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Unfair burden on state workers equals dire straits that will trickle down


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POSTED: Sunday, June 07, 2009

A strand of thought in the governor's proposed furloughs is that public-sector employees should “;share the pain”; of private-sector workers. To be fair to those who hold this position let's say it is a “;fairness”; argument. What would a fair amount of pain be?

Overall projected declines in personal income, net of inflation, are projected to be 3, 4, maybe 5 percent for the private sector during this recession. This actually fits into a common perspective of those who make this argument. They tend to think of “;pain”; as being unemployment. This decline comes primarily from unemployment. So by this metric “;fair”; furloughs would be 3, 4, maybe 5 percent of current income. Not 14 percent. Manifestly not fair.

Consider a second argument. It might not be fair, but it is necessary. The shortfall is 4.4 percent of the budget. The proposed furlough concentrates all of it on employees; a 4.4 percent shortfall becomes a 14 percent wage cut.

Concentrating these cuts on employees multiplies the impact and spreads the pain.

A dramatic restriction of income and thus consumption will reduce economic growth by 1 percent and reduce tax revenues by a further 1 percent. So necessity actually works the other way. This doesn't solve a shortfall but adds to it. Specifically it adds another $50 million drop in tax revenue.

A 4.4 percent restriction across the entire budget would hurt the public, and public employees, but not that much. Consider what effects a 4 percent restriction on high-tech tax credits, or tourism advertising, would have? Indeed if done thoughtfully it would not have nearly the magnitude of impact this sort of cut will. And the governor would feel far less pain as well. Few doubt she can restrict funds legally in this case.

A word should be said about state worker raises. Some have pointed out that wage raises have been “;between 16 and 29 percent over the past four years”; and that public employees can afford a wage cut.

Local inflation has been approximately 19 percent over the past four years. Some have fallen behind inflation while those who made 29 percent increased their purchasing power by ten percent. But the 29 percent raise went to a very small number and even that is deceptive.

The 29 percent raise went to 3,500 University of Hawaii faculty—8 percent of the work force. The remaining 92 percent did not even keep up with inflation. This is further complicated by the fact that this was a six-year contract. During the initial two years, raises were below the inflation rate over a longer period they netted 2 to 4 percent above inflation. (Private sector income net of inflation grew during this period.)

Public employees also will have an additional $250 a month being taken out of their paychecks for insurance premium co-pays. This means for a $50,000-a-year employee an additional $3,000 will be taken out of his or her check. So the 14 percent cut becomes a 20 percent cut.

Twenty percent is an interesting number; it approaches the rate of decline in income during the Great Depression. And I doubt anyone could call that “;fair.”; Because surpluses exist these cuts will reduce economic growth by about 1 percent and tax revenue by about $50 million. This is a plan that is neither fair nor wise. It doesn't share the pain, it spreads it.


Lawrence W. Boyd, Ph.D., of the University of Hawaii-West Oahu, is an economist at the Center for Labor Education and Research.