Improving Obama's wishy-washy plan to hurt some workers without helping others.

Improving Obama's wishy-washy plan to hurt some workers without helping others.

Improving Obama's wishy-washy plan to hurt some workers without helping others.

Moneybox
Commentary about business and finance.
Nov. 29 2010 7:30 PM

Don't Freeze Federal Pay. Cut It.

Improving Obama's wishy-washy plan to hurt some workers without helping others.

Illustration by Mark Alan Stamaty. Click image to expand.

On Monday morning, President Barack Obama proposed a two-year pay freeze for federal workers, a measure that would save the government $2 billion in the 2011 fiscal year and $60 billion over the next 10 years. The proposal, which would require congressional approval to become law, would cancel this year's 1.4 percent pay increase for the country's 2.1 million civilian federal workers and prevent any pay bumps next year, as well. (Uniformed military personnel would be exempt.)

"There's still a lot of pain out there," Obama said at a press conference. "But we do have to correct our long-term fiscal course," he continued, noting that "sacrifice must be shared by employees of the federal government."

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The White House intended the announcement to be a testament to its seriousness about the deficit. But it also proved a testament to how much the conversation has shifted from the immediate jobs crisis—nearly 15 million Americans remain unemployed—to the long-term fiscal crisis. And Democrats missed an opportunity to tackle both problems at once, lowering unemployment without the need for any more deficit-funded stimulus dollars. Forget federal pay freezes. They might have considered federal pay cuts.

Economists agree that during recessionary times, it would be better to have more workers earning less rather than fewer workers earning more. But employers tend to fire workers rather than cut wages, when their bottom lines are under duress.

The phenomenon is called "wage stickiness" or "wage rigidity." The price of workers (salaries, wages, and other forms of compensation) does not fall when demand declines and supply increases, at least not in the way that the price of goods and services do. A baker can knock $1 off the price of a loaf of bread on a lark. But that baker faces real obstacles—the threat of attrition, bad morale, and reduced productivity, for instance—if he decides to pay his cashier $1 less per hour due to declining sales and a surfeit of idled workers ready to nab the cashier's job. Therefore, wages tend to "stick," and employers tend to resort to layoffs rather than wage cuts when bad times come along.

Over the course of the last few years, wages have proved particularly "sticky" for federal workers, who have fared far better than their counterparts in the private sector, state government, and local government. Private companies have shed 7.3 million employees since the recession started in December 2007. States and local governments have also fired hundreds of thousands of workers in the last two years. But federal employment, even discounting employees picked up for the 2010 Census this summer, has grown.

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Moreover, federal wages have risen faster than wages in the private sector (where, in many cases, they have declined), state government, or local government over the course of the recession. The trend goes back further: A USA Today analysis completed earlier this month shows that since 2000, federal pay and benefits have increased an average of 3 percent faster than inflation each year, compared with 0.8 percent for private workers. And it goes deeper: The number of federal workers earning more than $150,000 per year has doubled since Obama took office.

The White House therefore reasons that it can freeze federal workers' wages to draw $2 billion down from the deficit without having too much of an impact on the recovery. But that $2 billion will diminish the spending capacity of mostly middle-class workers and might discourage Americans from seeking public-service work. Moreover, if the White House is intent on freezing wages, it could have done much more good with the saved funds.

In the last two years, faced with extraordinary budget pressures, businesses and local governments have increasingly turned to wage cuts and freezes—not just to improve their bottom lines, but to keep workers on payroll. Cops in Atlantic City, N.J., teachers on Long Island, N.Y., and firefighters in Phoenix, Ariz., to name just a few, all agreed to slash their own salaries to help save their co-workers. Indeed, a recent study by the National League of Cities found that more than half of U.S. cities have imposed pay cuts or pay freezes this year, with one--quarter revising union contracts to lower pay. Private employers—normally loath to cut compensation, as they would rather fire a few workers than anger a whole lot of them—have turned to salary cuts as well.

Other countries have implemented such controversial, if low-cost, ways to help bolster employment, to great effect. Most notably, Germany has held down its unemployment rate through the recession by using a variety of wage-cutting and job-sharing techniques. The most successful program is called "Kurzarbeit," or "short work." Employees work fewer hours, with government making up the difference if they lose more than 10 percent of their compensation. In turn, employers keep more workers on the books. The benefits have proved massive. The U.S. unemployment rate is 9.6 percent and Germany's is 7 percent, though, GDP-wise, the German recession was worse.

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Economists have urged the United States to adopt similar techniques, manipulating hours or wages to keep the unemployment rate low. Dean Baker of the Center for Economic and Policy Research has repeatedly pushed for a job sharing program like Kurzarbeit, for instance. "[U]se tax dollars to pay firms to shorten the typical workweek or work year, while keeping pay constant," Baker urged last year. "This should cause employers to want to hire additional workers to make up for the fewer hours worked by their incumbent work force."

To juice jobs—lost not at the federal level, but in state and local government—without adding to the deficit, Congress could freeze or cut federal salaries and transfer the money saved to state and local governments. It could also freeze or cut federal salaries and then use the saved dollars as tax incentives for private businesses to perform job-sharing.

But, of course, policy often works better on paper than it does in political practice. "The question is of equality of sacrifice, not economics," says Gary Chaison, a professor of industrial relations at Clark University. "Most Americans believe that the president has been very lax on public employees but has asked private employees to make sacrifices. The public is demanding that part of the jobs formula be less spending on public workers."

And for that reason, Obama's proposal to freeze salaries seems more of a political salve for the deficit hawks than an economic plan to tackle the country's jobs—or fiscal—crisis.

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