The visible hand in economics

Spending on government employees

Posted on: July 27, 2007

An interesting new blog on stuff tells us why interest rates had to rise. Now I agree that people in the public service are being paid too much (as I don’t work there 😉 ). However, I’m not sure that public sector core wages are the main reason for inflationary pressure (although they do play some part in the wage bargain in the private sector as well). I think that it is a broader issue, with wasteful government spending in health and education the major drivers of our inflationary mess, along with low rates of productivity growth (in both the private and public sectors).

Ultimately, much of the current inflation problem comes from government failure. There is a role for government in society, but I’m not sure that the Labour government recognises the appropriate boundaries associated with that role.

8 Responses to "Spending on government employees"

Lately a lot of media releases have come out looking at the size of the wage bill in the public sector, and how it has increased in the last 8 or so years. Much of this has been as a result of formalising relationships with contractors, who in exchange for a higher payment had less job security – such workers previously did not appear in the public sector wage bill since they were not technically ’employees’. There are more employees now and much fewer contractors – hence to an extent talk of the ‘burgeoning public service’ is wrong (though not fully).

One thing though – public service managers are not better paid than ever before, usually more so than in the private sector. The same does not hold for regular employees!

I see, I did hear something about managerial salaries being the area where spending on public sector employment was rising. I’m not entirely convinced about the contractors argument. I heard that when Labour first came to power they did internalize a lot of work that was contracted out. But now consultant firms around Wellington are flush with contracts from the public sector, as Labour prepares for the next election.

If I had time and access to data I would like to have more of a look at wage dynamics in Wellington. However, as I have neither I’m going to stick with the entirely different argument for why inflation is so bad, the government pours too much money into areas that do not add value, e.g. marginal spending on health and education.

I still find it ridiculous that private sector wages (more so for managers) are being driven by the public sector, I’ve always liked the efficiency wage theory of labor markets but it certainly doesn’t seam to hold in New Zealand

I’m sure the market is wouldn’t mind trying to pay efficiency wages, but when the government lifts peoples reservation wage higher and higher, the private sector can’t afford efficiency wages.

Public sector wage inflation is helping to cause inflation in price by both:
1) Pushing up wages
2) Reducing private sector productivity

Wage inflation in government is institutional, it isn’t based on productivity or even incentive alignment.

At least half of our inflation comes from an increase in the price of oil – the whole world is batteling with this inflationary problem, not just us.

“Wage inflation in government is institutional, it isn’t based on productivity or even incentive alignment.”

Economic studies consistently show that a unionised workforce is cetrus paribus, more productive than a non-unionised work force (try googling “OECD productivity statistics” some time, you will see that the free market economies such as the US and New Zealand have the lowest productivity growth rates of OECD countries over the last 20 years). Also, union bargained contracts don’t tend to emphasize incentive-based pay schemes – so this idea, that incentive-based schemes increase productivity is pure BS.

Half our inflation does not come from an increase in the price of oil. There are periods where fuel prices drive inflation, but this is not one of them. It is the price of domestically produced goods that is driving inflation, and that is the reason why the RBNZ is so worried about it.

very interesting.
i’m adding in RSS Reader

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