Too Many Government Workers?—Posner

Much of the concern with government deficits in countries as unlike as the United States and Greece focuses on public employees, viewed as overpaid parasites who, being paid by the government, contribute directly to the public debt. And there are indeed good economic reasons to expect the public sector to be less efficient than the private sector. The principal reasons are four: the incentive provided by the profit motive is absent; public agencies tend to be monopolies; public employees are voters; and public employers tend to substitute nonpecuniary for pecuniary emolumens, such as tenure and generous retirement benefits, because the public notices and reacts adversely to high government salaries. 

Therefore one might think that the larger the fraction of public employees in a nation’s workforce, the less efficient the nation’s economy, and so the lower per capita GDP would be. (Commonly for international comparisons GDP is translated into U.S. dollars on the basis of estimates of purchasing power parity, and I will do that.) I decided to examine that question empirically, with respect to 27 countries, including the United States and Canada from the Western Hemisphere, Australia, New Zealand, Japan, Taiwan, and Singapore from East Asia, Israel, and all the countries of Western, Northern, Central, and Southern Europe, plus Poland. The countries were not chosen at random, but instead selected as being at least roughly comparable to the United States in their economic system and political culture. 

The percentage of public employees in the workforces of these countries ranges from 6.35 percent in Singapore to 33.87 percent in Sweden. Indeed the three lowest countries, and the only ones with fewer than 10 percent public employees, are Japan, Singapore, and Taiwan. The highest countries after Sweden are Denmark (32.3 percent) and Norway (29.25 percent). The remaining Scandinavian country, Finland, is fifth with 26.31 percent. In fourth place, just below Denmark, is Hungary. The other countries with public-employee percentages above 20 percent are Greece (22.3 percent), Canada, and Poland, Greece being the lowest in this group of eight countries, despite all the negative attention its public-employee workforce has received lately. 

The rest of the countries in my list (that is excluding the above-20 percent and below-10 percent countries), are grouped pretty tightly between about 12 and 19 percent. The United States is in approximately the middle, with 16.42 percent. Surprisingly, it is well ahead of Israel, Spain, Italy, Germany, France, and Portugal. The European countries with the lowest percentage of public workers are the Netherlands and Austria, but Portugal is only slightly above the Netherlands. 

Per capita income, in purchasing power parity terms, ranges from $17,537 in Poland to $53,748 in Norway; interestingly, both have very high percentages of public employees. Regression analysis reveals no systematic correlation between percentage of public employees and per capita GDP, except that the Scandinavian countries as a group exhibit a statistically significant positive correlation between those two variables, if the Asian countries are treated as a separate variable—Singapore has the second highest GDP per capita after Norway, yet the lowest percentage of public employees. 

The upshot is that there does not appear to be a relation between a country’s prosperity and the number of public employees it has. (Or between population and the percentage of public employees, though one might expect that, given fixed costs of government, the percentage of public employees would be higher the smaller the population. Singapore is a dramatic refutation of the point, as it has a population of only 4.6 million, one of the lowest of the 27 countries, yet it has the lowest percentage of public workers.) 

A more sophisticated analysis would cover more countries (there are 195 countries in the world) and correct for more variables; obviously there is much that affect a nation’s prosperity besides the percentage of its public employees. I am nevertheless surprised that my crude analysis should yield no correlation between per capita GDP and percentage of public workers in a nation’s workforce. The critical omitted variable may be the jobs the public employees do. Are they teachers? Bank examiners? Revenue agents? Food and drug inspectors? Air traffic controllers? Police officers? Medical workers? Or are they railroad workers or other employees of business enterprises owned by the government, politicians’ relatives, licensing officials taking bribes from small business, or beneficiaries of a spoils system of public employment? It does seem significant, though, that the Scandinavian countries should be as prosperous as they are (though Norway, with a very small population and huge oil reserves, may be a special case) despite having such a high percentage of public workers, and it is equally striking that the East Asian countries (though my sample of them is very small) should be so prosperous despite having such a small percentage of public workers. Perhaps the relation between a nation’s economy and the percentage of its public workers is determined by a political and social culture that determines what tasks are assigned to government, what incentives and constraints are placed on public workers, and who is attracted to public service. Maybe, with the right conbination, public service can be as economically productive as private enterprise.

