A couple of followups on yesterday’s post about Wisconsin:
1) Several commenters have pointed out that the conflict in Wisconsin is not (directly) about wages, benefits or working conditions, but rather about collective bargaining. This seems to me to be a distinction without a difference; nobody would care about collective bargaining unless they expected it to affect wages, benefits, and/or working conditions. The point stands that workers who are very upset about losing their collective bargaining rights must expect to use those rights to achieve above-market compensation.
2) Jim from Wisconsin made a comment, and I made a reply, that I think bear highlighting here. Jim from Wisconsin said:
Futhermore, isn’t the idea in private business that if you want the best and the brightest, you pay them well? Don’t we want our Government programs run effectively and efficiently? Seems to work in the private sector, so why can’t this apply to public sector as well?
To which I replied:
The problem with this is that every “best and brightest” who is hired by the public sector is unavailable to the private sector, so it’s not at all clear that we WANT the best and brightest in the public sector. To take an extreme case, I don’t want the best Silicon Valley engineers tempted to work as high school teachers; I’d rather have them pushing the limits of technology. From the point of view of economic efficiency, this is the one and only reason why public sector employees ought NOT be overpaid. (It’s also a reason why private sector employees ought not be overpaid, but there’s generally less threat of that happening because of the private-sector profit motive.) It’s the one and only reason not to overpay public employees — but it is a good and sufficient reason.
I want to emphasize this. The main reason to hold down public salaries/benefits is not to save money for the taxpayers. I have no a priori reason to care any more (or less) about the taxpayers than I do about the public employees themselves. Instead, the main reason to hold down public salaries/benefits is to avoid drawing the “best and the brightest” away from more productive careers into public service.
Great points. But on the high salaries for the public sector workers, they have to be paid out of tax dollars. The more they get paid the higher the taxes on everyone. And every tax increase causes more deadweight loss than the previous tax increase (Mankiw says in one of his books if you double a tax, the deadweight loss quadruples and if you triple a tax the deadweight loss increases 9 times).
So there may be an exponential cost for every salary increase for the public workers. Also, to amplify your point about diverting good workers from the private sector, this might be subject to the law of increasing opportunity cost.
If we move a worker from the private sector to the public sector, the first one we would choose to move would give us the most public sector output relative to the private sector output lost. But the more workers we move, the less public sector output we gain and the more private sector output we lose. Each additional worker moved is not quite as good at producing public goods as the worker moved before him and he will be better at making private goods. So the cost of private goods given up for every public good gained may increase.
But surely if we have to have people in government intervening into the market wouldn’t it be better if they were smarter and brighter? Theoretically they would do less damage then? Maybe I’m being too optimistic about what even smart people can achieve for the economy when working under a non profit motive system?? I guess it doesn’t matter how smart you are, you can’t predict every consequence of your action…
Dave:
But surely if we have to have people in government intervening into the market wouldn’t it be better if they were smarter and brighter?
That depends entirely on what else the smarter brighter people could be doing instead.
In response to your original point: if you cut the pay of a tenured and well-respected teacher, even one who is not overpaid, it will be a pretty big inconvenience for him to have to find a new job at a new school (maybe tenure wouldn’t even transfer?)
Do you really want all the “best and the brightest” economists at Goldman and JP Morgan, and none at the Fed, Treasury and the SEC?
Or all the best biologists at the pharma companies and none at the NIH or the Center for Disease Control?
Regarding the “Best and Brightest” debate…
It is important to note that this “you get what you pay for” mentality is one that comes from the incentives it creates in the market setting. In order to “get more” you have to offer to pay more, or likewise, for the producer to get you to pay more they must offer more (quality or quantity). If consumers randomly offered to pay double for their purchases, they would not end up with more or better products…they would simply pay more. I suspect that in the public sector, our institutions are more like the random overpaying model than the model of competitive incentives.
“Do you really want all the “best and the brightest” economists at Goldman and JP Morgan, and none at the Fed, Treasury and the SEC?
Or all the best biologists at the pharma companies and none at the NIH or the Center for Disease Control?”
No. I want some of them at the Goldman or Pfizer and some of them in the public sector, and some of them teaching high school calculus. To use econ jargon, given a constant level of social output, I want them to be indifferent to each role, this requires the benefits of working for both, given a constant level of social output, to be more in line with one another.
Aaron: Thanks for saving me the trouble of saying this, and for saying it perfectly.
Wait a minute, this strikes me odd of you to say:
Several commenters have pointed out that the conflict in Wisconsin is not (directly) about wages, benefits or working conditions, but rather about collective bargaining. This seems to me to be a distinction without a difference; nobody would care about collective bargaining unless they expected it to affect wages, benefits, and/or working conditions. The point stands that workers who are very upset about losing their collective bargaining rights must expect to use those rights to achieve above-market compensation.
If the employer is willing to pay higher wages and provide better conditions through negotiating via collective bargaining than they would normally pay an individual prospective employee, who has virtually no negotiating power, then how are you determining this is ‘above-market compensation?’ This seems to me that both worker and employer surpluses are reaching equilibrium levels. Only when union workers are being laid off due to ridiculous demands or leaving their jobs because they’ve given up on improving their standards is their any sign of above-market or below-market compensation.
Richard: Perhaps you didn’t read the original post.
I understand the intuition behind “if we want better teachers, we have to pay them,” but I think that insofar as it’s the case**, it’s not a direct and sufficient causal mechanism. Rather, it’s that there might be a series of steps we could take that would end with us having better teachers and, along the way, it might require more money. E.g., you could imagine figuring out how to measure value-added teacher effectiveness better, posting very high potential wages to draw lots of applicants each year, and then savagely firing three quarters of every entering crop of teachers (not to mention many of their predecessors). But that doesn’t mean that paying any existing teachers twice as much is going to make them educate twice as well as they were before (value which they could be producing now but don’t because their current paychecks aren’t big enough). The existing institutional framework that determines how teacher salaries are set (not to mention who gets laid off when and how difficult this is to accomplish) doesn’t really give us much of a mechanism for turning more pay into better teachers.
** Which isn’t to take away from any of the arguments above. I’m interested in how you’d go about increasing quality & pay, which is different than asking when paying for increased quality would or wouldn’t be worth the opportunity cost.
