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Beaches, Sunshine, and Public-Sector Pay

Theory and Evidence on Amenities and Rent Extraction by Government Workers -- David Neumark, UC Irvine
Oct 06, 2011 from 12:00 PM to 01:30 PM (America/Los_Angeles / UTC-700)
1130 K Street, Room LL3
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The issue of public-sector pay has come to the fore lately, in part because of state budget woes, and in part because of perceptions that public-sector workers, especially when they are unionized, are overpaid.  Freeman (1986) argued against the ability of public-sector unions to extract excessively high wage (“rents”) from taxpayers, because “Citizens unhappy with [the] level of public services can move elsewhere, reducing the taxable population and thus the ability to pay public sector wages.  Mobility places great constraints on public-sector union bargaining power” (p. 51).  But this view does not take into account variation across locations in the level of amenities for which residents are willing to pay.  In high-amenity locations, public-sector workers may have more leeway to extract rents from taxpayers.  Our paper first models and then tests for such a link, and the evidence supports this alternative view of pay setting by public-sector workers.  We estimate standard log wage regressions that include a public-sector/private-sector wage differential that can vary with local amenities.  The results show that the public-sector wage differential is larger in the presence of strong amenities, as predicted by the theory.  The results emerge for public-sector workers overall, and for two large groups of public-sector workers that are the focus of much attention with regard to pay: teachers and prison guards (correctional officers).  Moreover, the evidence is particularly strong for unionized public-sector workers, who are presumably better able to exercise political power to extract rents.

David Neumark is a Professor of Economics at the University of California, Irvine.  He is also a Research Associate of the National Bureau of Economic Research, and a Research Fellow of IZA.  He has held prior positions at the Public Policy Institute of California, Michigan State University, the University of Pennsylvania, and the Federal Reserve Board.  He is primarily a labor economist, and much of his recent research focuses on labor market issues relating to urban economics and economic development.  Examples of such research projects include: studies of the effects of city living wage laws; an evaluation of enterprise zones in California; a study of the gains to cities from locally-owned businesses; evidence on relocation of businesses across state and county borders; and measurement and estimation of the impacts of state business climates.  Neumark has published over 100 peer-reviewed in journals including: Journal of Political Economy, Quarterly Journal of Economics, Review of Economics and Statistics, Journal of Urban Economics, Journal of Regional Science, and Journal of Policy Analysis and Management.



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