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Budgeting for a Local Government Workforce: Implications for Compensation

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Agustin Leon-Moreta
May 21, 2018

Wages play a critical role in keeping and motivating a competent workforce in local government. Although other incentives matter, low wages may certainly discourage competent workers from working in local government. What factors affect wage levels in local governments? This article discusses some basic factors influencing wages determination in local government. After briefly discussing the importance of wage determination, it focuses on alternative explanations of differences in wage levels of local governments. Some implications are discussed in the conclusion.

Wages play a critical role in motivating a public service workforce. Although wages are not the only motivating factor, they can play an essential role in encouraging or discouraging competent professionals from working in local government agencies. Determination of wages thus is a key management tool for attaining a variety of purposes in local government. Yet, while the importance of wages is well understood, improved analysis is necessary to understand what factors shape the determination of wages in key functional areas of local government.

One factor of influence is the fiscal capacity of a local government. Fiscal capacity is important because it affects local governments’ ability to pay for a qualified workforce. While some local governments have a high fiscal capacity, other local governments have a limited fiscal capacity. Those differences in fiscal capacity will naturally affect local governments’ ability to pay workers. If their fiscal capacity is constrained, a local government may be forced to freeze wages and other benefits. In contrast, when their fiscal capacity is high, local government will be able to afford wage increases and other types of benefits. As a result, increasing fiscal capacity allows local governments to pay higher wages and other compensation benefits to employees.

Socioeconomic and institutional conditions may affect the fiscal capacity of local governments. One institutional factor is that of collective bargaining laws. Many states allow for collective bargaining in local government. Collective bargaining laws would play a critical role in the compensation levels of municipalities. Salaries tend to be higher wherever collective bargaining is allowed by state law. Of course, the actual impact of collective bargaining ultimately depends on specific provisions of collective bargaining laws. However, the presence of collective bargaining legislation, by itself, may be a significant support for higher salaries in the public sector. Absent that legislation, the bargaining power of employees would be lower.

Relatedly, the extent of unionization will affect salaries and compensation levels in local government. Where unions have a strong presence, higher salaries would be expected. The effect of unionization on wages may partly work through collective bargaining. Unionization, however, may drive up salaries via other mechanisms as well. For example, unionization is sometimes associated with a more qualified workforce. When workers are more qualified, local governments may be willing to pay higher salaries. Unionization also reduces incentives for individual workers to work for specific professions. If someone must belong to a union to be able to work, that restriction may reduce the pool of potential workers. For these reasons, unionization will typically drive up compensation levels.

Political ideology may be another relevant factor affecting compensation levels in local government. Where programs provided by local governments are politically supported, decisionmakers will be more willing to support higher compensation levels for public employees. Where the programs provided by local governments are not appreciated, decisionmakers may be less willing to increase compensation levels. Depending on the local political ideology, decisionmakers may be more (or less) able to allocate funds for salary increases in local government units. Influenced by the local political ideology, decision-makers will be willing to fund compensation packages that are consistent with the larger preferences of the voters regarding the role of government in the community.

Regarding socioeconomic factors, income inequality could lead to higher salaries in local governments. First, income inequality would raise expectations of using public employment to compensate inequalities. Income inequality may also increase the demand for services. Because of inequality, local governments may need to hire a higher number of employees to deliver social services. Because of the need to hire a higher number of employees, salaries in the local government sector may tend to increase.

How can local governments pay adequate salaries, while containing payroll costs on their budgets? Clearly, there is a tradeoff between increasing payroll benefits and containing their burden on local government budgets. However, there are some options for local governments to try to accomplish those conflicting purposes. A first option is collaborating with other local governments. If other local governments provide similar services, then interlocal collaboration may result in budgetary savings for local governments. Local governments can jointly deliver services and thus reduce the overhead costs of providing those services. A second option may be outsourcing some positions via private contracting. In a few cases, working with private contractors might save resources to local governments. In sum, the costs and benefits of those options should be assessed when budgeting for a workforce in local government units.

Author: Agustin Leon-Moreta, PhD, Assistant Professor, School of Public Administration, University of New Mexico https://spa.unm.edu

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