Thursday, November 18, 2010

Incentives Are the Difference Between Public and Private Sector Workers

It was probably a year ago that I cancelled my subscription to The Capital--not in protest or anything because I do enjoy reading it, but for 2 reasons.  First, I found that on most days I would just recycle it without reading anything, and second because I found a more efficient way to line my outdoor table for eating crabs.  I kept my paper box, however, because I still wanted to receive the lovely landscaping flyers and community propaganda and that type of stuff can't go in the mailbox!

Consequently, it's more difficult to use letters to the editor as blog fodder.  The best source of opinion now is probably the commenters on the Capital's web site, a crowd of probably 30 regulars that sling entrenched opinions from the comfort of computer screens.  Little known fact: every year the online opinion world competes in the "Mom's Basement Bowl", whereby competitors try and type the nastiest slur possible while eating a bowl of chips and dip.  Last year I came in 5th place. (My dip was too thick and my chip broke in half just as I was about to lay into the Deputy Streetsweeper.  Major disappointment.)

So I was looking through the comments on this story, and a mini debate erupted regarding workers in the private sector vs. the government sector.  The current paradigm of course is that private sector workers think that government workers meet for happy hour every day at 2 pm on a beach in the Bahamas, and government workers think that private sector workers ignore the vital role of government employees, which the private sector workers are too greedy and selfish to ever do themselves.  As always the truth is somewhere in the middle.

There are lazy people and hard working people in both sectors.  The Annapolis City Clerk, for example, is one of the best government employees I've ever come across.  The base city clerk salary I think might be $70-$75k, with benefits pushing the total compensation to $90k ish off the top of my head.  Fair cost to taxpayers?  Could someone willing to work for $20k less do the same job?  Does a private sector worker making $50k require the same job skills?  Hard to say.

The problem is incentives.  Private sector employees have an incentive to work hard because if not they will get fired.  Businesses pay their employees with their money--it's an investment.  If the investment doesn't pay off, the employee doesn't work there anymore.  I can't really think of an example of tenure in the private sector.  Maybe unions offer some type of protection for seniority, maybe other examples exist that I don't know about.  But governments are a different story.  The people that pay the salaries of government workers (you) don't have a say in how these workers do their jobs.  That's the problem.  Government managers don't have as profound an incentive to keep their workers productive because they are paying them with a third party's money.

My guess is that workers that coast through their jobs (in either sector) are workers that have no mobility, either upward or downward.  Or 'outward' I guess--gotta get all the 'ward's in there.  With no fear of being fired, and no possibility for advancement, why work hard?  Maybe an intrinsic work ethic keeps you busting your butt for a while, but eventually you realize you get the same money no matter how much work you do.

I do think the government has been trying to place more incentives for pay raises based on merit.  I think this only on the basis of knowing that my brother, who works for the IRS, makes more money if he does more stuff like get continuing education or whatever.  Even so, a recent study found that all things considered the average federal worker makes double what the average private sector worker makes.  Theoretically a cost of living raise should match inflation, but the raises received by government workers have outpaced inflation by 33% since 2000.

Some job requirements of government workers wouldn't be tolerated by the private sector.  The city clerk, for example, has to work from 7 pm to 11 pm every other Monday night, and sometimes has to stay at the office until midnight in case candidates want to file for election at the 11th hour.  How much overtime would have to be paid to a private sector employee to do the same?

I am confident that good and bad employees exist in both sectors.  I am also confident that government is less efficient than the private sector--much of my political belief system relies on this confidence.  The government will never be able to provide the same incentives that markets do, which I believe is why we should have as little government as possible.

5 comments:

John J. Walters said...

Well and truly stated. Incentives matter, and all generalizations are false (including that one). Couldn't have said it better myself.

Baltimorean said...

While I understand your desire to fit your thesis into your personal set of beliefs, I strongly disagree with your opinion here. And I do so respectfully; I simply maintain that you've ignored a fundamental economic principle of macroeconomics.

The difference is not incentives. The difference is that the two economic sectors function in different "markets." Private employees working for private firms work for a sector that relies upon an output of maximized profits. Government officials/workers function in markets where no profit margin exists. This is a fundamental difference between private and public employees. It has nothing to do with incentives.

