Nevada’s Privileged Class

As our legislature looks forward to the changing of a decade it’s time reevaluate where we are and where we want to be in the year 2000. Despite considerable attention paid to balancing budgets in the midst of more and more responsibility assumed at the state and local levels, we have paid little attention to the disparities in compensation and benefits between the public and private employee. The following statistics will examine the decade between 1980 and 1990. 1990 to 1996 will be examined in a future Issue Brief.

Government employment has grown more than manufacturing, mining, finance, insurance and real estate combined in Nevada. The trend is a national one and not unique to the Clinton administration. In fact the trend began during George Bush’s term. From 1989 to the present 1.5 million more Americans worked in manufacturing than worked for government. Today the number outstrips the number in manufacturing by more than a million. Unionized government employees, especially at the state and local levels, typically receive salaries and benefits that far exceed the compensation of comparably skilled private sector workers. And with Nevada’s unique situation with large portions of land under the Federal ownership, the numbers are far higher.

Between 1980 and 1990, average private employee compensation increased by 62.2 percent, compared to 81.7 percent for state and local government employees. Non-education employees had an increase of 90.7 percent, compared to the education employee increase of 73.0 percent.

Comparison Employee Compensation, 1989-1990

  1980 1990 Change
Private Sector Employees      
Wages and salaries $15,721 $25,523 62.1%
Employer Benefits $2,893 $4,673 61.6%
Total Compensation $18,614 $30,196 62.2%
Public Sector Employees      
Wages and salaries $15,129 $26,881 77.7%
Employer Benefits $3,200 $6,430 101.0%
Total Compensation $18,329 $33,311 81.7%

Source: American Legislative Exchange Council

Why is public employee compensation increasing so much more quickly than private employee compensation? In collective bargaining, public employee unions cite high cost public labor contracts negotiated in other jurisdictions to justify inflationary increases. Even when there is no collective bargaining, public jurisdictions sometimes develop their compensation programs based upon a comparison with other public jurisdictions. Both practices produce unfavorable results form the perspective of the public interest because they take insufficient account of trends and conditions in the context of the larger competitive market, on which all public programs depend for the tax funding.

The public sector labor market has become less flexible as the percentage of public employees covered by collective bargaining has increased. Collective bargaining itself does not make labor markets less flexible, however, when applied to a monopolistic environment (as opposed to a competitive environment), the result is less flexibility.

While each of these factors contributes to the extraordinary compensation increases, the pervasiveness of the trend suggests a more basic cause. Unlike private sector employee compensation, which is subject tot competitive forces, public employee compensation is established administratively with little or no competitive influence. It is to be expected that employee compensation determined by administrative processes, and subject to political manipulation, will rise at a higher rate than would be possible in a competitive marketplace. Short term perspective also adds to the inflationary element.

Not everyone agrees that wages and salaries should be subject to competition. However, competition routinely occurs in labor markets, and could only be eliminated through comprehensive administrative or political wage and salary setting. The overwhelming evidence is that if economic growth and affluence are desired, competitive incentives should be employed, and central planning avoided.

The fundamental problem in public sector compensation is the administrative determination of what should be established through the competitive market. Until this situation is corrected taxpayers will be on a treadmill that requires greater and greater financial sacrifices to support the excessive and unjustified increases in the compensation of state and local government employees that occurred in the 1980s.

Policy Recommendations

  • Competitive procurement of goods and services.
  • Competitive contracting substitutes administrative determination of compensation with market determination. These could be legislatively mandated.
  • Interests of public employees could be protected by applying the same strategies that are routinely used by downsizing companies in the private sector – reduction of staff size by employee attrition, early retirement incentive programs, reassignment of displaced employees and out-placement programs for employees who have been laid-off.
  • For public services which cannot be competitively contracted, compensation should be regulated to mimic the private sector- a concept called public pay equity. With Nevada accepting more and more responsibility from the Federal government, additional extraordinary compensation increases could occur if allowed to go unchecked.