Teachable moments

Brad Bumsted of the Pittsburgh Tribune-Review leads the latest news on Pennsylvania tax collections with the following:

Kenneth Gailey of Midland doesn't like the idea of raising state taxes or cutting benefits.

The 50-year-old contractor, who spent 16 years as a carpenter for
PennDOT, said he believes state government can make a huge dent in an
estimated $4 billion deficit by eliminating or cutting high-end salaries
for management and making government more efficient.

'Do we need more taxes? Do we need cuts in the few benefits we have?
What we need is fewer people on the high end of that pay scale.'

Is this true?  John Schmitt a labor economist at the Center for Economic and Policy Research has estimated differences in public- and private-sector pay by decile after controlling for factors like age and education (PDF of his paper).  What Schmitt found is that the distance between the top earners and those near the bottom in the public sector is smaller than in the private sector (see the table below).

Low-wage workers employed in the public sector (the bottom 20%) earn a bit more than similar workers in the private sector.  By contrast, workers in the top 20% of the wage distribution in the public sector earn between 9% and 11% less than similarly skilled workers in the private sector.  Wages for a PennDOT carpenter fall in the middle of the wage distribution, and while they likely earn less than carpenters in the private sector, the penalty they face for public service is smaller than that faced by workers at the top of the wage scale. 

It is true that there is a problem with top incomes in our economy, but that is a private-sector phenomena.  Below is a figure on CEO pay from The State of Working America.  In 1965, CEOs claimed salaries that were 24 times larger than the average production worker.  In 2009, top executives claimed salaries that were 185 times larger than those earned by the average production worker. In fact, these trends in top incomes suggest that one important avenue for closing the Commonwealth's budget gap should include consideration of constitutional means of levying higher taxes on wealthy households, like taxing dividend income at a higher rate.

An additional aside (warning: a bit wonkish):

Schmitt's paper is based on a sample of national data that includes but is not limited to Pennsylvania. A paper (PDF) by Keith Bender and John Haywood finds that public sector workers in Pennsylvania also earn less than comparable workers in the private sector. This result, like Schmitt's, is driven by the wage penalty that college graduates in Pennsylvania experience when they choose to go into public service.  This strongly suggests that Schmitt's results on the wage penalty by decile presented above would be similar if run for a sample of just Pennsylvania private- and public-sector workers.


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