While I work on Slutsky’s Labor Supply model for my “Slave Wage” paper, the model never addresses “other” motivators for working; such as having a pension at the end of a career. Enter Detroit and the slew of fire fighters (amongst others) who are about to have their pensions obliterated, as exampled in this story I read.
Here’s an example of what Detroit Fire Fighters can expect in slashes from their pensions. The median income for fire fighter in Detroit is $42,700 per year (BLS). They currently receive 56% of their salary as a pension, which is $23,912. For a family of four, that’s about the federal poverty line. If (as in other cases), Detroit wants to slash pensions to 25% of salary, that would be $10,675, which would be BELOW the federal poverty level of a SINGLE person.
The current budget shortfall for Detroit public pensions is about $8 Billion. Michigan has a GDP of about $37 Billion. If Michigan covers the pension short fall, it would suck 21% of their economy (I have no idea how much of that revenue was generated by Detroit). However, I seem to remember a crime bill in 1994 where Bill Clinton gave $15.8 Billion in Federal Money to police departments for a variety of stuff (including pensions). If the federal government were to cover the pension short fall in Detroit on its $16 Trillion economy, it would cost a measly 0.05% of GDP. Considering that the Fed printed $600 Billion in reserves to banks in 2012, it shouldn’t be a big deal to keep retired fire fighters out of poverty; but it is.
Fire Fighters across the country are going to have a bigger problem down the road, however; recruiting. Who will want to work for 20+ years, putting their lives on the line just so that they can face a life of poverty?
Let’s look at the basic model of Labor Supply that we all know & love (or hate) – or at least we should:
As wages increase, hours worked increases, up to an Indifference Curve where backward bending pressures can reduce hours worked (it’s the backward bending Curve that I’m tweaking for my paper).
Citizens expect value for their tax dollars, including public safety, which ironically, is Constitutionally mandated. For providing that public safety, workers are recruited in part because of the pension offers. Pension offers are also “descriptors” as to how we value the concept of public safety. In our basic labor supply model, let’s replace “wages” with “pension promise”. Without doing the math, just thinking about it in the graph clearly shows that fire fighters will withhold their labor. What’s the point? Even if we add a backward bending curve, the labor supply of fire fighters would still shrink.
Not paying the promised pensions of fire fighters isn’t just bad social policy, it’s bad politics, and bad economics.
In full disclosure, one cold February night, my house caught fire. Hordes of fire fighters spent most of the night fighting my fire, while in my PJs, I was placed into the Fire Chief’s car to keep warm. I was more than happy to pay every tax penny I could to those guys who not only showed bravery, but incredible amounts of compassion.