I don’t follow the argument that just because we don’t want to hire potential brain surgeons as teachers, that therefore it follows that we do not want to pay more to get better quality teachers.
I read the original post Steve and I’ll ask again. How are you determining that using collective bargaining power is by default seeking above-market compensation? You haven’t logically answered this. It can be used as such. Your argument, however, was if you cut the pay of an overpaid worker he’ll scream bloody murder. You haven’t answered how public sector workers using collective bargaining is by default seeking above-market compensation. Collective bargaining exists in the private sector as well. Are all those in the private sector who use collective bargaining with their employers then seeking above-market compensation?
Your argument is the equivalent of if I protest the government’s revoking of my right against unreasonable searches and seisures without a warrant, then I must have something to hide.
Richard,
I’ll bite. Yes, in general, you would think that attaining and using market power would push prices above market, absent reason to suppose something is preventing prices from rising to the competitive rate. That’s true for private markets as well.
And yes, if someone complains about a price drop but doesn’t sell elsewhere, I would take that as evidence that he can’t get a better price elsewhere. Why don’t you?
@Steve: I still think there is another reason to not want to overpay public employees to get “the best”. You won’t get them anyway. Private employers have an incentive to get the best they can find, but public agencies and those who control them often have veryu different incentives. These can include “affirmative action”, or cronyism, or pressure from the other current employees and their unions. So often enough the “best” will be passed over.
This has a net cost in general welfare.
@Neil: I think you do follow the argument. I think you just don’t like the conclusion. Extreme examples highlight the logic but just because the extreme example is unlikely does not mean the logic isn’t clear. As your remark suggests the differntial will rarely be extreme enough to induce Feynman to forsake science for janitorial work; the effects will be much smaller. The effect might be small per person but there are a lot of public employees and the sum of the losses can be substantial.
Ryan,
First off, by all means, do bite…I’ll get back to you later on today however. School has got me swamped until the evening.
I have an a priori reason for favoring taxpayers — they are being coerced to transfer money to those public sector employees.
Ken B.
The logic is simply wrong. A restaurant, say, might not want to hire a world renowned chef, but that does not mean it does not want to pay more in order to get something better than a short order cook. One could continue the examples ad nauseum.
And it has nothing to do with whether I like the conclusions. In fact, I don’t care. I will however point out a logical fallacies.
If top talent wants a 40 hour work week, their benefits paid at 100%, and a defined benefit pension plan, then maybe companies seeking top talent could:
– Not ask top talent to work more than 40 hours per week, or provide extra compensation when they work more than 40 hours.
– Determine how much it is willing to compensate top talent. Subtract the cost of health insurance and a defined benefit plan and pay top talent what is remaining.
– Seek long term capital appreciation so that top talent sees a future with their company.
If it is impossible for anyone/group to use actuarial/economic/investment skill to determine a cost for a defined benefit retirement plan, then please disregard the above.
Of course if it is impossible then most Americans like me are really screwed. I have neither types of these skills and so I’m pretty clueless about whether the investments in my 401(k) will allow me to retire in the U.S. when I’m 60 or in Yemen when I’m 75.
AC
The taxpayer is being coerced to pay taxes to hire public servants for their labor, the same way the taxpayer is coerced to pay taxes to hire soldiers to defend the country. That is the nature of government.
Whether the public servants are overpaid for their services is another question. And I don’t buy Steve’s smoking gun. If complaining when your pay is cut is the definition of being overpaid, then I wager that 99% of Americans are overpaid.
Richard: “If the employer is willing to pay higher wages and provide better conditions through negotiating via collective bargaining than they would normally pay an individual prospective employee, who has virtually no negotiating power”
No negotiating power? Is it too trite to respond to this merely by pointing out that slavery has been illegal in the US for more than 200 years?
Gah, that was supposed to say more than 100 years. Still, the point stands – individual employees are not forced to take any job.
“But surely if we have to have people in government intervening into the market wouldn’t it be better if they were smarter and brighter? Theoretically they would do less damage then?”
Since when does intelligence and ethics walk hand in hand?
If the workers are really complaining about the end of collective bargaining, then might it not be the unions stirring up the workers to complain? After all, it sounds like the unions are losing a lot more than the workers.
Wouldn’t this mean (to badly mix metaphors), that there is a smoking gun, but it’s on the other foot?
Isn’t collusion though inherently just part of life? When one girl calls another girl a slut for giving away sex too cheaply/quickly, do we frown on this attempted collusion? my point is that subtle collusion happens all the time so should we even bother to stop explicit collusion among individuals?
I’m consistently disappointed at the way you recast your misunderstandings of political situations into simple but completely incorrect logical equivalencies. It’d be much more honest to admit that you don’t understand the role collective bargaining plays, or why people care about it – because you don’t.
However, even if future bargaining over wages is the *only* reason people would care about it (which is false) and even if that meant you could pretend that caring about collective bargaining is equivalent to caring about wages, you’re still ignoring the fact that they agreed to all of the wage & benefit cuts being proposed. So to the extent that collective bargaining = wages (which is a false premise), it still doesn’t support the actual point you intended to make.
Simply, you claimed that the amount of protest about wage cuts suggests they’re currently significantly overpaid. But in fact, they are willing to take these wage cuts. Whatever they fear for the future, the direct evidence contradicts the point you intended to make, even if the only thing they fear for the future is an inability to negotiate wages.
Ok, here…
First off, John, seriously?! No way! Slavery is illegal? Better change those tags on the back of the shirts that I sell from “100% cotten picked by blacks” to “100% cotten.”
Seriously, way to strawman what I was saying.
Ryan:
And yes, if someone complains about a price drop but doesn’t sell elsewhere, I would take that as evidence that he can’t get a better price elsewhere. Why don’t you?
One problem I think with Steve’s example (which now that I’ve read over my responses, it is my fault for not stating this earlier) is that his claim that collective bargaining means workers are seeking above market level compensation ignores inflationary expectations. Suppose workers in a union, whose wages are not indexed for inflation, expected inflation to rise soon or in the near future. By the time they have the option to renegotiate their wage contracts, they may collectively bargain to what they percieve the new potential market rate would be for their type of work at the expected price level. At the time it may seem like seeking above-market compensation, but in real terms it really wouldn’t be.
