Wages in the private sector more accurately reflect market conditions. If they do not, businesses will either not hold on to their employees or go out of business, because their high wage costs cause them to lose money.

 

I was watching C-SPAN the other day and a woman called in and with pride described her husband ran a small business for many years. It was the type of business that normally employs low-skilled workers. She proudly explained that her husband believed in paying a "living wage," and thus he paid wages significantly higher than other similar businesses in the area.

 

Just as the call ended, she mentioned that unfortunately her husband went for several years without making any money and that he was eventually forced to shut the doors because of increasing losses. Thus, the question is: Were the workers actually better off with a job and lower wage or with no job? In the private sector, wages ultimately have to come from productivity, and any employer who pays wages that exceed worker productivity will not stay in business.

 

On the other hand, government has the ability to tax. Its survival does not depend on its paying a wage that is in line with employee productivity. Likewise and loss of workers is not as critical, because there is no competition that can drive it out of business, if it is less efficient in providing goods and services to the public. These differences allow for politics to be much more involved in the setting of worker salaries. Ultimately, it is politics that will determine a government agency's survival or demise.