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Federal pay freeze: why Obama is following path trod by states, businesses now

Obama's proposed federal pay freeze is an idea whose time has come to a sector whose turn has come. It's also a nod to the GOP and recognition that deficit-cutting is a priority for the public.

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"Small businesses and families are tightening their belts. Their government should, too," Obama said. He said the pay freeze represents an imperative that deficit reduction involve "sacrifice ... shared by the employees of the federal government."

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Politically, the proposal also represents a willingness to reach out to Republicans, by embracing an idea that they support and that liberals oppose.

In the private sector, many companies instituted wage freezes or outright cuts in pay benefits during the recession, says John Challenger, a labor-market expert at the outplacement firm Challenger, Gray & Christmas in Chicago.

"The government is now facing the same kind of crisis" that many firms in the private sector faced a couple of years ago, he says.

While some private employers still face severe financial stress, the typical firm this year is raising pay by about 2.5 percent, Mr. Challenger says.

Many US workers have experienced stagnant or declining wages in recent years, relative to inflation, in part because of global competition. Now the public sector may be entering a period when pay will be under pressure in new ways – as federal or local governments struggle to finance debts and cover expenses.

Consider what states have already been doing: Raising eligibility ages for pensions, instituting "furlough Fridays," putting hiring on hold, or laying off employees.

Pay freezes have been another common strategy for states since the recession began to bite. Florida's current budget (for the 2011 fiscal year) includes no pay raises for state employees. Similarly, Arkansas has put cost-of-living increases on hold. Arizona has moved further still, cutting pay by 2.75 percent for most state workers.

"No one area of the country has been immune" from budget pressures, says Todd Haggerty, a policy analyst at the National Conference of State Legislatures in Denver.

A year or more ago, the big problem for states was plunging tax revenue, due to the recession. Now, although revenues are starting to recover, states are squeezed by the disappearance of federal stimulus funds, and because they've run out of options like tapping their rainy-day funds.

Economists say that, like states, the federal government has a long-term fiscal challenge that will require tough choices on many fronts. A pay freeze, they say, would be just a temporary and largely symbolic step. Obama has asked his deficit commission to report on proposed fixes on Dec. 1.

IN PICTURES: Inside President Obama's White House

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