Richard, I guess that answers my question in the affirmative. Slavery is illegal => no-one needs to take a job if they don’t want to => employees’ bargaining situation is symmetric with employers’ bargaining situation (no-one needs to offer anyone a job if they don’t want to (modulo “equal rights” legislation”)).
Ford, GM and Vokswagen aren’t allowed to get together to decide how much they want to pay their workers. Does this mean they have “no negotiating rights”?
@Cos: I will ignore what returning to a blog to be “consistently disappointed” suggests about the alternative uses of your time and focus on a particularly surprising passage from your contribution above:
“Simply, you claimed that the amount of protest about wage cuts suggests they’re currently significantly overpaid. But in fact, they are willing to take these wage cuts.”
SL’s point was not so much “protests suggest overpayment”, rather “protests confirm overpayment”. (You added ‘significantly’ to your own bit of recasting.) “But”, you say, “…in fact, they are willing to take these wage cuts” – you’ve hit the nail on the head. They are willing to take “these” wage cuts as long as they can retain the ability – through collective bargaining – to accure “other” wage increases in the future.
As far as the evidence contradicting the point – the evidence is that people, instead of finding alternative employment opportunities or spending more time with their family, are choosing to protest the loss of a mechanism that will improve the probability that they are able to garner above-market wages and benefits in the future. That behaviour reflects the value the protester’s place on the mechanism and, all-but-confirms that they are, in fact, over-paid.
John, but isn’t Ford and GM in effect a very large collection of individuals who hire people to represent them in much the same way unions do?
Napoleon said “people will die for ribbons”. Collective bargaining may be a form of ribbon – people will fight very hard for it as a right without considering whether it gives them overpayment. If the workers believed that collective bargaining was needed to obtain proper pay rates, they may well fight very hard to keep them, even if they were mistaken. It is not a “must” that people “expect” their collective bargaining to achieve above-market compensation.
Steve, you say: “Instead, the main reason to hold down public salaries/benefits is to avoid drawing the “best and the brightest” away from more productive careers into public service.”
Fair enough.
But, how DO you set the salaries/benefits in public service?
How do you set the salary of a biologist at the CDC as opposed to a biologist at a pharma company?
Richard,
As I understand it, teachers do get cost-of-living bumps (at least, that’s what I remember was the case for my mother, who retired from a WI school district a year ago). But again, that’s pretty much irrelevant to the question. Whatever pay is, and however it moves, if it is cut and the new level is worse than what you get elsewhere, you would go elsewhere. If not, then not. Are you disagreeing with this claim?
I would assume that if their work provided equal benefit, then the CDC biologist should be rewarded the same as the pharma one. The reward may not all be in money, some could be in working conditions etc. It is also very difficult to asses if they provide the same benefit.
So what is the correct level of pay? Especially if the service provided will only be done by Govt., so there is no direct comparison possible.
If the Govt identified thst if someone were to perform a conplicated series of motions, $200,000 was magically added to the USA economy in real goods each year. To perform the motions requires training and some skill, along with conscienciousness. The Govt. selects a person with a suitable skill – perhaps a data entry clerk. After training, the person does the job of complicated motions, and the country is rewarded by $200,000 per year. What is the correct level of pay for this person, and how do we asses it?
From Steve’s analysis, this should be about equal to what this person could get elsewhere. Since the training for performing the motions is useless to everybody else, this is a data entry clerk’s wage. However, if the person decided that he would rather do data entry for this wage, then the motions would not be done, and the country loses $200,000. The person feels (with justification) that he shoud be rewarded for the training, but this has no use elsewhere. In order to get people to do the training, rewards must be higher than data entry clerks, even although the individuals will not be able to get the rewards for their training in the private sector. So what is a fair pay for this person?
If the Govt decided it would be $100,000, the person did the training, and the Govt then said, sorry we will only pay you as a data entry clerk, that person may well be justifiably upset, and protest quite loudly. Even if he could not get the same pay in the private sector, he may not be overpaid.
@Neil: If the logic is wrong give a counter-argument or counter-example. The argument is one about marginal rates of substitution, so you need a counter-exasmple at the margin.
You seem to think the extreme case of the brain surgeon refutes the argument. It does not because the brains surgeon is presumably outside the margin. Make the rewards differential bigger and it will look quite plausible.
Ken B
You can make the argument as marginal as you like. You can hire more skilled mechanics (make it as marginal as you want) by paying more. There is a market wage schedule, increasing in skill and experience. Firms can make sensible decisions to move up it. So can school districts, military recruiters, you name it.
A point I have said before, but within rambling posts, so here on its own: manufacturing has much lower quit rates than leisure, does that mean manufacturing overpays?
Prof. Landburg:
Where did you get off spewing illogical ideas that don’t make any sense?
The next thing you know you’ll be saying that many American private sector employees are overpaid and they reason they cry bloody murder about allowing immigrants into the country is because they are trying to protect their overpaid compensation.
Neil: the individual is overpaid if he produces less than an worker generally who is paid the same. So if a biology teacher produces the same as, say, a junior researcher in a pharmaceutical industry, then the total value of his rewards should be the same. If the biology teacher is overpaid, then the position may attract, say, a senior researcher in the pharmaceutical industry, and total output will be less. However, it may be judged that the biology teacher does in fact produce as much value as the senior researcher, in which case the senior researcher rewards would be appropriate, and the teacher would not be overpaid.
The problems are that we have no direct measure of either the value produced by the teacher, or the value to him of his rewards in money and other benefits. This makes any direct comparison almost impossible. As I see it, Steve is attempting to use quit rates and protests in a similar way to prices, as a way of summing up all of these factors and assess if the rewards are appropriate. All being equal, I think he is right. I am not sure if all is equal.
Will A: “The next thing you know you’ll be saying that many American private sector employees are overpaid and they reason they cry bloody murder about allowing immigrants into the country is because they are trying to protect their overpaid compensation.”
If it wasn’t for your first paragraph, I wouldn’t be able to tell if this was satire: so far as I can tell, this is pretty much exactly the reason that people complain about immigrants “taking our jobs”.
