Public sector salaries and size of political jurisdiction

Political decision makers often propose to considate smaller political jurisdictions into larger ones to save money. In Illinois, Governor Quinn has suggested consolidating smaller school districts into larger ones to reduce costs. The objective of this paper is to demonstrate that public sector salaries are higher in larger communities, so that when smaller jurisdictions are combined into larger ones, salaries will increase, at least partially counteracting any possible cost savings. 

The paper develops a theoretical model of public sector wage determination using the public choice theory approach of political support maximization. Consider a public agency, such as a school board, with the authority to set salaries for public school teachers and tax rates on constituents to finance public education. The school board will set salaries for teachers and tax rates imposed on constituents in such a way as to maximize its political support. From the first order maximizing conditions empirical implications are derived. One empirical implication is that salaries will be higher in larger communities. 

The empirical implications of the model are tested for public school districts in Illinois. Data for public school teacher salaries in Illinois are available from the state as well as number of public school students, district type, and unionization. Census data by school district is available for community size, income, level of education, percentage of the population over 65, average family size, etc. 

Multiple regression analysis is used to test the empirical implications of the model. In particular, the results confirm the empirical implication that, holding other factors constant, public school teacher salaries are higher in larger communities. This provides the basis for an estimate of how much salaries may increase when two smaller school districts are consolidated into a larger one. This brings into question the expectation that political consolidation will save money.