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How Much Can Taxpayers Afford to Pay Public Employees?

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By Lowell L. Kalapa

While no one wants to discuss it in public, many are wondering what impact the recently arbitrated public pay raises will have on taxpayers in the coming years.

It appears that the arbitration panels believe that taxpayer will have the ability to pay for substantial increases because the economic picture apparently “turned the corner” and is improving. That assessment is probably debatable and only the next few months will tell whether or not Hawaii’s economy has truly “bottomed out.” However, one element that is sorely apparent to most businesses in Hawaii is that the long slump has forced many to become “lean and mean” with no fat to spare. In the last ten years, businesses have had to downsize their operations, cut payroll, consolidate operations, and find more efficient ways of doing business.

Those businesses which have survived watched while many of their friends and competitors who did not heed the warning went out of business or moved out of state. Those survivors watch the bottom line carefully making sure their receivables are paid on time. In many cases, those who work in these businesses have little in the way of salary or wage increases.

Thus, for the average taxpayer, it has been a bit difficult to accept the decision of the arbitration panels who recommended substantial pay hikes for public employees in the coming two years. Apparently not only did the arbitrators believe that the state’s economy has and will be improving, but they also bought into the argument that Hawaii’s public employees trail their counterparts in other states.

While comparing compensation of public employees (or for that matter private employees) in different jurisdictions might seem to make sense – a baker in Hawaii versus a baker in Albany, New York, for example – when you think about it, it makes the worse sense in the world. What does the pay scale for a clerk in Honolulu have to do with the pay scale of clerks in Des Moines, Iowa?

Some might argue that if one compared the compensation of two similar or identical positions with the cost of living in those communities, Hawaii employees, either public or private, should be getting paid more because the cost of living is so high in this state. That might be a plausible argument except all that it does is feed the rat-race called inflation as we saw in the early 1980’s.

No, if there is to be any realistic comparison of pay or compensation, one has to look right in our back yard. Labor, like all other commodities, is dictated by the basic law of supply and demand. If the labor supply is less than the number of jobs or positions available, then it is a “sellers” market in that workers can demand whatever they want to be compensated. This was the experience here in Hawaii during the “bubble” of the late 1980’s and early 1990’s when construction workers were scarce and therefore in high demand.

That has been the case during the past few years on the mainland, where the economy was booming and workers were in short supply. As recent national economic indicators are beginning to show, that situation is beginning to reverse as unemployment inches up.

But during the hey day of just a few months ago, workers on the mainland could demand what they wanted in compensation. In some areas where the high technology industries flourished, it was not uncommon to hear about fabulous pay and benefits from stock options to health club memberships to free vacations as part of a compensation package.

As a result, many government jurisdictions on the mainland had to compete in that environment to attract workers to stay in the public sector. And because economies were booming, property values hiked property tax collections while income and sales tax collections boomed in the wake of higher compensation which put more dollars in consumers’ pocketbooks.

That is obviously not the case in Hawaii. With unemployment still high by comparison, it is not a seller’s market. Workers in the private sector feel lucky just to hang onto their jobs. This is why many taxpayers find the recent arbitration recommendations for double digit pay increases for public workers difficult to accept.

In fact, many taxpayers are asking whether or not it would be more appropriate to compare public compensation including benefits to what private workers receive in Hawaii. Now that would be a valuable comparison.

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