Ask a Scholar: Private vs. Public Wages

John Mathys

Dear Ask a Scholar,  

Why is it OK for an executive in a private company to be paid millions (as salary/bonus/pension) and not OK for a public employee to receive high pay and a rich pension?

- Gerry Baranano, Yale University

Answered by John Mathys, Professor of Finance Emeritus at DePaul University. Dr. Mathys received his M.B.A. and his Ph.D. in finance from the Illinois Institute of Technology.

Private workers are paid from money obtained from the voluntary purchases of the company's goods or services by the public. Executive compensation is overseen by a compensation committee which judges that the compensation is in the best interests of the company. If you do not approve of the executive compensation, do not buy anything from the company or buy some common stock in the company and bring the issue up at the annual stockholders meeting.  

Public workers are paid from money obtained involuntarily by taxes from the public and public workers can vote and contribute money to politicians who can raise taxes and the public workers’ salaries and pensions paid by those increased taxes. 

For these reasons and others, liberals in the 1930s used to oppose public employee unions. New York mayor, Fiorello La Guardia, and Franklin Delano Roosevelt both opposed public employee unions, FDR saying "a strike of public unthinkable and intolerable."

Since the 1960s public employee unions have grown rapidly in membership and power. In the current economic recession, private sector jobs, medical benefits, and pensions generally have been cut much more than their public employee equivalents.   

The Pew Center on the States estimates that the 50 states together are $1 trillion underfunded for public employee retirement benefits. My state of Illinois was the most underfunded of all and this major accomplishment was rewarded by the recent reelection of the major state politicians who did this. The politicians responded by sharply raising individual and corporate income taxes with no cuts in costs except a questionable "reform" of state Medicaid and a proposal to borrow $2 billion to pay for some of the underfunding. Over 300 public employee retirees will be getting over a $100,000 annual pension and the number will grow to more that 800 in the coming years. This likely is much better that their private sector equivalents.

An enterprising student might ask why there is an efficient process to terminate the inefficient use of resources in the private sector—bankruptcy—but no equivalent process to terminate the inefficient use of resources in the public sector?  Then the student would invent an efficient, workable public sector bankruptcy process and deserve a very high salary and pension.

Who would pay the inventor student?

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