@ John Faben:
Yes it was sarcastic or facetious (as Ken B usually points out, I need a better education). It’s possible that another way to see if someone is over compensated is to look at the effect immigration has on a job’s compensation.
As a computer programmer for the last 20 years, I’ve work in a field that the U.S. allows H1 VISA immigrants to pursue. As with most programmers, my compensation in the last 20 years hasn’t suffered.
My guess is that I’ll know that (employed) American computer programmers are overpaid when they stop granting or slow down in granting H1 VISA’s.
Will A wrote:
“Prof. Landburg:
Where did you get off spewing illogical ideas that don’t make any sense?”
Tenure, tenure. And he’ll scream bloody murder if you try to take it away …
:>
John:
If I have to read another inanely idiotic post of yours directly responding to me, in which case the substance serves as nothing more than an effective strawman, I’m going to lose brain cells. It is for this reason I’m dismissing you. Slavery has nothing to with my argument concerning lack of negotiating power amongst workers vs. employers. If you believe that it somehow reaffirms your position, then so be it; you win. Congrats. I don’t care much for people who lack the ability to critically think. I also can’t help but point out that your second post is a non-sequitur (no one has to take the job if they don’t want to -> bargaining power is symmetric between employer and employee…lol!)
Now that I got that out of my system, onto someone who I actually care to respond to.
Ryan:
As I understand it, teachers do get cost-of-living bumps (at least, that’s what I remember was the case for my mother, who retired from a WI school district a year ago). But again, that’s pretty much irrelevant to the question. Whatever pay is, and however it moves, if it is cut and the new level is worse than what you get elsewhere, you would go elsewhere. If not, then not. Are you disagreeing with this claim?
In short, yes I am. First, two things before I address that.
1) Teachers are not the only type of unions that collectively bargain. Nor is the public sector the only sector that can collectively bargain. It may be the case for teachers that their wages are indexed, but it might not be true for a vast majority of other public-sector industries.
2) This is not irrelevant to the question. Here’s why (an excerpt from a front page article in today’s WSJ titled “Ohio Vote Puts Curbs On Unions In Reach.”)
Protests have been held over the past two weeks in state capitals across the country to protest proposed legislation to limit rights of public and private sector unions. The protests were sparked more than two weeks ago when Wisconsin Gov. Scott Walker presented his budget repair bill that included stripping unions of the right to bargain over pension and health care contributions. While the unions would retain the right to collective bargaining over pay, the bill would also cap wage increases to the rate of inflation.
This is why I don’t think collective bargaining by default means workers are trying to achieve above-market compensation. They have to take into account price level increases considering their wages aren’t indexed!
Finally, your claim that you would go elsewhere if the cut is too substantial is simply wrong empirically. Theoretically I believe it works when we’re working under assumptions of a perfectly competitive model, but that model doesn’t and never will exist in society. It’s simply exists for foundational and pedagogical purposes in economics. Information, for one, is not perfect but asymmetric and therefore costs of obtaining information about market rates and other firms hiring workers of similar caliber hinders potential candidates from ever finding that other job. Secondly, workers can be highly inelastic to pay cuts because moving into another job is too costly. Individuals bound by family obligations or other personal constraints don’t have the free range to take their labour elsewhere, many business firms understand this and capitalize on it. Hell, it was even a test question my teacher posed at me concerning differences in pay between the sexes.
@Neil: you are not addressing the point. If the public sector outbids for talent and uses it less efficently then there is a net loss. The HYPOTHESIS is that the public is outbidding AND under utilizing it.
” Hell, it was even a test question my teacher posed at me concerning differences in pay between the sexes.”
Thanks, we needed the laugh. Women’s stdudies course?
I understand that perfectly. The statement is true by definition. My point is simply that managers in the public sector, like the private, can make choices to pay more in order to attract higher quality workers, and that, by itself, does not imply there is waste or overpaid workers. There is waste only if the productivity of the attracted workers in the public sector is lower than in the private sector, which has to be established We might suspect this is the case because of the way the public sector functions (tenure, weak incentives, etc.), but my point is that paying more to attract higher quality workers to the public sector per se is not evidence of waste.
Further, once the worker has made a location decision, there are quasi-rents. The worker learns skills in the public sector that perhaps are not easily transfered to the private sector (and vice versa), or has bought a house in the capital city, or has kids in school,,etc. So public (and private) workers may well complain about pay cuts rather than exiting their jobs, but that is not smoking gun evidence of overpaid workers. As I said earlier, by that criterion, most workers are overpaid, because practically all will complain about a pay cut and not all would exit.
So what is evidence of overpaid public sector workers? Steve’s original point about differential quit rates in the public and private sectors is probably the best we have, but there is still the possiblility of selection bias. Wage rates are no good, because public sector workers often settle for government jobs at lower wages because they can get away with working less hard.
Lets agree that if public wages are 10% less than private wages for comparable skils, but public workers can get away with 20% less work, then they are overpaid. Now, how do we prove that?
Let me propose a thought: collective bargaining causes misallocation of resources, because it is creating an equilibrium different from what would be a pure market, i.e. most efficient equilibrium. How can that happen? The threats of strikes, obstacles to fire unionized workers etc, create the possibility of uncertain additional transaction and other costs. Now the employer may (and is likely to) prefer to replace those by (possibly easier to estimate and quantify) additional costs she is going to suffer after yielding to the demands of the collective bargainers…
Dave Losna:
Let me propose another thought: Large corporations forming political action committees that can collectively negotiate with elected government representatives for subsidies, tax breaks, removal of regulations, favorable labor laws, etc. creates an equilibrium different from what would be a pure market.
How can that happen? In order to get elected, in the United States representatives need to raise money which large corporations have. In states with term limits, representatives need jobs for when their terms expire.
Thanks, we needed the laugh. Women’s stdudies course?
Try intermediate microeconomics course that was taught by a politically and economically leaning conservative who is chair of the department.
Laugh all you want, chances are you don’t know what you’re talking about. How’s that English ‘stdudies’ course treating you?
Prof. Landsburg,
You are asking the wrong question. “Are Wisconsin teachers overpaid?” is an almost impossible question to answer. Pay fairness, like beauty, is in the eye of the beholder. Here, we use markets and individual liberty to determine pay. $250 million seems like too much to pay Alex Rodriquez (the baseball player) in my opinion. However, if a baseball owner disagrees, then I am ignored and A-Rod and the Owner make their own deal — as they should.
