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Beaches, sunshine, and public-sector pay: theory and evidence on amenities and rent extraction by government workers

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  • Jan K. Brueckner

    ()
    (University of California, Irvine)

  • David Neumark

    ()
    (University of California, Irvine & National Bureau of Economic Research)

Abstract

The absence of a competitive market and the presence and strength of public-sector labor unions make it likely that public-sector pay reflects an element of rent extraction by government workers. In this paper, we test a specific hypothesis that connects such rent extraction to the level of local amenities. Specifically, although migration of taxpayers limits the extent of rent-seeking, public-sector workers may be able to extract higher rents in regions where high amenities mute the migration response. We develop a theoretical model that predicts such a link between public-sector wage differentials and local amenities, and we test the model’s predictions by analyzing variation in these wage differentials and amenities across states. The evidence reveals that public-sector wage differentials are, in fact, larger in the presence of high amenities, with the effect being stronger for unionized public-sector workers, who are likely better able to exercise political power in extracting rents.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2011/42.

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Length: 52 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ieb:wpaper:2012/1/doc2011-42

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Keywords: Public-sector pay; unions; amenities;

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References

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  1. David Albouy, 2009. "What Are Cities Worth? Land Rents, Local Productivity, and the Capitalization of Amenity Values," NBER Working Papers 14981, National Bureau of Economic Research, Inc.
  2. Patricia E. Beeson & Randall W. Eberts, 1987. "Identifying productivity and amenity effects in interurban wage differentials," Working Paper 8707, Federal Reserve Bank of Cleveland.
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  7. Richard B. Freeman, 1986. "Unionism Comes to the Public Sector," NBER Working Papers 1452, National Bureau of Economic Research, Inc.
  8. Jeffrey Thompson & John Schmitt, 2010. "The Wage Penalty for State and Local Government Employees in New England," Working Papers wp233, Political Economy Research Institute, University of Massachusetts at Amherst.
  9. Gyourko, Joseph & Kahn, Matthew & Tracy, Joseph, 1999. "Quality of life and environmental comparisons," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 37, pages 1413-1454 Elsevier.
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  16. George J. Borjas, 2002. "The Wage Structure and the Sorting of Workers into the Public Sector," NBER Working Papers 9313, National Bureau of Economic Research, Inc.
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  18. repec:aei:rpaper:31094 is not listed on IDEAS
  19. Stuart A. Gabriel & Stuart S. Rosenthal, 2004. "Quality of the Business Environment Versus Quality of Life: Do Firms and Households Like the Same Cities?," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 438-444, February.
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Cited by:
  1. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
  2. Lutgen, Vanessa & Van der Linden, Bruno, 2013. "Regional Equilibrium Unemployment Theory at the Age of the Internet," IZA Discussion Papers 7763, Institute for the Study of Labor (IZA).

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