Economic Benefits of Limiting Government, Part 2

In the first part of this three-part series on the economic benefits of limiting government I explained that: 

  • Private sector jobs produce 2.3 to 2.6 times more economic value than state and local government jobs;
  • Between 2007 and 2010 state and local governments added 4,600 workers to their payrolls in Wyoming, while the private sector cut away 11,300 jobs;
  • If those extra government workers were instead private employees, our state GDP would be up to $373 million bigger than it is today.

In other words, Wyoming would gain significantly from a balance shift, so to speak, from government to the private sector.  Such a shift would take a lot of work on behalf of our legislators, and even more work from the citizens of Wyoming to bring about that change.  But it can be done, and one way to do it is to follow the plan I suggested in a recent blog.

If the numbers presented thus far on our burdensome government – including Wyoming having the largest government-to-private employee ratio in the country – are not enough, let me add yet another perspective on the cost of big government.

Governments pay their employees generously, both in terms of salary and in the form of benefits.  State and local governments in Wyoming are no exceptions.  In 2011, the average state and local government worker earned an employee compensation of $55,854.  That same year the average private non-farm employee in Wyoming earned $38,687.[i]

For every dollar the private-sector employee earned, the government employee got $1.44.

Is there an economic rationale for this difference?  The short and distinct answer is: no.  As I reported earlier, the average private employee is up to 2.6 times more productive than the average government worker.  This means that the government worker produces an economic value of 38 cents for every $1 of economic value produced by the private employee.

The government worker is significantly less productive and earns significantly more than the private worker.

In other words, we could bring down the cost of government just by compensating government employees based on the economic value they produce.

What would that mean?  To begin with, let us adjust the compensation of the average government employee down to the value of what he is actually producing.  In 2011 state and local government employees produced an economic value of $49,033 per capita.[ii]  That same year they earned $55,854 per capita in employee compensation.  That is an over-compensation of 14 cents per dollar of produced economic value.

These are average numbers and should be treated as such.  There are individual sectors of government where workers come closer to their true economic value; there are also sectors where the gap between value and compensation is even larger than the average 14 percent.

Nevertheless, these numbers give us a good picture of what we stand to gain from scaling back government – if only in such a humble way as adjusting employee compensation closer to what it is in the private sector.

We are dealing with staggering numbers here.  If all the 65,700 people that were employed by state and local government in Wyoming in 2010 were compensated at 100 percent of the economic value they on average produce, then Wyoming taxpayers would save $448 million.

This is more than what the state took in from property taxes in 2010.[iii]

But wait – there is more.  Private sector employees do not get compensated at 100 percent of the economic value they produce.  Their employers have to pay taxes and set money aside for shareholders (whose investments they are responsible for) and for investments in preserving and expanding operations.  Therefore, the average private-sector employee is compensated at 30 percent of the value he produces.

Suppose, just as an experiment, that we lowered the average compensation of government workers to the same ratio of their produced economic value.  All of a sudden they would earn $14,709 on average, hardly a proposal that would seem palatable to that many job seekers.

While some shoot-from-the-hip libertarians may get a kick out of imagining police officers, teachers and court clerks making just over $1,200 per month, it would be very irresponsible to reduce the burden of government this way.  That said, the comparison between government workers’ compensation and the economic value they produce, as well as corresponding private-sector numbers, shows us how small measures can produce big gains for taxpayers.

One of those small measures is to cap the compensation of government employees so that they cannot earn more than the value they produce for taxpayers.

Notes


[i] Bureau of Economic Analysis, Regional Compensation of Employee Data.  See http://bea.gov.

[ii] This value is estimated using Bureau of Economic Analysis data for state GDP, employment by sector and a calculated parity between GDP per private and government employee, respectively, for 2010.  It is assumed that the parity is the same in 2011 as in 2010.

[iii] Census Bureau: State and Local Government Finances by Level of Government and By State. Available at: http://census.gov.

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