Comments

[Jack]

Tans -- with so few days left before a new assignment, perhaps you can do a piece on why MASSIVE government deficits under "conservatives" were "right wing" "supply side job growing yadda" while the very same led by Democrats is "leftist" and "Keynesian?"

Also....... if we devised our Keynesian spurring to fatten the wallets of the already well off......... would that make it a fine conservative example of "supply side" success?

[TANSTAAFL]

One more day. Looking forward to informed commentary from Prof. Becker and Judge Posner as much needed relief from the leftist pap contaminating this blog in their absence. If we outsourced the leftist Keynesians to China or another socialist paradise, they could have their wish. And more jobs would open up for friends of economic liberty here in America. A win-win solution.

[Jack]

Tans.... with Observer, NEH and myself filling the week's void with some fairly hearty fare.... I wonder if, with but "a day to go" you might rig something up? Mebbe a Dagwood? or even a BLT on white bread? Anything?

[TANSTAAFL]

Keynesian baloney, perhaps? No, thanks.

[NEH]

Jack, Better "Keynesian Baloney" than an "Air Sandwich" as offered by the New Right in their "Affl" program... ;)

[Jack]

Tans? Couldn't you take a crack at telling us the diff between $12 Trillion of deficit spending under the guise of "supply side" yadda replete with seemingly unaffordable tax cuts for the wealthy pals, and Keynesian spurring?

IS it strictly the blasphemous idea of targeting those of lower incomes who have a much higher propensity to spend any marginal buck that might "trickle down" nearby?

[Daniel]

Perhaps another interesting question one can ask using this data: whether government-delivered services in the low-percentage countries (Singapore, Taiwan, Japan) are perceived to be signficantly poorer than those in the high-percentage countries (e.g., Italy, Greece, the Scandinavian countries).

[TANSTAAFL]

Which of the leftist screen names above hides the washed up comedian Al Franken?

[an observer]

Daniel

comparing data is basically meaningless as needs, etc.,are so different.

[Jack]

Tans -- not sure... but if Franken having matriculated to the Senate by the unusual method of having whipped, by an admittedly narrow margin, a sitting incumbent is evidence of being a "washed up comedian" would we, logically, agree that Reagan having matriculated to record setting D E B T builder was a "washed up actor?"

BTW... did you enjoy his book on the Lying Liars?

[Jack]

Daniel: We'd have to consider culture too. Comparing, for example, Japan to the US, they're committed, to perhaps a fault, to education, not prone to much illegal drug use, have much lower rates of crime and almost no homicide, (a fraction that of gun laden US), a much smaller military, far lower rates of auto use and all the policing and highway maintenance involved, and until very recently, when recession hit, they did not throw their workers to the wolves to be cared for by .......... more government workers.

[TANSTAAFL]

Thank heavens the Nobel Committee this year has honored two economists whose empirical work calls into doubt the underpinnings of Keynesian economics.

[Jack]

Tans, Indeed! And what are their "feelings" on "supply sider" deficit spending in good times and bad?

Any thoughts on revenue as a share of GDP being the lowest since before WWII? at 15% which never has paid the bills, even before our being saddled with the extra interest payments on our huge debt, 80% of which was rung up while, supposed, "conservatives" held the, rarely used, veto pens?

Do you happen onto any old fashioned conservatives who favor the timely paying of bills? being reluctant to dive into foreign entanglements and willing to pass the hat when the costs of "national defense" soar as they did during the sole source profiteering of recent years? I used to kinda like those old timers; made a lot of sense.

[Jack]

How about this topical article? Are the protests against WS thievery and the 'bagger movement evidence of a major shift?

Something’s Happening Here
By THOMAS L. FRIEDMAN
When you see spontaneous social protests erupting from Tunisia to Tel Aviv to Wall Street it’s clear that something is happening globally that needs defining. There are two unified theories out there that intrigue me. One says this is the start of “The Great Disruption.” The other says that this is all part of “The Big Shift.” You decide.

