December 2, 2012

Jobs programs should be productive

I am sometimes accused of failing to understand Keynesian economics. The arguments usually follow a few themes.

Some argue we all would be better off if everybody received higher wages, except perhaps the 1 percent. A variation of this is that private-sector workers deserve the wages and benefits found in the public sector.

I’d hate to see us design economic policy based on what we would like rather than what would work. Keynes and I would agree that it would be wonderful if every worker in this country earned more. Let’s imagine we passed a law that everybody must be given a living wage. We would find almost immediately that the price level would rise by the same amount as the average wage increase, unless there was a commensurate increase in productivity and output.

In other words, real wage growth occurs only if output grows at the same time. Otherwise, wage growth is nominal and inflationary. Demands for higher wages all are noble, but the policy is not.

Any mention of government workers, of which I am one, invariably invokes responses. Some assert that government salaries are not higher than private-sector salaries. They are correct. A recent analysis of Census Bureau data showed that government wages are only 1 percent higher than private-sector wages. However, the same study showed that government wages and benefits combined are 20 percent higher than private-sector packages.

Critics then retort that this is an unfair comparison. They claim government workers are more educated and skilled than their private-sector counterparts. That proposition is difficult to prove, given private-sector employees often receive significant job-specific in-house education or skills enhancement that may not earn a college degree but is nonetheless valuable.

Comparisons of public- and private-sector job productivity are difficult. We can easily measure private-sector job productivity per worker because their output is sold in a market. It is much more difficult to keep score of the productivity of government workers.

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