Labor theory suggests that public sector worker pay shouldn't get too far out of line with private sector wages because taxpayers are mobile, and if costs rise too much in a particular state thanks to high public employee compensation, residents will simple leave. We are seeing a bit of just that right now, as states with the highest public sector costs grapple with outmigration that is contributing to their fiscal problems.
Still a new paper by economists Jan K. Brueckner and David Neumark of the University of California, Irvine, argues that traditional labor theories don't account for the pull that natural amenities have on citizens, making them willing to pay a premium to live in places deemed more desirable. This attraction, the economists find, accounts for the fact that public sector wages are further out of line with private wages in some states than in others. Not surprisingly, California is a big loser.
"The presence of local amenities can grant public sector workers a form of monopoly power that lets them extract more rents," the authors write."People can only consume the beaches and sunshine of southern California, or benefit from dense urban areas like Manhattan, by living nearby, and public sector workers can therefore extract rents up to the point where those who pay the rents are induced to leave the area."
The authors measure several variables, including types of weather (mild is most preferred), proximity to water, and population density (because of the variety of experiences and opportunities that heavily populated areas provide). Perhaps not surprisingly, their study finds that states with the highest differential between public and private sector wages, including California, New Jersey, New York, and Rhode Island all boast certain key amenities that help boost the public sector wage premium.