The real question is “Are market forces being subverted by the use of unions in the public sphere?”. Or even “Is Democracy being subverted by the existence of unions in the public sphere?”.
I think the answer to both previous questions is: yes. I guess, ultimately, this push back against union rent seeking is only natural for an electorate that is hard pressed by deficits right now. Unfortunately for unions, it seems that they are easier, bigger targets than one-off corporate rent seekers. I would also really enjoy seeing the corporate rent seekers frustrated as well.
Scott H.:
“Is Democracy being subverted by the existence of unions in the public sphere? … yes”
Can you expand on this subversion? Is there are group of people who are unable to vote because of unions?
Are we going to prevent subversion of democracy by preventing people (teachers, CEO’s, bankers, lawyers, doctor’s, smelt lovers) forming groups to express common concerns?
For sure our law makers job would be much easier if no one was allowed to talk to them after they were elected.
Scott H.:
Pay fairness, like beauty, is in the eye of the beholder.
I am taking “overpaid” to mean “paid enough to make this activity substantially more desirable for them than their next best alternative”. That, I think, is a reasonably objective standard.
“paid enough to make this activity substantially more desirable for them than their next best alternative. That, I think, is a reasonably objective standard.”
Objective, yes, but not necessarily the correct standard. Suppose teaching only existed in the public sector. A school leaver studies teacher training for 3 years at college. He teaches for several years and gains significant teaching experience. What is the correct pay for the teacher?
On the definition above, it is the same as his next best alternative *at that time*. Since his teaching qualification and years of teaching experience are not worth much in another profession, (and we have supposed teaching only exists in the public sector), this will be much lower than his current salary. This seems to me to be the wrong way to evaluate his pay.
Using this standard (and assumptions), no-one would enter the teaching profession.
A better time (perhaps) to evaluate whether the pay is correct in this situation is at the time the person chooses teacher training over, say, accountancy or engineering. If the levels of remuneration seem right, then the student will enter the profession. Once in the profession, if you then cut his wages, he is probably justified in complaining, since his choice was made years ago.
I think this shows that the above definition of “overpaid” can be wrong in some situations.
Richard: Yep, I made a typo. In a blog comment. Clever of you to notice.
The point you refer to is just a prestext (sic) for ignoring an argument. There are two ways to see this. First a reluctance to move just moves the demand curve; the argument still applies. Or alternatively it is true everyone will have an amount they can be cut where they won’t move even if the cut takes them below the market value. But they don’t all have the same amount, and in a large group you’ll see a spread. And a cut will move into that spread anc cause departures not complaints.
@Harold:
Objective, yes, but not necessarily the correct standard. Suppose teaching only existed in the public sector.
Highly unlikely (for the appropriately broad meaning of “teaching”, i.e. includes apprenticeships, etc.). But if that really were the case, it would be questionable why there should be teachers at all. Why doesn’t anyone want to spend their own money on such teachers (in this scenario)? I could understand extreme non-excludable goods, but teaching ain’t like that.
Are there any empirical studies that demonstrate that quit rates are the best measure of how well or poorly compensated people in a particular profession are? Or is it just theory/narrative?
I’ve not found any, but readily admit I’ve only spent about 10 minutes on Google looking for one. During that time, I’ve learned that K-12 teachers have an extremely high quit rate: 25% in the first two years. According to quit rate theory, new teachers are not paid enough. I learned that tenured professors have a very low quit rate. They must be paid too much. I learned that tenured female and minority professors have a much higher quit rate than their white male counterparts, so either they are paid too little, their white male counterparts are paid too much, or there is something else at work here. Perhaps there is something about academia that is hostile toward women and minorities. All tenured professors have a much much lower quit rate than adjunct professors -yet adjunct professors are the ones carrying the teaching load(what does that say about the quality of instruction?). Interestingly enough, private university professors have a lower quit rate than their public university counterparts. Why would that be?
Across all professions I learned that people in their 20’s have a much higher quit rate than people in their 50’s. So either young people are undercompensated, old people are over-compensated, or something else like life experience and proximity to retirement are at work here. How would we choose?
So, according to quit rate theory, what is the optimal quit rate toward which all professions should trend?
Without any empircal results to look at and evaluate, I’m not sure why quit rates are any better than studies that account for age and education and other factors. Anybody find a study with empirical results and not just a theory?
Not trying to troll, but I cannot think of a larger waster of human potential than Universities, which give professors (who probably come from the top 10 percent in intellectual abilities) a very comfortable and undemanding package. Students (which probably generally come from the top 50 percent) spend 4 years and untold dollars getting what is often a symbolic piece of paper.
Yet so many market cheerleaders reside there, or at think-tanks, or other sinecures, safely sheltered from anything faintly resembling creative destruction.
I think the problem with Jim from Wisconsin’s argument is that he only applies it in one direction, to increase compensation. If you want to optimize performance, you have to be able to decrease compensation for underperformance and to dismiss employees as needed. And that is what collective bargaining eliminates. It makes for stickier compensation and rigidity of unemployment and thus is contrary to optimizing performance.
As the automakers have proven.
@ Fenn:
Would it be possible to clarify what you mean by waste of human potential and how it relates to market cheerleaders?
Is your point that Universities only educate students that a Free Market/Capitalist economy is the only viable system and that because of this we should only study how to tweak/improve the Free Market?
Obviously, I’m just guessing what you are trying to get at. But if your point is that once every academic in any field assumes we have come up with “the answer (e.g. free market)” that just needs tiny tweaks, then intellectual inquiry become stifled, this seems to be an arguable point.
As it relates to this topic, if you find that all economic professors in a given university have the same position as to whether or not the most talented individuals should be in the private sector, then students in that university are probably short changed as it related to intellectual inquiry.
Of course, it is possible that a Free Market economy is the zenith of economic systems and that it improves the conditions of every society of life forms that have the capacity for both reason and emotional responses.
Will A,
My response to your most recent comment is:
1) collective bargaining and unions are not necessary to form groups for advocating.