Paul Gilding, the Australian environmentalist and author of the book “The Great Disruption,” argues that these demonstrations are a sign that the current growth-obsessed capitalist system is reaching its financial and ecological limits. “I look at the world as an integrated system, so I don’t see these protests, or the debt crisis, or inequality, or the economy, or the climate going weird, in isolation — I see our system in the painful process of breaking down,” which is what he means by the Great Disruption, said Gilding. “Our system of economic growth, of ineffective democracy, of overloading planet earth — our system — is eating itself alive. Occupy Wall Street is like the kid in the fairy story saying what everyone knows but is afraid to say: the emperor has no clothes. The system is broken. Think about the promise of global market capitalism. If we let the system work, if we let the rich get richer, if we let corporations focus on profit, if we let pollution go unpriced and unchecked, then we will all be better off. It may not be equally distributed, but the poor will get less poor, those who work hard will get jobs, those who study hard will get better jobs and we’ll have enough wealth to fix the environment.

“What we now have — most extremely in the U.S. but pretty much everywhere — is the mother of all broken promises,” Gilding adds. “Yes, the rich are getting richer and the corporations are making profits — with their executives richly rewarded. But, meanwhile, the people are getting worse off — drowning in housing debt and/or tuition debt — many who worked hard are unemployed; many who studied hard are unable to get good work; the environment is getting more and more damaged; and people are realizing their kids will be even worse off than they are. This particular round of protests may build or may not, but what will not go away is the broad coalition of those to whom the system lied and who have now woken up. It’s not just the environmentalists, or the poor, or the unemployed. It’s most people, including the highly educated middle class, who are feeling the results of a system that saw all the growth of the last three decades go to the top 1 percent.”

Not so fast, says John Hagel III, who is the co-chairman of the Center for the Edge at Deloitte, along with John Seely Brown. In their recent book, “The Power of Pull,” they suggest that we’re in the early stages of a “Big Shift,” precipitated by the merging of globalization and the Information Technology Revolution. In the early stages, we experience this Big Shift as mounting pressure, deteriorating performance and growing stress because we continue to operate with institutions and practices that are increasingly dysfunctional — so the eruption of protest movements is no surprise.

Yet, the Big Shift also unleashes a huge global flow of ideas, innovations, new collaborative possibilities and new market opportunities. This flow is constantly getting richer and faster. Today, they argue, tapping the global flow becomes the key to productivity, growth and prosperity. But to tap this flow effectively, every country, company and individual needs to be constantly growing their talents.

“We are living in a world where flow will prevail and topple any obstacles in its way,” says Hagel. “As flow gains momentum, it undermines the precious knowledge stocks that in the past gave us security and wealth. It calls on us to learn faster by working together and to pull out of ourselves more of our true potential, both individually and collectively. It excites us with the possibilities that can only be realized by participating in a broader range of flows. That is the essence of the Big Shift.”

Yes, corporations now have access to more cheap software, robots, automation, labor and genius than ever. So holding a job takes more talent. But the flip side is that individuals — individuals — anywhere can now access the flow to take online courses at Stanford from a village in Africa, to start a new company with customers everywhere or to collaborate with people anywhere. We have more big problems than ever and more problem-solvers than ever.

So there you have it: Two master narratives — one threat-based, one opportunity-based, but both involving seismic changes. Gilding is actually an optimist at heart. He believes that while the Great Disruption is inevitable, humanity is best in a crisis, and, once it all hits, we will rise to the occasion and produce transformational economic and social change (using tools of the Big Shift). Hagel is also an optimist. He knows the Great Disruption may be barreling down on us, but he believes that the Big Shift has also created a world where more people than ever have the tools, talents and potential to head it off. My heart is with Hagel, but my head says that you ignore Gilding at your peril.

You decide.

[Bryan]

why does it always come down to a numbers game?

[TANSTAAFL]

Geez, Jack, thanks for the Friedman editorial suggesting that you are more likely to succumb to propaganda inveighing against economic liberty than I am.

[Jack]

Tans? In keeping with academic protocol could you please define your terms? Thnx!

