The Republicans in Wisconsin, in secret session behind locked doors, were able to pass a law last night that prohibits state employees from engaging in collective bargaining for any wage increases that exceed the inflation rate. At first glance, this may seem reasonable, in that it allows state employees to attempt to try to keep up with inflation. In a world in which real productivity growth is usually in the range of 1.5-2.0%, however, this guarantees that the relative pay of state employees will decline over time if such a policy is maintained. While productivity may grow at a slower rate for many public-sector employees (due to the nature of their occupations), equilibrium wages tend to rise by similar amounts in all occupations over time. If they don’t, workers leave the occupations in which relative wages are declining and enter the areas in which relative wages are rising.
If real wages for public sector teachers do not keep up with wages of private sector employees, only the least capable individuals would tend to select public sector employment. Then, you could end up with a Governor and state legislators who are incapable of understanding how labor markets function.
