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This post is part 1 of 2. Watch for part 2 on Monday, August 13, 2012.
It’s like watching a train wreck in slow motion. You know the budget crisis is going to end badly but it’s too early to know how many people will be hurt or the final damage. They have only recently started to report the early causalities. A June 11 article by Ben Polak, chairman of the economics department at Yale University, and Peter K. Schott, a professor of economics at the Yale School of Management, titled “America’s Hidden Austerity Programs,” reported local government employment is down by three percent. The worst months were in 2010 and 2011, but job cuts are again increasing. State employment is down by 1.2 percent.
The Focus on Payroll Costs
The recent election in Wisconsin has reinforced the interest in other states to push for similar changes. A Pew study entitled “The Widening Gap Update” highlights the $1.38 trillion gap in pension funding. Another study by the Center for State and Local Government Excellence highlights the findings from a survey conducted early this year on changes affecting state and local workforces. Nothing good is happening it seems and there are reasons to think things will continue to deteriorate into 2013.
From a broader perspective, trends in a number of other countries are, if anything, worse. I have had the opportunity over the past nine months to work with the Organisation for Economic Co-operation and Development (OECD) and have exchanged information with a number of their member countries. The pressure to improve government performance and reduce costs is close to a global phenomenon.
The state and local workforce “solutions” to date have cut costs but few changes represent a long term answer. The primary changes to pensions were increased employee contributions. The same is true for health care costs. Few of the respondents indicated they made changes in the plan provisions.
That may be about to change. The residents in San Jose and San Diego recently voted overwhelmingly to cut benefits for both current and future city employees. That may be the beginning of a tidal wave as other state and local public employers are considering similar actions. I have been told by actuaries that the assumptions governing pension funding are often not realistic and have been used to reduce or actually mask the actual gap. The can was kicked to the end of the road.
When I put on my “Carnac the Magnificent”(a la Johnny Carson) outfit and pull out my old economics texts, I do not see state and local public employers solving their fiscal problems for years. I am not anti-union but their political clout may never recover. Recent headlines used the phrase “organized labor at a turning point.” In my work with the OECD, I saw a statement by a union spokesperson for an alliance of unions in Europe confirming that actions were taken without involving the unions. This may be the end of an era.
Pay freezes and hiring freezes are stopgap actions at best. In the long run they create problems. Lower morale is perhaps the easiest of those problems to fix. In the long run, the actions are going to damage the perception or brand of public career opportunities. According to the survey, public employers are already finding it difficult to recruit people in a number of occupations. Looking ahead, the survey respondents listed “retaining staff for core services” as their second most important concern, after the “public perception of government workers.” The recruiting and retention problems are likely to get worse if the private sector continues to recover.
That, of course, makes the pay system a focal concern. Wage and salary levels are undoubtedly less competitive today than they were in 2007 and 2008. That could also be true of the benefits package, although private sector employers have also taken steps to control costs. However, it’s unlikely public employers will recover enough to grant broad based pay increases for several years.
Labor Markets are Coming Back to Life
Another “however” is that private employers are coming out of the recession with a different strategy in managing their pay programs. It’s no longer enough to remain competitive; their focus has shifted to doing everything they can to recognize, reward and avoid losing high performers. The days of ‘spreading increase dollars like peanut butter’ ended with the recession.
Companies are also reporting problems keeping their best people, but they, in many cases, have more flexibility and are willing to commit more money to recruit and retain key personnel.. Businesses can also offer other rewards to their employees, such as retention bonuses and stock grants, making it difficult for public agencies to compete.
As the country comes out of the recession, talent shortages are again emerging. Annual studies by ManpowerGroup show that in the years prior to the recession, roughly four in 10 employers found it difficult to fill jobs, but by 2010 the percentage dropped to 14 percent. In the past two years the numbers have risen to five in 10 employers. Looking to the end of the decade, largely as a result of demographic trends, the fastest growing industries and occupations—many of which are relevant to government—will be those related to health care, personal care and social assistance.
At the same time, there are occupations that are projected to see a decline in employment through the decade—clerical and office support jobs, for example.
The shortages will inevitably push pay levels higher in selected fields. Occupations in decline are likely to experience continued stagnant wages.
The problem for government is that the typical classification and compensation system does not have the flexibility to respond to diverse market trends. In industry there has been a strong trend that dates to the 1990s recession to reduce bureaucratic practices and make pay systems more responsive to market trends. Companies at least in the U.S. have largely abandoned formal job evaluation systems and now rely on market-based strategies to assign jobs to salary ranges. When the market pay level for a job increases rapidly, they simply slot it in a higher grade. Government pay systems rarely have that flexibility.
Watch for part 2 of this post, which discusses the impact of staff cuts, allocation problems and continued scrutiny, to post on Monday, August 13, 2012.
Howard Risher is a private consultant and frequent author on pay and performance issues. He has experience in every sector including federal, state and local government. Email: email@example.com.