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Public Employee Health Benefit Costs

By February 10, 2014Commentary

It has finally become common knowledge that government employees generally are compensated at a higher rate that their private sector peers.  That higher compensation includes richer, and more expensive, health benefits.  In the private sector, economists have established that higher health benefit costs tend to reduce wage compensation.   A study at the National Bureau of Economic Research explores whether this is also true in the public sector or who is really paying for these rich benefit plans.   (NBER Paper)   The answer seems pretty obvious, since taxpayers fund the government which is employing and compensating these public workers.  About one in seven people work for a state or local government and health costs for this group in 2010 was estimated at $117 billion.  The study focused on the level of insurance premiums, the employee’s share of that premium, the perceived strength of the bargaining group and current economic conditions.  While government workers’ health benefits remain more generous than those in the private sector, there has been an increase in less generous plans and more cost-sharing by employees in recent years, particularly during the financial distress caused by the recent recession.  But government workers were starting at a far more generous place than their private sector counterparts.  The results suggest that strength of unions diluted a government’s ability to offset financial distress by passing more health benefit costs on to employees.

Looking more specifically at school district workers, the authors find that only a small amount of benefit cost increases are offset by wage reductions, unlike the private sector.  And school districts often funded these benefit increases by questionable transfers from budgets supposedly devoted to other purposes.  Districts with stronger unions had even less offset of benefit cost increases.   And the research suggests that, at least measured by the dropout rate, the quality of education declined as benefit costs rose.Aside from the basic unfairness of workers who are funded by taxpayers getting better compensation and benefits than those who are paying for them, the uncontrolled growth of benefits and wages limits the ability of these governments to provide good services to citizens, including such basics as public safety, good roads and good schools.  This is an inexcusable situation, exacerbated by the inability of these governments to fire incompetent or lazy workers.  We need a national law which imposes a fiduciary duty on government employees to deliver value to the taxpayers and which limits their compensation to what equivalent workers in the private sector receive.


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