2) Unions subvert democracy by extracting dues for political advocacy and spending them in ways that not every donor agrees with, thus distorting the dissidents’ voices.
3) If “big money” distorts democracy, unions are as big a source of “big money” as any corporation. In my district, the only outside TV ads came from AFSCME.
4) Public sector unions also subvert democracy at the bargaining table across from small municipalities. It may be the popular will to set a budget at a certain level. But often there are non-modifiable levels of spending for pension and health insurance that are set at the state level by officials seeking to ensure that unions support them or don’t aggressively support an opponent. In ny town, there is precious little in the way of discretionary spending left to cut. Yet the budget grows every year due to pension and healthcare charges by the state for public sector workers and retirees.
“Are there any empirical studies that demonstrate that quit rates are the best measure of how well or poorly compensated people in a particular profession are? Or is it just theory/narrative?”
Not well or poorly. Over or under what they can get elsewhere. If I make $5000 an hour but can easily find a job for $6000 an hour I’m under but I’m also well compensated. If I make $3 and hour and cannot find anyone to give me even $1 in another job I am over but still poorly compensated.
It sound to me like you are still reading “overpaid” as a value judgment. It is not, at least not how SL is using it. That is why it is “reasonably objective.”
I am struck by how many want to avoid a simple conclusion. You can buy gas for $4 a gallon at Citgo. Just across the corner you can get it for $3 at Shell. I see you at Shell and ask why you do not buy citgo gas. “It’s over priced” you say, “I can get a comparable product here a lot cheaper. That’s what overpriced means.”
But when the topic is a teacher’s salary not the price of gas we hear endless rationalizations why this obvious conclusion does not apply. Price theory somehow someway just doesn’t apply here!! Teachers are different!! Some of them are not even consistent, such as the argument that “we should pay more to get better teachers” — which clearly implies labor responds to prices.
1) Thanks for the education on this. It’s good to know that under the Wisconsin law that teachers will be able to form an advocacy group and lobby politicians (state and local) for pensions for teachers.
2) What percentage of Wisconsin’s teacher would you say would like to get rid of collective bargaining rights?
3) Big money only distorts democracy when citizens allow it. Democracy is subverted when citizen give up responsibility to inform themselves on issues.
4) Similar point to #3. If you are as upset about your position as the teachers in Wisconsin, then you and like minded folks can storm the state capital/city hall. If 8,000 people show up to argue on one side and 80,000 show up on the other side, why shouldn’t the 80,000 get what they want. The democratic totals 8,000 on 1 side. 80,000 on the other. 25,000,000 don’t care. The 80,000 have it.
5) Lastly, what does government spending have to do with democracy? Is the measure of how democratic a society based on government spending. Is your contention that the countries that have the smallest government budget are the most democratic?
@Will A: You shouldn’t ask questions about things that don’t exist. What is the radius of a square circle, is the largest integer even. Collective bargain powers exist, but collective bargaining rights do not.
Will A: not much of disagreement here, except that “removal of regulation” might be also a good thing…
I have had my disputes with Will A but even I am surprised to read this:
” If you are as upset about your position as the teachers in Wisconsin, then you and like minded folks can storm the state capital/city hall. If 8,000 people show up to argue on one side and 80,000 show up on the other side, why shouldn’t the 80,000 get what they want. The democratic totals 8,000 on 1 side. 80,000 on the other. 25,000,000 don’t care. The 80,000 have it.”
Is this sarcasm? It doesn’t seem so from the rest of the post. This is an outburst not an argument Will A.
Ken B:
I guess it was more of an sarcastic outburst. Many Democrats say that corporations are corrupting democracy. Many Republicans say that unions are corrupting democracy.
Neither party mentions that apathetic American voters are as much if not more to blame.
A classic example of American democracy in action would be a luncheon planning committee with 11 members. They need to decide on the type of food to have. 1 obstinate person wants Italian food, 2 obstinate people want Chinese food. The other 8 sit back and watch the argument.
The leader asks for a thumbs up vote. The results:
– 1 thumb for Italian
– 2 thumbs for Chinese food.
– 8 (actually 16 I guess) thumbs hidden from view.
The 2 thumbs have it and enjoy their victory.
Ken B,
“It sound to me like you are still reading “overpaid” as a value judgment. It is not, at least not how SL is using it. That is why it is “reasonably objective.””
Well you are right. I have trouble separating “overpaid” from being anything but a value judgement. We are talking about a person’s compensation for how they literally spend their lives, their ability to provide for their families etc. Are there very many things in this world that are more deeply personal, and therefore more inherently value laden? There probably are some, but not many. It seems to me much more artficial to claim value neutrality on such a deeply personal issue, than to pretend otherwise.
The claim on the table is that Wisconsin public employees are overpaid, and therefore collective bargaining should be eliminated (but not for police and fire departments – no theory offered on that one) and the support for the overcompensation claim is quit rate — Although the data I found says that the quit rate for teachers is very high which would indicate that teachers are underpaid. Not overpaid — All of which makes me suspect this really is a battle over ideology more than anything else. Ideology is always value laden.
So I ask, where is the empirical evidence that quit rate is a good measure? If I take quit rates too seriously, then by definition, every person employed at this very moment is paid too much, otherwise they would be quiting to do something else. It’s sort of like the employers version of the winner’s curse in auctions. The person who wins paid too much by definition because the rest of the market was only willing to pay up to the bid previous. That kind of reasoning has its limitations. At the extreme, the best bid is no bid. No bid, no auction.
So if quit rate is a good, value neutral metric, what does the theory tell us is the optimal quit rate?
Ken B,
Gasoline is a homogeneous product, so it is easy to determine when you are overpaying by comparing price. Am I overpaying if I can pay an inexperienced surgeon less than an experienced one?
Prof. Landsburg:
Here is an timely example of Business Executives in India having difficulties with overpaid workers in India who are crying bloody murder:
http://news.yahoo.com/s/ap/20110304/ap_on_re_as/as_india_executive_killed
The article makes mention of “Incidents of industrial violence are common in India, where workers often target executives in cases of wage disputes and job losses.”
I don’t necessarily mean this as a contradiction to your point. It is possible that these incidents have only happened as wages have started to increase in India.
DividedLine71:
So if quit rate is a good, value neutral metric, what does the theory tell us is the optimal quit rate?
