Efficiency Wages for Politicians
Dennis Coates, University of Maryland Blatimore County
Periodically, Congress must pass legislation raising members’ salaries. An argument in favor of higher salaries is that without them the best people will have little incentive to run for office. Low wages for elected officials, and for judges and many other positions in the Federal government, would result, the argument implies, in reduced effectiveness of government. Considering the rate of economic growth as the measure of effective government, this paper seeks to explain differences in economic growth across states using salary data on state legislators and governors. Support for the argument that higher wages draw higher quality candidates and, presumably, higher quality elected and appointed officials, would be a finding that states that pay higher salaries experience faster growth in real income, all other things constant. Alternative measures of the benefits of higher paid elected officials, such as reduced infant mortality, teen pregnancy, high school dropouts, or increased longevity, greater business investment or job creation, are not considered in the analysis.
The analysis makes use of a panel data set which includes salary variables for governors and legislators in each of the 50 states of the United States for a period of about 20 years. Also in the data set are indicators of political control of the state legislature and governorship, bills considered and bills passed, the number of days the legislature was in session, salaries in legal services, and the growth rate of real income per capita in the state. Using fixed effects estimation, the impacts of paying higher salaries to governors and legislators on the number of bills considered, the number of bills passed, and income growth are estimated.
There is evidence that legislators who are paid relatively well, compared to the average citizen in his or her state, deal with and enact more legislation than legislators who are less well paid. This is modest evidence that greater pay elicits more work from legislators. It does not, however, imply either more talented individuals seek elective office or that the additional legislation improves the overall well-being of the citizens.
Examining the effects of salary on growth in per capita personal income, the results are not so clear cut. When salaries enter in levels there appears to be no effect. As the earnings of legislators rise relative to those of workers in the legal services sector, the growth rate of real personal income per capita rises as well. This is clearly consistent with the intent of those who argue that higher salaries are necessary to entice the more able into public service.