Jurisdictional Competition, Market Power, and the Compensation of Public Employees

Jurisdictional competition can encourage government efficiency but may also lead to collective action problems (e.g., bidding wars) that increase taxpayer costs. The net effect is particularly consequential for the cost of public employee compensation, which accounts for more than half of local government spending. Examining two decades of U.S. teacher salary data and changes in local teacher labor markets over time, I show that jurisdictional competition is associated with lower teacher salaries. One mechanism consistent with the evidence is that competitive markets help encourage lower spending through "yardstick competition.'' The findings may help explain why government consolidations designed to promote economies of scale and efforts to take advantage of coordinated buying power do not always produce the expected savings.