Arnold Kling  

Just a Reminder

Underwriting Errors Outlawed... The First Amendment and the Pr...

That we do not need one penny of fiscal stimulus to save state and local government jobs. Just cut pay and keep the workers with the same budget.

Everyone to my left seems to keep forgetting that option.

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CATEGORIES: Fiscal Policy

COMMENTS (12 to date)
Ted writes:

Let's say a state has to save $x. They can save it two ways. Either cut everyone's salary as a percentage equal to $x. Or eliminate a few workers where the costs come to $x. Either way, $x worth of income has been eliminated from the system.

In the first case, everyone revises there permanent income estimates downward (since cutting wages is usually a unit root deal), thus decreasing consumption. In the second case, most people don't revise there permanent income downwards and the ones who were fired get 99 weeks of unemployment benefits!

Thus, the latter case - firing people to pick up unemployment benefits - is likely to be a better outcome from an aggregate consumption perspective. Without unemployment benefits the case is ambiguous if it makes a difference or not, since it depends on how permanent income revision come into play when you are fired from a job.

Prakhar Goel writes:

Dear Arnold,

Everybody to your left forgets that option because it is not in fact an option. Pretending public-sector unions don't exist doesn't make them go away.

Besides, intentionally or not, everybody to your left has been working tirelessly for at least the last eight decades to remove this option and guess what? They succeeded. Public-sector unions and the bloated inefficient disgraceful government institutions that they entail are here to stay.

Boonton writes:

Economic analysis question: Why doesn't this happen?

It's not just unions. Across the board salary cuts are rare even in private industry. And while union leadership has an incentive to go with job cuts (those who lose their jobs don't vote in the next union election, only those who still have a job with no pay cut do), it hardly seems like many union members are itching for salary cuts. They'd rather roll the dice with layoffs if absolutely necessary.

Why is this?

Tom writes:

Cut jobs and you can ditch your worst workers. Cut wages and your best workers will ditch you.

Boonton writes:

But then why do workers themselves appear to favor layoffs over wage cuts? Is this a case where everyone thinks they are above average hence they will dodge the axe?

8 writes:

The proper strategy is to say offensive things about the unions and government workers. Goad them into going on strike and let the savings roll in. The longer government is shut down and most people realize that it doesn't affect them, the more popular it will be to just fire a huge percentage of these workers.

Kevin Harris writes:


Human beings are not simply economic agents. From an individual perspective, the pay cuts are (at least perceived to be) arbitrary and punitive. Everyone is punished, everyone feels victimized and productivity, morale etc plummet.

With layoffs, you can at least create a narrative (if you are one of the survivors) that the layoffs were necessary and best workers were kept on or it was luck of the draw.

That's why private companies generally choose layoffs over paycuts.

Floccina writes:

Under "Open books managment" employees choose lower pay.

Boonton writes:

The problem is that this narrative is only true in the case of downsizing. When an organization has grown to have too many people. What if, though, the number of people it has is optimal to get the job done relatively efficiently? In that case wage cuts would be the most efficient solution to needing to reduce labor costs. Yet since they seem taboo both in unionized sectors as well as private ones, the 'solution' is layoffs which means too few people are left to do too much work.

Grant Gould writes:

The marginal cost of an employee greatly exceeds that employee's salary, and substantially exceeds even salary+benefits (think of desks, chairs, phone lines, even the rental cost of the space the employee occupies).

Thus a 10% layoff can save as much as a 20% pay cut. But I suspect that most employees will view the latter as more serious than the former. For an organization that wants to keep morale high and moral dudgeon low, the choice is obvious.

Plus, of course, Tom's point -- the choice of whom to work for is stickier for low-performers than for high-performers, so if you treat them equally you will shake loose more high-performers than low-performers.

Boonton writes:

The marginal cost of an employee greatly exceeds that employee's salary, and substantially exceeds even salary+benefits (think of desks, chairs, phone lines, even the rental cost of the space the employee occupies).

This applies only if your layoffs are great enough to lower fixed costs. Is the school moving to a smaller building because it will have fewer teachers? Is the police force selling off some of its cars? Most cases we hear about do not involve such dramatic downsizing (and if it did it would be a while to realize savings as capital costs are often amortized over many years)

BTW, just to give a big picture perspective:

Real state and local government purchases (2005$) had fallen from $1543.7 billion per year as of 2007QIV to $1537 billion per year as of 2009QIV and then dropped to $1521.7 billion last quarter.

That's about a 1.4% drop in spending during a period where I estimate population increased about 5% (using and inflation grew by nearly 9% (using

redbud writes:

As the boss, I cut only my pay in order to fund raises and bonuses and retain all staff. My folks work harder than ever. I will redeem the six figures I have sacrificed at some time in the future, as the equity in my shop is protected and growing.

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