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.
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Friday ~ July 15th, 2011 at 2:06 pm
Wonks Anonymous
The government could both be paying too much and getting too little. Let’s say it sets an above market wage-rate. It is flooded with applicants, and it picks from them randomly (with a bit of effort, it could also pick worse than randomly, but it’s simpler to ignore such perverse decision methods). There’s also the question of whether the form of compensation (which is heavily backloaded to later years) is attracting the best workers for the buck.
One implication of the stick-wages theory of unemployment is that most employed people could simultaneously be overpaid. Are there any studies on how workers react when their nominal wages are cut during a recession?
Friday ~ July 15th, 2011 at 2:11 pm
Leigh Caldwell
Good argument, though I guess it’s a little more complicated than that because labour prices increase over time without the employer going back to the market and re-hiring.
In the apple example, this would be like buying a contract for continuing apple supply, then increasing the price to reward or incentivise the farmer to keep giving you good apples. It is quite possible for the apple buyer to get that estimate wrong and end up paying the farmer much more than they need to.
I’m not saying that’s what happens with public employees, but it could.
Friday ~ July 15th, 2011 at 2:17 pm
Joshua Probert
If the state can’t fire bad workers and is indiscriminate in hiring, I don’t see how this would apply.
They are “unduly hiring higher quality workers” who actually have no higher quality. So you had various civil service exams and political (or union connections).
Friday ~ July 15th, 2011 at 5:22 pm
Gepap
If your conditions were true, perhaps your argument would have some validity, but your conditions aren’t true, not for the bureaucracy.
Saturday ~ July 16th, 2011 at 9:49 am
paulreece42
This assumes a closed model where money has a fixed value though, where all workers are equally good at negotiating salary.
In reality that’s just not how it works. If someone in India is making $20k they’re living like a king with personal servants and everything, but in USA they’re hardly getting by.
Thursday ~ July 21st, 2011 at 4:51 am
MP
This is interesting, but I’m not sure it’s comletely convincing. As a few other people have pointed out, there are very plausible mechanisms that could lead public sector hiring and pay to be systematically wrong. That said, this is a good challenge.
It reminds me in a way of Modigliani-Miller in how that challenged conventional ideas about the effect of capital structure on value leading to a more careful identification of specific mechanisms through with it could have an effect. Here, it’s not enough to say that public sector workers are overpaid, because you should really start from a presumption that the market would respond. But that doesn’t mean that you can’t carefully identify real reasons why it isn’t doing so.