Tuesday, December 20, 2005

The Carrot and the State Employee

Governor Daniels is so proud of the work of his state employees this year, he is issued a letter to them conveying the following:

By any estimation, 2005 was a year of great improvement for Indiana state government and, even though we have much left to do to return a bankrupt treasury to the black, the progress deserves recognition. Accordingly, I have ordered a general salary adjustment of 2%, effective the first paycheck in February…

If you ever wonder why government jobs pay less than those in the private sector, here is the reason. The current inflation rate is 3.46% and the 2005 average of monthly inflation rates is 3.389%. A 2% increase in state salaries (as a “reward” for good work) actually translates into a decrease in real wage. So the longer Mr. Doe works for the state, the less he can purchase with his salary. And you can expect him to do the minimum amount of work necessary to keep his job, since the “reward” is issued to all current employees at a flat rate. Work above and beyond the minimum required provides no additional benefit to Mr. Doe.

This year-end reward system is not unique to the Daniels administration. It is simply how things work at the state. And for this reason, state employee salaries fall each year relative to the private sector (and you end up with lawyers and engineers making 60% less at the state than in the private sector).

BUT…Mitch is changing the reward structure effective next year. Another excerpt from the letter:

It is our intention that future salary adjustments be less “general”, instead being based on performance, as determined by the evaluation system now being put in place. Starting next year, there will be no automatic increases; individual raises will depend on performance that at least meets expectations. Outstanding work will be rewarded by greater levels of increases.

This will affect the quality of work produced by state employees more than anything that has been done so far by the Governor. The only effective way to improve employee performance is to give the employees a benefit for hard work. In an effort to give credit where credit is due, I must commend Mitch Daniels for his initiative in changing the reward structure next year. There are some things that government can learn from the private sector, this being the most important.

However, Governor Daniels must be mathematically careful in order for his changes to succeed. A nominal raise in salary is only a benefit if it increases the employee’s purchasing power (i.e. real wage). In order for this reward structure to work, the percentage increase to be given to those that “at least meet expectations” must be greater than or equal to the current inflation rate. Anything less is a punishment (as is the current increase), and we should not be punishing employees that meet expectations.

Provided that the Governor minds his numbers when calculating raises, there will be mutual benefit both to state employees and to the taxpayers that depend on them.

6 Comments:

Anonymous RiShawn Biddle said...

The problem with your statement is that you forget the entire compensation package: Nearly-free health insurance, which is something private sector employees never get and defined-benefit pensions that, in an age of 401-Ks, is quite generous -- and funded by taxpayers who don't get similar benefits.

When one actually does the per-hour compensation (in this case, the Reason Foundation, which looked at public pensions last year) public-sector employees get average total compensation of $34 per hour; private-sector workers get a mere $23 per hour in total compensation on average.

Now one must note that private-sector employees, depending on the areas of business they are involved, can make far more in salary and such benefits as stock options. On the other hand, there comes the risk. That's fine. But don't forget that public-sector workers, because they trade the risks and rewards of private-sector work for the long-term security of public sector employment (aided by the fact that taxpayers ultimately foot the bill if, say, pensions are underfunded, a major problem for all public sector pensions). Add to that fact, the reality that most public employees are unionized -- and unions by nature focus on security -- pensions and bennies as you will -- means that salaries are going to be low. But that's compensated by the kind of benefits no private-sector firm dares offer anymore because it's just too costly.

12:00 PM  
Blogger Jezebella said...

It is definitely true that the benefits add to the hourly wage of a state employee. I agree that my 60% figure would be much lower if benefits packages were taken into account.

My main point was not so much the overall level of compensation, but rather the year-to-year changes. All benefits stay at the same nominal level as the year before (i.e. Daniels did not increase pensions, decrease healthcare deductibles). So holding benefits constant, state employees will have less purchasing power in 2006 than they did in 2005. Regardless of the quality of their work.

12:51 PM  
Anonymous taking down words said...

Two points: Gov. Daniels actually bragged in his availability about how the 2 percent "raise" will do more for state employees than collective bargaining ever did.

Also, you can't feed your family with health benefits. Last time I checked, anyway.

A third and somewhat ancillary point: The state's new health insurance proposal, which was reported in the IBJ a few months ago, actually puts more of the burden on state employees and creates a system that's more beneficial for insurance companies.

Oh, and seriously, RiShawn, the "long-term security of public sector employment"? You don't actually talk much to people in and around state government these days, do you?

3:57 PM  
Blogger LP Mike Sylvester said...

I have to overall agree with Rishawn. I think that public sector employees have it far better then they want poeple to think.

I agree that they make somewhat less then their private counterparts. The benefits in the private sector are pretty much gauranteed and you have to count their benefits package in comparison to most private companies.

If the current trends continue you will actually see the most qualified people going into the PUBLIC sector due to the benefits...

10:34 PM  
Blogger Jezebella said...

Non-employer-sponsored health care premiums average $173/month, or $2,076 per year. An engineer making $116,000 per year in the private sector (vs. $44,000 for the state) could certainly afford that, and could afford to invest a significant portion of that in an IRA or 401(k). So I do not buy the argument that benefits FULLY compensate for the wage discrepancy, though I do understand that public sector benefits are better than those in the private sector.

The point is that people respond to changes to their economic status, not their overall nominal compensation package. No matter which way you frame the argument, state employees will be worse off (in economic terms and assuming inflation > 2%) next year than they were this year. To reward someone by making them worse off is not really a motivation tool.

It is instead a good way to push employees into the private sector, provided they can calculate that $116,000 - $2,076 is still more than $44,000.

12:33 AM  
Blogger Jezebella said...

Just to mention, this is also true for jobs requiring less education. An administrative assistant for the state will earn about $18,000 compared with around $30,000 for a private firm. So even for this person, $30,000 - $2,076 is greater than $18,000.

12:37 AM  

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