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States and localities are once again wielding their budgetary knives. This has been an annual exercise for the past three years. Only this year, it's more desperate. There are few frills left to insulate the very core of government expenditures: the wages and benefits of public employees.

From here on, needed economies will mean reducing work forces, freezing salaries and flattening benefits. Savaging wages and benefits is an excruciating exercise for local politicians. Public workers, their families and friends can make up much of the electorate, especially in times of low voter turnout. But taxpayers, wounded by the recession, are demanding stern stuff.State and local governments are essentially service providers and, for most, the biggest costs they incur are for labor. Some 35 percent of all state expenditures, exclusive of transfer payments, are for employee wages and benefits. For local governments, it's 52 percent; for school districts, a whopping 70 percent. Thus, beyond curtailing travel, enforcing furloughs and rationing supplies, there is simply no place else to make meaningful cuts.

And it's happening. In Philadelphia, Mayor Ed Rendell, faced with a $200 million accumulated operating deficit, proposed a five-year wage freeze and a curbing of benefits. In New Jersey, the legislature is hacking away at the state transit authority, resisting any but nominal raises and those only to workers earning less than $30,000 a year.

These episodes reflect the realization that, despite the unrelenting pressure of the recession, state and local payrolls and employment have continued to grow, while those in other sectors have taken repeated hits.

Perhaps more difficult to sustain politically is what happened to average employee wages and benefits. From 1987 through 1990, compensation of state and local employees grew 20 percent faster than in the private sector; benefits, which started at a higher base for typical government workers, grew at the heroic rate of more than 7 percent a year. This created an impression that public employees were not sharing in the pain of the recession. A reversal of this trend has set in. More recently, state and local compensation has been growing more slowly than the private sector's.

Over the long haul, government workers face the same economic unpleasantness that many others in the economy do: the lack of productivity and improvements in the service sector. There seems to be no mechanical replacement for the "human touch" of the cop on the beat, the teacher in the classroom and the social worker in the field. Attempts to improve productivity by increasing patrol areas, pupils per teacher or client caseloads bring howls about the decline in services.

The rough political justice of the public sector will be that, having bitten the public employment bullet late in the recession, its workers will see their share of the economic pie shrinking even faster as better times return. That will be too bad because so many of the biggest problems will need the brightest and best - if not the highest-paid - in the public sector.

(John E. Petersen is president of the Government Finance Group, a financial research and consulting firm based in Arlington, Va.)