Posner’s results are consistent with findings of little connection among the richer countries between their per capita incomes and the share of incomes spent by the government. Unfortunately, causation is hard to determine from such regressions. For example, as Scandinavian countries got richer, they raised government employment, partly by taking over much of the child-care services traditionally supplied by families. This helps explain why women in Scandinavia are much more likely than men to work for the government. A further problem with using government employment as a measure of government’s impact on an economy is that many regulatory agencies, such as the EPA (Environmental Protection Agency), the Fed and other central banks, and labor departments often have large effects on an economy through regulations that require few employees.
Public employees in Greece, Italy, in state and local governments of the United States, and government workers elsewhere are in the news in recent months not so much because of links to productivity, but rather because of connections to fiscal difficulties. Private companies typically adjust to financial problems partly by reducing employment and earnings of their employees, although such adjustments are harder in countries with strong unions and stringent labor protection legislation.
Both employment and wage adjustments are much harder for governments in difficult fiscal situations. Many of their employees are protected from being laid off by union contracts and civil service rights. It is also usually extremely difficult to cut their earnings, again partly due to restrictions imposed by unions and government rules. Government workers also take many of their benefits in the form of early retirements, and generous health benefits and incomes after retirement. These inflate current government spending when many past employees are receiving retirement benefits. In addition, as Posner indicates, votes of government employees can influence election outcomes if they are aroused by what they perceive to be unfair treatment from an incumbent political party.
Government workers in countries like Greece and Italy frequently retire in their fifties after only 20 or 25 years of government employment, while private sector employees are more likely to work into their sixties. Yet, even though they have generous retirement benefits as well as early retirements, their salaries are on a par with or exceed those of comparable private sector workers. This explains not only why lay off rates are low among government workers, but also why quit rates are lower than in the private sector. Why quit a government job if one is likely to earn less, and have less generous benefits, when working for private employers?
These benefits of government employment may be tolerable, and also extremely difficult to reduce, when economies are growing robustly, and government tax receipts are in balance with government spending. But they become a serious problem when tax receipts fall in a recession, and governments begin to run sizable deficits, and have problems funding their domestic, and especially their foreign, debt. Governments then come under pressure to cut spending, including spending on employees. Yet this adjustment is hard when government workers make up a sizable fraction of all workers-their share is over 20% in Greece- and when many government employees have tenure, fixed wages, and generous retirement benefits.
The state of California hired many employees and paid them well while times were good during most of the period from 1990-2007. Then the Great Recession led to huge holes in the state’s budget, which in turn forced confrontations with teachers and other unions as California tries to bring its bloated spending in line with sharply reduced revenues. A liberal Democratic recently elected mayor of Chicago, Rahm Emmanuel, has been staring down the teachers union (and other government unions) as he tries to get teachers and other government employes to work longer hours as he confronts a very serious budget deficit.
Greece’s problems are well chronicled: it borrowed heavily from French, German, and other banks during the good times of the early 2000s when its government ran sizable (although disguised) deficits. Greece is now under pressure to cut government spending during what will be a prolonged austerity period as it adjusts to the new economic realities. The government’s overpaying of employees is not the only problem it faces, but this is surely a significant one.
I have no doubt that for various reasons government employees are on average less efficient than private sector workers doing comparable work. Yet since many other variables are also important I am not surprised that correlations are weak between the share of workers employed by the government and income per capita, or even with the growth in per capita incomes. Nevertheless, overpaid and underperforming government employees are a drag on productivity, and especially on fiscal outlooks when economies are weaker. This helps explain why many state and local governments of the US, and governments in countries like Greece, are encountering serious obstacles to improving their fiscal houses as they respond to the Great Recession.