The Daily News of Los Angeles 
June 12, 1997, Thursday, 


BYLINE: Shirley Svorny 

Last week the City Council voted to raise wages for city employees by 16 percent over a four-year period. 

In exchange, the employee unions promised to get workers' compensation claims under control which, if accomplished, would save the city a considerable amount of money. 

Also, as council member Jackie Goldberg pointed out, the wage increase buys us four years of freedom from union demands. 

At the same time, it has been reported that Mayor Richard Riordan has paid out close to $ 100,000 in bonuses to individuals on his staff. These people are being rewarded for doing what the mayor considers to be a good job. There is a big difference between the council's vote and the mayor's action. 

The mayor's bonuses are tied to some measure of performance, the general wage increase is not. The 16 percent wage increase comes on top of a wage and benefits package that already is perceived as unusually generous compared to packages for similar workers in the private sector. City employees have nearly absolute
protection from job loss. 

I've seen the results of this type of employment arrangement up close and personal, as the California State University, for which I work, has similar job protection rules. 

Faculty with tenure literally cannot be fired. The protections for clerical staff make it almost impossible, a super human effort, to fire someone for incompetence. 

Nor does anyone have the incentive to fire a complacent or shirking employee, as there is no market constraint to be profitable. These agencies do not face a bottom-line constraint. 

Consider, alternatively, the use to which wages are put in private markets. Offering high wages and benefits can be an extremely useful tool. Workers with generous wage and benefit packages are more motivated to act in the interest of their employer, less likely to leave (reducing hiring and other turnover costs) and morale is generally

Economists call this arrangement, where workers earn more than they are worth elsewhere, an ''efficiency wage.'' Henry Ford's 1914 decision to offer workers in his automobile factory wages twice the prevailing market wage often is cited as an example. When Ford raised wages, productivity rose 50 percent. In the year following the wage increase profitability doubled. Everyone was better off. 

But the key here is that you have to be able to fire a worker to enjoy the incentive effects of high wages. Just offering high wages is not enough. 

Only when employees risk losing these generous wages will their behavior change. If workers have secure jobs, they have little incentive to show initiative or to take on new tasks. 

At CSUN I see the results of decades of unparalleled job security. But the state university system has taken a small step in the right direction. Three years ago it implemented a compensation program for faculty and some staff that all but eliminates the previous automatic pay increases (requiring only that you were still breathing), and a large sum of money has been shifted toward discretionary wage increases under the purview of each campus president. Faculty who do a bad job in the classroom no longer will receive a pay increase. It is not a perfect system - there is much debate over the objectives that the university seeks to meet - but it is an improvement. Not surprisingly, the large majority of the faculty would like to go back to the old system, where once you were promoted, no amount of activity could increase your wage, nor no amount of inactivity decrease it. 

I suggest that the city move in a similar direction. If the City Council wants to raise employee wages, it should tie the wage increase to incentives for performance. Assign a small area, perhaps a Community Plan Area (there are 35 in Los Angeles), to a team of street sweepers, tree trimmers, painters and other city employees. If the outcome does not please the community, the workers should not get the 16 percent wage increase. 

Where service is deemed to be inadequate, the funds that would have gone to wage increases should be set aside for the community. These funds could then be used to augment city-provided services through contracts with private providers. 

This would create the type of local control and incentives necessary for improved service provision. 

Wage arrangements can be used to motivate workers only if they have something to lose. 

If we cannot take away the civil service protection city workers enjoy (i.e., fire them), at least let their wages reflect the contribution they make to the local community. 

Shirley Svorny is professor of economics and director of the Center for the Study of the San Fernando Valley Economy at Cal State Northridge. She is an Affiliated Scholar at the Milken Institute for Job and Capital Formation.