The Corner

Your Stimulus Dollars at Work: Teacher Pay Raises

The Washington Post has the story:

After a two-year salary freeze, Fairfax County teachers are lobbying the School Board to spend anticipated federal funds on pay raises instead of hiring hundreds of new instructors.

With budgets shrinking and enrollment growing, teachers have not received even cost-of-living raises, and some are among several thousand employees who have been hit by non-salary pay cuts. County teachers – pleading low morale and difficult schedules – are looking to a possible $21.3 million federal windfall for respite.

This is interesting in many ways. First, back in February the White House changed the rules of how stimulus money should be accounted for so that pay raises are an acceptable way to use the funds and several pay raises could be counted as one job created or saved. Second, I find it interesting that these supposedly exhausted teachers wouldn’t be happy to see new teachers hired to unload some of their hours. Third, I wonder whether being a teacher is like getting tenure (you want easy rules before you get tenure and then hard rules so no one else gets it).

Interestingly, a more sophisticated aspect of Keynesian theory about why government intervention is needed in a recession is that the wage adjustment (pay cuts) that would allow employers to keep their employees, allowing employees who would rather have a job at lower pay than no job to stay on, doesn’t happen fast enough. Keynesian economists — Larry Summers, for instance — explain that because wages and salaries don’t change on a daily basis the way that stock prices and gas prices do, businesses end up firing people. That’s the “sticky wages” theory. If a company hits a sales slump, the salespeople will earn fewer commissions, but the company won’t instantly cut the pay of most workers. Most companies would rather fire a few people than reduce everyone’s salary.

Under this theory, as long as wages remain sticky, government intervention is needed to help the economy. But this theory also acknowledges that if wages fall and adjust, as prices of stock do, it’s a good thing. And this is a good argument for salary freezes, because in real terms it means that salaries are adjusting downward, as they should.

The bottom line: these teachers should not be getting a pay raise. 

If you are dying to learn about the sticky-wages theory, you can read this piece that my colleague Garett Jones and I wrote a few months back to explain why government spending crowds out private employment.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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