Austerity protests in Wisconsin have partially involved the question of whether state and federal employees are paid too much. Are recent article in the NY Times (here) reviews research by the Bureau of Economic Analysis comparing private salary and benefits with those paid to public employees. It's not an easy question to answer.
Looking at the graph above (the lead graphic in the NY Times article), however, it's possible that we are asking the wrong question. Notice that private and public compensation diverges around 1980, the beginning of neoliberalism (think Ronald Reagan) and globalization. What this graph suggests to me is that private sector compensation, as a result of these two trends, is too low!
Public sector jobs cannot be outsource and public sector workers have been more successful in retaining union affiliations and protection. All the discussion about public sector compensation assumes that markets have magically set private sector compensation at the right level.
Globalizing labor markets are driving employee compensation down to subsistence levels and that's great for management bonuses and Republican party political contributions. It's not so great for workers or for aggregate demand.
THEORY: If disposable income decreases, consumption decreases which decreases aggregate demand, Y = I + C + G + BOP.
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