The quit rate is a highly imperfect measure. If one quit rate were 25% higher than the other, I’d say there are many possible ways to explain that away. But one quit rate is in fact 200% higher than the other, and it seems to me that the size of that gap dwarfs the various imperfections in the measure.
An optimal quit rate would presumably decompose as follows
1) percentage of workers who have de-skilled or turned into jerks whom the employer is better off without.
2) percentage of workers who have spectacularly up-skilled or turned into saints who can benefit society much more by leaving and doing something else.
3) stuff to do with comparative statics- i.e. signals informing the employer of what is happening with transfer earnings as well as stuff that impacts on 1) and 2).
The problem with an ‘efficiency wage’ (i.e. pay the guy a lot more than his transfer earnings so he doesn’t threaten to quit any time you get on his case) especially when dealing with people with poor work ethic or high leisure preference is that if they exist in a regime with high property rights in jobs (like India) plus collective bargaining of a rancorous sort that enforces a ceiling (rather than a floor) on productivity and good faith ‘x efficiency'(again India or the U.K pre-Thatcher) then you are likely to get ‘inefficiency wages’.
The argument for collective bargaining as being allocatively efficient w.r.t a monopsonistic employer fails in this context.
Silas Barta: that is why I said “suppose”. I was establishing a principle. It is likely that the state will take on tasks that would not be performed otherwise, or be performed to a much lesser extent. This is in part the role of Government. Police, army and many other functions spring too mind that have no private equivalent. And what proportion of teachers do in fact work for Govt? Any large excess in the state sector would prevent a normal market working, I think. Steve says quit rates are an imperfect measure, and the size of the difference between public and private is unlikely. I am inclined to agree, but we really do not know. The quit rates vary quite widely in different sectors, so perhaps the difference is not quite as large as 200% (see note on manufacturing). The monopoly position of the Govt., education level etc. could explain all the differences. Unfortunately, we are left with having to correct for the differences, as we are with a direct comparison of incomes and conditions.
Steve:
“The quit rate is a highly imperfect measure. If one quit rate were 25% higher than the other, I’d say there are many possible ways to explain that away. But one quit rate is in fact 200% higher than the other, and it seems to me that the size of that gap dwarfs the various imperfections in the measure.”
A lot of claims are being made about quit rate that have the potential to disrupt a lot of lives and alter what is considered normal in the social contract. My experience is really looking at something that is the inverse of quit rate — which is employee retention rates. It’s a very noisy metric, and in isolation, without a dashboard of other metrics surrounding it, it is nearly useless. Some points for your consideration:
First, if we are talking about a 200% difference in the context of 1% vs a 3% quit rate, as a manager it’s hardly worth bothering about. If we are talking about 8.3% vs 25%, then that perhaps garners some attention, but even that depends on the other dash board metrics.
A few of the issues include the burger flipper and the brain surgeon comparison. Because of barriers to entry and exit for both the employer and employee, if the quit rate of brain surgeons matches the quit rate of burger flippers, you’ve probably got a problem. Without other metrics you couldn’t really know, but in general I’d expect a high quit rate for burger flippers and a low quit rate for brain surgeons. I think others have already made this point.
I can’t claim to have read every comment on every thread, but I don’t think I’ve seen anybody make this point. When it comes to retention rates (or inversely quit rates) probably the biggest single factor setting the rate is the size of the organization. The larger the organization, the lower the quit rate is going to be — 200% would not surprise me in the least. Plenty of reasons for this, but some include that people generally quit when they have other opportunities. They usually find other opportunities through their personal networks. Personal networks usually begin at work. Inside a Fortune 500 company, for example, it’s relatively easy to change career from say engineer to product manager and because the person stays in the same company it doesn’t count toward quit rate. Large organizations have both the opportunities and the institutional knowledge to fill in and allow people to change jobs without having to quit. In a start up situation or in a small company positions are few and specific expertise is at a premium. It isn’t as easy to change jobs/careers within the same organization. So quit rates are higher.
Further, inside most start ups and small companies capital is scarce. It’s hard to get funding from a VC, and frankly most companies fail. People are good at reading the tea leaves when this is happening. It’s not hard. One day they go to the supply cabinet and notice it isn’t being so robustly stocked any more. Whispers start in the hallways. Then the employees start putting out feelers for a new job because they know it’s much easier to get hired when you have a job than it is when you don’t. It doesn’t matter why a person doesn’t have a job – Potential employers read unemployment as a signal. Small companies have inflated quit rates.
Good bad or indifferent, the government is the largest employer of all and it isn’t going out of business any time soon. So if the quit rates haven’t taken organizational size into account (most businesses are small), the metric isn’t terribly meaningful in isolation.
Whatever the mythical efficient quit rate is, it would be the one that minimizes the sum of turnover costs and compensation costs (I’d argue there’s more to it than that, but for now the textbook answer is sufficient). This is not likely to be the same quit rate as the private sector since the government has a natrually lower quit rate due to its large size and because there is good reason to believe its turnover costs are probably higher than turnover costs in the private sector.
DividedLine71 wrote: “First, if we are talking about a 200% difference in the context of 1% vs a 3% quit rate, as a manager it’s hardly worth bothering about. If we are talking about 8.3% vs 25%, then that perhaps garners some attention, but even that depends on the other dash board.” You are applying an irrelevant standard here. Sure a manager responsible for department may find the 200% difference between a 1 and 3 % quit rate just a mild cost. If we were talking about how quit rates affect the smooth running of the organization this would matter. But the issue is not costs to the manager or owner or whoever. It is what the quit rate *tells us about the employees* which is at issue. A persistent difference on the order of 3:1 is significant and revealing.
@Neil: “Gasoline is a homogeneous product, so it is easy to determine when you are overpaying by comparing price. Am I overpaying if I can pay an inexperienced surgeon less than an experienced one.”
This is obfuscation. The whole point is we are comparing public service uinon members to THEMSELVES. The point SL raised is not “but I can get high school droputs to work for less”. It is “the current incumbents of the job would clearly work for less because they make little or no effeort to move when their compensation is cut; the yell instead.”
@Will A: Ah. I thought you making an unusually stupid assertion, but you are ridiculing it. Yes, there are people who seem to think like that aren’t there.
