Beaches, Sunshine, and Public Sector Pay: Theory and Evidence on Amenities and Rent Extraction by Government Workers

Rent extraction by public sector workers may be limited by the ability of taxpayers to vote with their feet. But rent extraction may be higher in regions where high amenities mute the migration response. This paper develops a theoretical model that predicts such a link between public sector wage differentials and local amenities, and the predictions are tested by analyzing variation in these differentials and amenities across states. Public sector wage differentials are, in fact, larger in the presence of high amenities, with the effect stronger for unionized public sector workers, whose political power may allow greater scope for rent extraction.