Britain Leads the Way On Wage Freezes

Over the last decade, Britain and America have seen similar trajectories in public sector pay: it’s rising much faster than compensation in the private sector. In Britain, this has led to political consensus that government employee compensation must be reined in. Could this consensus be coming to America?

As recently as 2005, private British employees out-earned their public-sector counterparts, but now public sector salaries average 7% higher than private. In 2009, public employees saw their wages rise 2.8% while private wages rose just 1.1%.

The disparity is even greater on benefits, with public employees receiving pension benefits worth nearly 20% on top of salary. Meanwhile, most private employees have defined-contribution plans similar to American 401(k) accounts, and employer matches are typically in the 6% range.

These facts, and the existence of a massive structural budget gap, have led all three main parties to endorse a cap on public employee raises in the current election campaign. The parties disagree about how austere the cap should be, but each plan would keep pay rises lower than have been seen in recent years, and lower than most U.S. states are giving.

The Conservatives are calling for a one-year freeze on all public employees’ salaries, except the lowest-paid one million (about a sixth of the total government workforce.) The Liberal Democrats would cap pay increases at £400 ($615) per year, a bit shy of 2% for the median public employee, for at least two years. Even Labour, a political party that counts labor unions among its key financial backers, would cap salary growth for all employees at 1% for two years.

Pay trends in the United States have been similarly favorable to public employees. But with public employee unions serving as one of the Democratic Party’s most loyal and important constituencies, can this fact pattern lead to the same consensus as in the UK?

National U.S. numbers show that hasn’t happened yet. Public sector pay growth continues to outpace that in the private sector. In the last three years, state and local government employees saw wages and benefits rise by an average of 9.8%, while private employees saw just 6.9% growth. Federal employee wages are up 9.9% over the same period.

So far, there’s no sign that the Democrats who run Washington are interested in a federal pay freeze. Last year, Congress enacted a raise average of 2% for civilian employees -- lower than in recent years, but still generous given the fact that inflation is near zero and the federal budget deficit is at record levels.

However, there are some hopeful signs from states and localities, which have much less ability to finance pay increases with deficit spending. And because only about 10% of civilian employees work for the feds, lower levels of government are where the real savings can be achieved.

A huge share of state and local employees are covered by multi-year union contracts, which complicate the process of adjusting compensation levels or freezing wages. Lawmakers typically must wait for a new contract to seek wage concessions -- though even with a contract in place they can try to induce unions to reopen negotiations with the threat of layoffs; they can make legislative changes to non-bargained benefits; and in some states they can invoke emergency powers to cut pay.

In this context, some states and municipalities have taken steps to rein in public employee pay. For example, earlier this year New Jersey’s Democratic-controlled legislature passed, and Republican Governor Chris Christie signed, a law that will require public employees to contribute 1.5% of their salaries to pay for health benefits.

Christie has also been urging teachers’ unions to reopen their contracts and accept pay freezes at the district level. State employees already agreed to defer a wage increase in exchange for a no-layoff promise made by the previous governor, Democrat Jon Corzine.

Without a freeze, teacher pay will rise an average of 4% this year under existing contracts. A Rasmussen poll found 65% of respondents agreed with Christie that teacher pay should be frozen. Unions in a few districts have accepted a freeze -- and the governor has urged voters to reject school budgets in districts where teachers refuse.

Las Vegas Mayor Oscar Goodman, a former Democrat turned independent, has gone even further. He is demanding that all public employees take an 8% pay cut and then accept two years without wage increases, or else face huge layoffs.

Don’t cry too hard for Vegas public employees -- the police contract signed in 2006 included a 21.6% wage increase over four years. The unions are balking at Goodman’s offer but have offered up (smaller) concessions of their own.

New York lawmakers have not been as aggressive. My colleagues at the Empire Center for New York State Policy have been urging the governor and legislature to use their emergency powers to freeze employee wages, but so far elected officials (including Governor David Paterson) have not shown interest in using them.

So far, politicians with union ties have mostly raised procedural objections to efforts to restrain pay between contracts. Many Democratic figures in New Jersey, including Sen. Robert Menendez, have criticized Christie for urging voters to defeat school budgets.

But it’s hard to find any legislators of either party going on the record saying that public employees deserve their scheduled raises on the merits. And given their teamwork with Christie on health benefit reforms (and pension reforms, which mostly affect future employees), it’s no longer a safe bet that public employee union opposition will get Democrats to block a bill.

Indeed, New Jersey Democrats’ decision to go along with these reforms has sparked outrage from union leaders. Earlier this month in the Philadelphia Inquirer, a spokesman for the Communications Workers of America called Democrats’ moves “very disappointing” and said that “people in the labor movement feel like Democrats are abandoning their friends.”

The biggest test will come when large, union-heavy states renegotiate employee contracts, as New York will in 2011. When they have their best opportunity to hold the line on employee compensation, will state lawmakers do so? We likely won’t know until well after Britain has in place a new government and a new wage freeze.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets