Beaches, Sunshine, and Public-Sector Pay: Theory and Evidence on Amenities and Rent Extraction by Government Workers

Abstract

The absence of a competitive market may enable public-sector workers to extract rents from taxpayers in the form of high pay, especially when public-sector workers are unionized. On the other hand, this rent extraction may be suppressed by the ability of taxpayers to vote with their feet, leaving jurisdictions where public-sector workers extract high rents. However, although migration of taxpayers may limit 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. We find that public-sector wage differentials are, in fact, larger in the presence of high amenities, with the effect stronger for unionized public-sector workers who are likely better able to exercise political power in extracting rents. The implication is that the mobility of taxpayers is insufficient to prevent rent-seeking behavior of public-sector workers from leading to higher public-sector pay.