Public Sector Employees: To Cut or Not to Cut?

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Published April 19, 2012

| FOXBusiness

All jobs are not created equal.

That sentiment is at the crux of a growing debate over the loss of hundreds of thousands of public sector jobs at the local, state and federal levels in the wake of the 2008 financial crisis.

Do those job losses, which have undoubtedly contributed to a stubbornly high unemployment rate and reined in much-needed consumer spending, pose an obstacle to the broader economic recovery? Or do they represent a long-overdue pruning of bloated government payrolls?

Like most arguments, it depends on who you ask. One thing seems pretty clear, though -- the   U.S. economy is slowly healing as labor markets gradually strengthen.

Unemployment is down nearly a full point, at 8.2% from 9% a year ago, and, according to the most recent data from the Bureau of Labor Statistics, a number of key sectors are experiencing significant growth: employment in professional and business services has risen by 1.4 million since hitting a recent low in September 2009; factories have added 470,000 jobs since January 2010; and restaurants and bars have added 563,000 jobs since February 2010.

Indeed, since the recession officially ended in June 2009, the private sector has added 2.8 million jobs, according to a recent report from the Economic Policy Institute, a pro-organized labor research center in Washington, D.C.

Meanwhile, the public sector – municipal, state and federal governments – has lost 584,000 jobs during the same period, the EPI reported.

The EPI, whose board of directors includes the presidents of the AFL-CIO, the American Federation of Teachers and the Communications Workers of America, unambiguously views these losses as an obstacle to the recovery, arguing that additional public sector jobs benefit the economy by virtue of the boost in spending and consumer demand that follows all job growth.

Had the U.S. added public sector jobs at the same rate they were added during earlier recoveries, the EPI estimates that 1.2 million public sector jobs would have been added to the economy since mid-2009. Moreover, those jobs would have helped “preserve” 500,000 private sector jobs, the EPI claimed.

The EPI said recent labor trends (the government’s March jobs report showed public sector jobs were essentially unchanged from February) offer “reason to be optimistic.” 

“If the sector begins to actually add jobs in the coming months, the economy would benefit significantly in 2012 and beyond,” the EPI concluded.

The EPI is hardly alone in its belief that all jobs are in fact created equal. And the more the merrier.

Another argument in favor of adding (or at least maintaining) public sector jobs holds that important services decline when government employees are laid off. This point is especially relevant when police and fire department layoffs are threatened, as has been the case in municipalities across the U.S.

Michael Shires, an associate professor at Pepperdine University’s School of Public Policy, said local governments took advantage of huge revenue increases when property taxes exploded during the housing bubble early last decade. They used the additional revenue to expand their payrolls and increase salaries and benefits for current as well as past employees, Shires said. 

Then, after the housing bubble burst and property values and tax revenues plummeted, these same municipalities found they didn’t have the money to pay for the new employees and added benefits.

Taxpayers have reached the same conclusion, according to Shires. Many feel they are being held “responsible for something that was irresponsibly managed. These pension obligations are huge,” he said.

Vallejo, Calif., stands as a stark example of what can happen when costs for services outstrip revenues. Vallejo, a Bay Area suburb, filed for bankruptcy in 2008 after failing to renegotiate union contracts that were sweetened at the height of the housing bubble.

In 2000, seven years after a watch-dog group first raised red flags related to Vallejo’s labor contracts, the city council approved a plan that expanded rather than scaled back city employees’ retirement benefits. The changes allowed police officers and firefighters to retire at age 50 and receive an annual pension equal to 90% of their final year’s pay (assuming 30 years on the job), an amount that gets increased every year to keep pace with inflation. The old plan provided for a pension equal to 60% of their final pay at age 50.

In actual dollars, that meant a Vallejo police officer making $150,000 a year could retire at 50 on an annual pension of $135,000, bumped up each year to account for inflation.

“There’s a sense (among taxpayers) that these are very expensive employees with very generous benefit packages, and the concern is that it takes a lot of private sector employees to pay for them,” Shires said.

Layoffs, if not bankruptcy, were almost inevitable.

“One of the real impediments to recovery is a high level of taxation,” said Gary Sasse, director of Bryant University’s Institute for Public Leadership in Smithfield, R.I.

Sasse, once a top fiscal advisor to Rhode Island Governor Don Carceiri, offered three arguments in favor of slashing public payrolls, where necessary.

First, onerous tax burdens, whether at the local, state or federal level, push away investment by businesses and homeowners who will choose to open their businesses or buy their homes elsewhere.

“No area is an island,” said Sasse. “If your tax burden is so out of line with your neighbors’, businesses won’t invest in your community.”

Second, public employee pensions and benefits have gotten too expensive. “Unsustainable, unaffordable, and unrealistic,” is how Sasse described them. Unions that represent public sector employees should either renegotiate their contracts or simply “give back” some benefits to ease tax burdens on local businesses and homeowners.

Last, governments should be cutting jobs for which new technologies can provide more efficient services. Sasse cited fraud detecting software that could be used to detect Medicare fraud in lieu of investigators. 

Conversely, public sector jobs should be added where they are most needed, Sasse explained. Job trainers at local community colleges, for example.

In sum, government, in keeping with its ostensible goal of being as efficient as possible, should cut unnecessary jobs while simultaneously creating jobs that improve efficiencies.

“Not all public employees are created equal,” Sasse said.

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