seemed to simple. I read Walsh’s Monetary Theory and Policy and thought, is this even economics? This is like something you might give a bright twelve year old.
Yet, I there appears to be something about money qua money which makes even simple treatises difficult for folks to digest. I think its because like labor, its wrapped up with a lot of moral intuition.