Alabama public school teachers will finally get their first real raise since 2007.  The state legislature’s Education Trust Fund budget includes a 4% raise for teachers and principals; teachers making over $75,000 a year will see a 2% raise.  A 2013 raise merely offset increased benefits costs.  Adequately paying teachers and public sector employees in general is wise policy.

This might seem like a surprising admission from a proponent of small government.  I actually consider myself a proponent of limited government, as contrasted with fiscal conservatives, who I think are more accurately described as proponents of big government on the cheap.  Fiscal conservatives seem to want many government provided services and hope to keep taxes low by cutting corners, like under-paying employees.

I believe in limiting government to its legitimate functions in a free society.  But the limited tasks are important (otherwise government shouldn’t be doing them) and should be done well.  High quality services cost money.

Competition in the labor market makes skimping on salaries particularly unwise.  Businesses and governments compete for good employees.  Nick Saban is the best college football coach in the country, but if Alabama did not pay him adequately, other universities would do so happily.   Our state government must store and protect sensitive taxpayer data from hackers.  Failing to pay adequate salaries for highly qualified IT professionals merely compromises our personal data.

The salaries set in markets reflect supply and demand and not any preconceived notions of fairness.  Governor Bentley’s raises for his cabinet members have drawn a lot of fire, but the new salaries ($164,000 a year) are hardly extravagant for professionals.  On the other hand, some people think that teachers should make significantly more than they do because their jobs are so important.  But supply and demand say otherwise.  Many capable people want to work as teachers, and this supply keeps salaries relatively low.  Market salaries reflect millions of voluntary choices about what careers people wish to pursue (on the supply side) and the value of labor to different employers (on the demand side), which ultimately reflects our choices as consumers.

Government’s power to set public sector salaries can be abused.  One problem is when government officials pay themselves salaries out of line with the market.  The case of Bell, California, where in 2010 the city manager was making almost $800,000 a year, the police chief $457,000 a year, and the part-time city council members $100,000 a year, illustrates this.  These outrageous salaries were also out of line with markets.  The poor suburb of Bell (population 38,000) paid its police chief more than Los Angeles.  Highly competent persons for both positions could have been hired for far less, so these officials enriched themselves at taxpayers’ expense.

A bigger problem arises because higher salaries do not make employees more productive.  This might seem at odds with simple economics, but is true.  Performance incentives make employees work hard, while differences in base salary direct employees to different jobs.  To see this, consider college football coaches.  Coaches in the Sun Belt Conference, where Troy plays, make much lower salaries than coaches in the Southeastern Conference, yet still work hard.  Incentives – including possibly being hired to coach a Power Five conference school – motivate Sun Belt coaches to work hard.  Gus Malzahn did not become a better coach when he left Arkansas State for Auburn or got a raise after the 2013 season.  His salary reflects the fact that Coach Malzahn was good enough to win an SEC championship.

Alabama’s school children will not be taught 4% better in 2016-17 due to this raise.  We need both adequate salaries and efficient forms of compensation in public education, like merit pay for the best teachers.  Salary levels ultimately though are crucial in attracting and retaining good teachers.

There are better and worse ways to contain the cost of government.  Limiting the scope of government, privatizing services better provided by markets, and eliminating nonessential jobs sensibly limit spending.  All government employees should be essential, and adequately compensated.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.