A large share of the total cost of state and local governments is personnel costs. Wages and benefits constitute 60 percent or more of the costs of many local governments. And as the impact of the recession has dragged on for these governments, there has been an ever-increasing focus on the salaries of government workers.
The public discussion has gotten louder and more vitriolic as ordinary citizens, hurt economically by the recession and egged on by many in the political arena, have been increasingly skeptical of the value of public workers. And the public workers themselves have become increasingly demoralized, desperate and defensive. Nearly all of this public discussion around personnel costs has been misguided.
Wage rates are not labor costs. Over and over, we hear about what government employees are paid. That's the wage rate. Labor costs are different and need to be looked at in two ways: first, as a cost per unit of production, as in labor cost per lane-mile of road maintained, and then as the total labor cost of the organization. At the very least, the total labor cost must be managed so as to not rise faster than total revenue on an annual basis and must be low enough to not crowd out investments in capital. This is done primarily by reducing headcount — something governments have doing with a vengeance since early in the recession. Between August 2008 and June 2012, state and local governments reduced their total employment by more than 650,000.
Productivity is the result of capital applied to labor. Private businesses continually look for opportunities to increase productivity by investing in technology and machinery and thus reducing labor costs. We see examples of these sorts of tradeoffs in the routine of our daily lives. Bank tellers have been largely replaced by ATMs, we pump our own gasoline, we go to the self-service checkout at the store and we punch our own buttons on the elevator. In every case, the industry in question has replaced workers with investments in capital.
The public focus on wage rates complicates the productivity picture in government because often the result of the investments in technology and equipment mean that the workers have to be more highly trained and therefore better compensated. A backhoe operator can move more dirt per hour than a worker with a spade, but being a backhoe operator requires more skill and training and therefore a better wage rate. And unfortunately, the headcount reductions in government have largely not been the result of increased productivity through investment in capital. Rather, they have been precipitous cuts driven largely by the need to close short-term budget gaps. If headcount is reduced without productivity improvements, the result is a reduction in services and an eventual decline in the quality of life in the community.
Managing labor costs in the public sector is further complicated by the "quartet phenomenon." If you reduce the headcount for a quartet, you get something different — a trio — which is not good if what is required is a quartet. Government has lots of these situations — classroom sizes in the case of schoolteachers, for example. There might not be much difference for students if classroom size increases a little, but large increases will have a negative impact on a good teacher's ability to reach every child with quality instruction. Facilities such as community centers and libraries have to have a certain minimum staffing to keep the doors open.
Completely absent from the discussions I've seen of government-employee costs has been a consideration of how much a good employee is worth. How much, in quality of life and revenue from increased residential and business growth, is a good police officer or schoolteacher or park-maintenance employee worth?
Governments that do well are those that focus on productivity and value by managing labor costs well, making prudent investments in technology and equipment, and focusing on providing services their constituents value.
The impact of the recession seems to be that the wealth and income disparities are growing between well-off communities and those that are in fiscal distress. In the end, these well-off communities will have fewer employees than most cities, but their workers will be better equipped and better managed. The successful communities will be those that manage their labor costs wisely and well, not by holding down wage rates but by smart investments in capital.