Don’t know if someone has pointed this out, but, “Paid Well” < "Over Paid", which just seems axiomatically true. That was a bit of a switch, without the bait.
@Stephen: It’s not true though. “Paid well” is an implicit comparison to the average, but “over paid” is a statement comparing what you get and what you would get elsewhere/in a perfect market. You can be well paid and underpaid at the same time — if you are flooded with offers for higher pay you are currently underpaid even if you make millions. Similarly you can be well paid and overpaid: imagine we pass a law paying Landsburg $50M a week for blogging. Overpaid and well paid!
I’m coming into this argument rather late, but I have two comments:
1. I grew up in a small and wealthy town in New Jersey, and one of my teachers once told me that teachers in my school system earned less than those in the urban districts of the state. His explanation was that a teacher would accept lower pay to teach to kids interested in learning, and to have committed and involved parents and community. The flip side is that teachers in the urban districts basically required hazard pay to teach there. I have seen the same correlation as an adult, in that private school teachers generally earn less than public school teachers, in part because they are willing to accept less for a more rewarding job.
2. It’s hard to find a correlation between teacher pay and quality of education, both on a macro and micro level. Certainly, there is no apparent correlation between per student spending by state and average SAT scores, although relative cost of living and the rates at which students take the SATs throws off the data. I think the existance of teacher unions is partly responsible for this, but the other challenge is there is no reliable way to measure teacher effectiveness. I don’t believe measuring by tests scores is effective, because teachers can boost test scores by “teaching to the test”, which does not improve overall outcomes, only scores.
Ken B
“It is what the quit rate *tells us about the employees* which is at issue. A persistent difference on the order of 3:1 is significant and revealing.”
So what does it tell us about the empoloyees of large firms vs. small when the difference in quit rates is persistent and significant?
Same question for employees of firms that are less than five years old and firms that are greater than five years old.
All private sector comparisons.
Ken B,
“the current incumbents of the job would clearly work for less because they make little or no effeort to move when their compensation is cut; the yell instead.”
There are always challenges with “if you don’t like it you can leave leave” type arguments.
If I see a bunch of people protesting after a tax increase, but the emigration rate remains unchanged, should I assume the protestors are overpaid because it’s clear they are making no effort to move when their compensation is cut; they yell instead?
DividedLine71: As for taxes YES. You should see an outflux or lower growth for overtaxed states — and you do. The effect will be less than for the unions under discussion because the transaction costs are (much) higher. You ask this like it should be a point for you, but look at the facts in regards to states like Michigan and California compared to Texas or Canadian provinces like Alberta.
PLUS I see people *doing something* about the tax rate. They vote. They pass prop 13; they elect Scott Walker. They don’t JUST yel and yet not seek a remedy. (This is a big problem with your supposed counter example.)
As for large & small companies I don’t know what the numbers are or what you claim to be but if we see say small companies with a quit rate 3 times that for large companies then yes that would suggest something about over and under rewarding employees.
Ken B,
“As for taxes YES. You should see an outflux or lower growth for overtaxed states — and you do…You ask this like it should be a point for you, but look at the facts in regards to states like Michigan and California compared to Texas or Canadian provinces like Alberta.”
My writing skills are not up to snuff. I was thinking about national emigration rates when I wrote my post but I don’t think looking at the states really makes the point as cleanly as you suggest.
As of July 1, 2008 the combined state and local tax rate for each of the three states you chose are:
Michigan 6%
Texas 6.69%
California 7.96%
In terms of predictive power, tax rates are not a good metric for determining emigration as people are leaving both the highest and lowest tax state you listed and moving into the middle state. I’d speculate that more than tax rates, people have been leaving Michigan because the auto industry has been shrinking. People have been leaving California since the 90’s, during which CA taxes have decreased not increased, because they couldn’t afford a home. And people have been going to Texas because of low housing prices and jobs. You may or may not agree with my general narrative, but whatever the case may be, you’d need a whole lot more more data and explanation than just simply trying to draw a relationship between tax rates and emigration rate.
So the question is are emigration rates analogous to quit rates in that a whole bunch of other factors overwhelm the metric? If so, the law of unintended consequences would indicate a better metric/better argument is required to make a policy case in Wisconsin.
As for your other question about my claims about quit rates and firm size, you’ll have to pay five bucks to get a copy, but most of the research ultimately begins with Brown and Medoff 1989. They only differentiated between firms 100 people. In that study, the monthy quit rate in the smaller firms was ~ 100% greater than in larger firms. Other studies show the gap widens at larger firm sizes. Beyond that, there are a whole bunch of theories and arguments about what really affects quit rates. Google “Employer size wage effect,” and you’ll begin to get a sense for just how many competing theories there are about what drives quit rates. It’s a very noisy metric.
“It’s a very noisy metric.”
As I mentioned earlier, quit rates vary significantly in different sectors. From Steves original link: e.g. Government 0.5, manufacturing 0.7, construction 1.3 and leisure and hospitality 2.9.
Many of you seem to regard the idea that one is overpaid as something other than a value judgment. I don’t see how it can be anything but a value judgment.
You are arguing that teachers are overpaid for a variety of reasons. What would valid pay for a teacher be? Can you answer that question? What would you like to compare teacher pay to? If pay is the value of someone’s work, then what is the value of a teacher’s work?
I would argue that the value for society is extremely high. To have a successful economy requires a trained working public, something impossible to find unless they are taught well throughout their life, beginning with elementary school.
I would prefer to argue that in fact many professors in universities are overpaid. Although some provide valuable services, primarily in the hard sciences, most simply appear sit in their well-funded ivory towers and criticize others with theories that apply only in an ideal world. In the real world, there is more than just economics that come into play. As another commenter has noted, there are familial obligations that may limit one’s ability to find another job, particularly today when unemployment is so high. It seems to me that public teachers provide, in many ways, a greater service than most academics. Professors teach only 2-4 courses in a semester, reaching relatively few students. The rest of their time is taken up by research and writing books that will be read by very few, and, in general, help even fewer. The value of the work is to create even more for others to discuss in lectures, and have little effect on the real world where people are afraid of losing their jobs and other sources of income, and losing their right to bargain for their wage.