Government workers function in markets where private actors cannot realize a profit (i.e. regulation, public education, general health and welfare, public transportation, national security, etc.). The reason we have government is fulfill these societal needs. Civil societies require some actor to manage externalities that private actors cannot realize or account for.

An easier way to say it - focus on the outputs. Private firm output relies on marginal revenue. Public actor output relies on satisfying a public need - educating a populace, regulating public health, etc. This has nothing to do with whether public employees have an incentive to be more efficient or effective. The private sector won't address these "public good" markets because there's no way to realize a profit. There's no money in protecting public health, that is, unless, government actors make a public policy decision to create the market through subsidies.

Additionally, I think you have some other erroneous points in your post. No tenure in private industry? Partners in law firms. Partners in private equity firms/banks.

I've worked in the public sector for the last 5 years, 2 years teaching and 3 years in the central office of the Baltimore City Public Schools. Of course, in both places there were teachers and administrators who could have worked harder. That said, the vast majority of public sector employees that I've worked with have been more diligent, hardworking, and passionate than the employees I've worked with in the private sector. This is an incredibly small sample size and extremely biased based on my limited experiences, so it would be unfair to extrapolate this conclusion across all working employees. However, the point is, the problem is not incentives.

Now, when government crowds out private industry, we may find a point of closer agreement.

Baltimorean said...

While I understand your desire to fit your thesis into your personal set of beliefs, I strongly disagree with your opinion here. And I do so respectfully; I simply maintain that you've ignored a fundamental economic principle of macroeconomics.

The difference is not incentives. The difference is that the two economic sectors function in different "markets." Private employees working for private firms work for a sector that relies upon an output of maximized profits. Government officials/workers function in markets where no profit margin exists. This is a fundamental difference between private and public employees. It has nothing to do with incentives.

Government workers function in markets where private actors cannot realize a profit (i.e. regulation, public education, general health and welfare, public transportation, national security, etc.). The reason we have government is fulfill these societal needs. Civil societies require some actor to manage externalities that private actors cannot realize or account for.

An easier way to say it - focus on the outputs. Private firm output relies on marginal revenue. Public actor output relies on satisfying a public need - educating a populace, regulating public health, etc. This has nothing to do with whether public employees have an incentive to be more efficient or effective. The private sector won't address these "public good" markets because there's no way to realize a profit. There's no money in protecting public health, that is, unless, government actors make a public policy decision to create the market through subsidies.

Additionally, I think you have some other erroneous points in your post. No tenure in private industry? Partners in law firms. Partners in private equity firms/banks.

I've worked in the public sector for the last 5 years, 2 years teaching and 3 years in the central office of the Baltimore City Public Schools. Of course, in both places there were teachers and administrators who could have worked harder. That said, the vast majority of public sector employees that I've worked with have been more diligent, hardworking, and passionate than the employees I've worked with in the private sector. This is an incredibly small sample size and extremely biased based on my limited experiences, so it would be unfair to extrapolate this conclusion across all working employees. However, the point is, the problem is not incentives.

Now, when government crowds out private industry, we may find a point of closer agreement.

Mark Newgent said...

What happens when the costs (born by taxpayers) of those "public goods" produced my unincentivzed public sector workers outweigh the benefits?

You mention government crowding out private industry. In many respects it does that with two of the areas you discuss. Public transportation and education. Government crowds out privatization of mass transit and education.

We agree that education is a public good indeed the courts have said it's a civil right. However, who said government must be the provider of that education. In many cases government is failing on that account, where a private actor--yes acting in search of a profit--can better fulfill that need.

Also, you fail to account that there are indeed incentives in the pulic sector. Through taxation and regulation government redistributes wealth and picks winners and losers. There incentives are a)attaining other people'e money and b)power.

These are huge incentives for abor unions, and special interest groups advocacy groups. Not to mention the lobbyists who broker the deals.

John J. Walters said...

Good point, Baltimorean, about government workers operating in places where no profit motive can exist.

The problem, as I see it, is that we are too quick to assume that no profit motive can or should exist in a given industry. There are very few times when this is actually true.

Take the mail service: we have private companies there. Education? Private schools. The DMV? Norman's tag and title service. Healthcare, private hospitals and insurance companies.

I'm not saying that we don't need government involvement in some of these things, but we certainly could cut down government payrolls and pension debt by regulating them but allowing private firms to do the work.

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