Likely prompted by a new CBO study that argues federal workers are overpaid relative to private sector workers, Karl presents two questions I believe meant to imply that the government cannot overpay for workers. I would answer Karl’s questions with a question of my own: if the government offered a salary of a million dollars a year for a 30 hour a week mail carrier job, what would it get it return? Even though tens of thousands of workers from around the globe with a wide variety of skills would probably apply for the position, you wouldn’t get a million dollars a year in marginal product. Yes, at some margins if you offer more than you will get higher quality applicants. But the position must allow the possibility the marginal product large enough to compensate you, the employer, for the wages.
There are a couple of things that need to happen to get your extra wages worth, and that fact that this is low-skilled government work suggests this isn’t the case.
First, you need the extra dollars offered to lead to more skilled workers in fact being hired, rather than just more skilled workers queuing up for the position and first-come-first serve or some patronage determining who gets hired.
In addition, you need the extra skills to lead to extra value. If the majority of the overpaying was happening at the high end of the distribution where skills are more heterogeneous and extra skill has the potential to create a lot of extra value, I could buy Karl’s story that extra wages was buying valuable extra skills. This could be the case if the “overpaying” was happening for financial industry regulators. But the CBO report shows that the overpayment amount is inversely correlated with the level of education, with the most overpayment coming for workers with less than a bachelors degree., e.g. those that are least likely to have heterogeneous skills that extra wages can buy, and jobs with the flexibility to have those skills pay off. If the only thing a worker is allowed to do is trim the bushes at the Pentagon, or put stamps ons envelopes, there’s not a lot of job flexibility for extra skills to pay off, even if you hire a PhD. This is to say nothing of the incentives of government workers to actually create value once they’re hired into a job that might be both very secure and poorly monitored.
In short, it is certainly possible to overpay workers. If Karl doubts this is true, then he should try hiring someone to mow his lawn for $100,000 a year. Since he can’t overpay him he’ll expect to get at least that much back in lawn-mowing services.