Public Employee Market Power and the Level of Government Spending

Public Employee Market Power and the Level of Government Spending

Description

Recent budgetary rhetoric emanating from Washington and other governmental capitals suggests a growing fear that public spending is getting out of control. For long periods of time the government budget has grown more rapidly than GNP in most mixed economies, and observers of these trends have begun to realize that if this process continues, public expenditures will approach very high shares of GNP and income tax rates could get close to unity. These scare stories are counteracted by the simple question that if government gets too large, why can’t voters band together to stop its growth? Rational, informed, democratic voting processes should provide a limit to the size of the public sector; indeed they should insure that the public sector is just as large as the voters want it to be. According to what economists have come to know as the “median voter” theory, it is puzzling to know exactly how government spending could ever get too high or out of control. There have been several attempts to explain the apparent anomaly. The major focus of previous efforts has been on some aspect of bureaucratic aggrandizement, either broadly or narrowly construed. William Niskanen (1971), for example, presents a model in which bureaucracies desire to obtain as large a budget as possible for the bureau in which they are employed. (See also his 1975 paper.) Despite competition from other bureaus, the sized of the overall governmental budget is larger than socially optimal because the nature of the budget process allows bureaus to act as price-discriminating revenue maximizers. Their ability to use their market power is constrained, both by competition from other bureaus and by the preferences of relevant legislative committees. As is implicit in the title of his work, Bureaucracy and Representative Government, Niskanen’s major concern is with the way in which the institutions of representative government (particularly the U.S. federal government) may lead to overprovision of public services. The model is not directly relevant to the behavior of local governments since it ignores two important constraints on local government spending. One is provided by households’ opportunity to vote directly on referenda concerning tax collections, and the other by the ability of households to leave local jurisdictions in response to expenditure-taxation packages which they find to be unsatisfactory. More general in application than Niskanen’s work are a number of papers which focus on the ability of public employees to influence the political process so as to increase both wages and the size of the public sector. The implications of this approach have been discussed by a number of authors, but in each case the underlying model has been left unstated or undeveloped. For example, James Buchanan considers the possible ramifications of the right of public employees to vote when he argues: “Bureaucrats are not different from other persons, and, like others, they will rationally vote to further their own interests as producers when given the opportunity. Clearly their interests lie in an expanding governmental sector, and especially in one that expands the number of its employees. Salaries can be increased much more rapidly in an expanding agency than in a declining or stagnant one.” [p. 14] Buchanan clearly implies that bureaucratic size and market power are highly correlated, but doesn’t consider any limits to the growth of government. The dynamics of bureaucratic and governmental growth are also analyzed by Gordon Tullock, who argues that bureaucrats will utilize their market power first to expand the size of the bureaucracy and then to increase wages. Once again, no explicit model is provided to permit consideration of forces that might check the growth of government. A number of authors extended the earlier work of Buchanan, Tullock, Niskanen, and others by focusing more specifically on behavioral and motivational differences between public and private employees. For example, Winston Bush and Arthur Denzau cite evidence that voter participation (and presumably support for the public sector) is higher for bureaucrats than for private sector voters, and conclude that higher public sector growth may be the result. A related argument is made in the paper by Thomas Borcherding, Bush, and Robert Spann, who suggest that bureaucrats view public goods as yielding higher (wage) income as well as utility from consumption. If public employees perceive this added dimension as a reduction in the price of public goods, then public employees will opt for a larger public sector. While certainly not complete, this brief overview of the literature is suggestive. A number of reasons have been given as to why public sector growth might get out of control, without much discussion of the possible checks on governmental growth. As Buchanan and Tullock themselves state, “Presumably there is some limit on this process, but it has not been determined either theoretically or empirically” (p.150). In this paper we attempt to respond to the theoretical gap recognized by Buchanan and Tullock by providing a model that permits explicit analysis of some of the issues just raised. The context of the model is a local government beset by growing political and economic power of its own employees on one side, and the threat of mobility of the private sector on the other. As regards the former, it is natural, but not necessary, to view the process in terms of a cohesive public employee union that can bargain for uniform (and high) public wages, and can also choose to vote for a larger public employee work force (though we will see that this particular behavior can be sub-optimal). In terms of the classic seller-buyer dichotomy that underlies almost all economics, to the extent that public employees or their unions gain political power over the budgetary behavior of the jurisdiction, the problem become interesting because the suppliers of public goods are in part their own demanders, with the private sector having little to do but pay the bills. Section I presents the assumptions of the model. Of particular importance is the assumption that public employees have some control over both their own wages and the level of public output. Section II shows how the size of the government budget and its composition between wage rates and employment are determined, first when the private sector workers are the dominant electoral bloc, and then when public sector workers assume control. The main object of interest in this latter case is the ratio of government spending to total income of the community, which will be shown to depend ultimately on the sensitivity of private sector location decisions to the cost of government services. In Section III we deal explicitly with how the competing demands of public and private sector employees might be resolved by a majority rule voting process, noting that public employee bargaining power can alter the level of public employment and public expenditures even when these employees are a minority of the total voting population. This has important implications for the median voter theory, at least in its simplified form, because it argues that even when the median voter is a private employee, the presence of public sector market power will result in a level of public sector expenditures which is influenced by public sector voting power as well as bargaining power. At the same time, the influence of public employees should be a good deal less than is often claimed in the popular press, because the threat of outmigration by private employees constrains the size of the public budget. In addition, for a given public budget, as the employee work force gets large, public wages must fall. Finally, in Section IV, we conclude by summarizing the implications of the analysis for the questions of the controllability of public budgets and suggest some further policy issues that might be examined.

Source Publication

Municipal Expenditures, Revenues, and Services: Economic Models and Their Use by Planners

Source Editors/Authors

W. Patrick Beaton

Publication Date

1983

Public Employee Market Power and the Level of Government Spending

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