[TANSTAAFL]

Jack, academic protocol frowns on spamming. And what definition do you seek? Is the concept of "economic liberty" so alien?

[an observer]

Tans

Is slavery "economic liberty"?

Is having to work at slave wages economic liberty?

BYW, FRIEDMAN is wrong here, like Malthus before him. Do you know why?

[NEH]

tanstaffl, "Economic Liberty"? Isn't this an Oxymoron? Especially, in a Post-Industrial Age or in the "Third Wave".

[Jack]

Tans?? "Antipathy to work??" It's getting a bit hackneyed after a recent revival but was Moynihan original in observing that all are entitled to their own opinion but not to their own "facts?"

Any thoughts on the entire concept of theoretical "dollars" (as compared to bartering one's production for that of another, and "capitalism" becoming so distorted in favor of the well-positioned clever, that it will soon come tumbling down as did the USSR when working folk knew they were taking a screwing but playing along as the whole thing imploded with a shrug and "they pretend to pay us, so we pretend to work.?

I've the soaring rates of disparity graphs handy after posting them for you benefit elsewhere:

http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

Do you think the disparity was wrong in 1979? Wrong today (as it seems it was in 1929?" or that the sharply upward curving slope points to an income-curve nirvana not far ahead?

[NEH]

tanstaffl, Once again... is this all the better that the New Right can come up with - ad hominems? Sounds like you've been trained in the "Limbaugh School of Rhetoric and Eloquence". As for France, you do realize it is one of the economic powerhouses of the Eurozone and it's position on Eurozone Policy is having a major impact on our own Financial Industry and our ability to jumpstart our own Economy. France an economic weakling - think again.

[rational expectations]

I don't think that anyone has mentioned this: There is a piece on the mises.org website, from Murray Rothbard's book "Economic Controversies," which points out a major difficulty with the analysis of GDP per capita in relation to the efficiency of government employees. This is the fact that GDP includes government expenditures as one of its line items. "GDP = C + I + (X-M) + G", where C is Personal Consumption, I is Investment, X is Exports, M is Imports and G is Government Expenditures. C, I, X and M are measured by market prices based on voluntary exchange and therefore reflect value, while G is measured as total expenditures without regard to the actual value provided. So all one has to do to make sure that GDP per capita is high in the "Government Sector" is to have the government spend a lot per government employee. That makes the whole analysis a bit circular, doesn't it? Rothbard ref: http://mises.org/daily/5601/The-Fallacy-of-the-Public-Sector; GDP ref: http://en.wikipedia.org/wiki/National_Income_and_Product_Accounts

[NEH]

R.E., As for the equation GDP=C+I+(X-M)+G, the variables are expressed in dollars ($)only. There is no "value" "or actual value provided" accounted for. So, given the equation, if there is any increase in any of the variables, except "M", GDP will increase. A reduction in any of the variables will result in a decrease in the GDP. Now, "M" works in just the opposite way on GDP. If "M" increases, GDP decreases. If "M" decreases, GDP increases.

So given this, if "G" is increased (all other variables are held constant or increased) and "M" is held constant or decreases then GDP will increase. Now, if "G" is increased (and all others are held constant) and "M" also increases, then GDP will either increase or decrease depending on the relational dollar amount between "M" and "G".

So, if the GDP is increasing from year to year, the Economy is said to be expanding. If it decreases, it is then in contraction or a Recession. This is where the "Keynesian Stimulus" Plan comes into play. "G" is increased in order to compensate for any increases in "M" or decreases in any of the other variables.

The problem is whether or not the formula is an accurate and reliable model of the real Economy...

This is a rather simplistic analysis of how an Economy operates and I don't want you to takes this as Gospel...

[NEH]

R.E., It all comes down to how "value" is defined. There is the old saying, "He knows the price of everything, but the "value" of nothing". Then in the market place it's said, "The "value" of anything is the "price" some Rube is willing to pay for it (caveat emptor)". Confusing, eh...

Since we're dealing with the Market place, "value" is the monetary unit paid or the total monetary units spent within a given time frame.