Another Drag on the Post-Recession Economy: Public-Sector Wages

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February 5, 2014

The aftermath of the Great Recession has led to outright wage declines for the vast majority of American workers in recent years, resulting in a full decade of essentially stagnant wages. Though you might expect public-sector wages to have weathered the recession and its aftermath better than private-sector wages, the opposite appears true: While the decline in real public-sector wages started later, it was steeper and ultimately more damaging. According to the Bureau of Labor Statistics’ Employment Cost Index, public-sector wages have fallen by about 1.3 percent in inflation-adjusted terms since 2007, where private-sector wages have been essentially flat (an increase of 0.3 percent).

Unlike in previous recoveries, state and local government austerity has been a major drag on job growth and the broader economy. The number of public-sector jobs fell by almost 3 percent in the three years following the recession, while the number of private-sector jobs grew (albeit anemically). The fact that public-sector wages have lagged behind those in the private-sector exacerbates government’s drag on the economy.

The recent divergence between public- and private-sector wage growth cannot easily be dismissed as a corrective to rapid public-sector wage growth, since the two series grew in tandem from 2001—the start of the series—to 2007 (not shown). It can, however, be attributed to rising benefit costs, as the costs of wages and benefits together has grown slightly faster in the public sector than in the private sector since 2007 (1.4 percent versus 1.0 percent in real terms). Some of this can be attributed to increasing employer contributions to public-sector pensions in the wake of the 2007-08 stock market downturn, which also battered 401(k) account balances but did not result in increasing employer contributions to these accounts. Though benefit costs have risen, we would nevertheless want real wages in the public sector to at least hold steady in a recession and weak recovery rather than contributing to weak aggregate demand, especially since, as previously noted, productivity growth has outpaced compensation growth.

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