Government vs. Unions: Are State's Public Employees Overpaid?

Amid the rage over Wisconsin Gov. Scott Walker's proposals to shrink government worker compensation, one question predominates: Are these workers overpaid? If so, it makes sense for them to accept less, rather than force taxpayers to give up more.

We're told, of course, that they're not. In recent weeks, left--leaning think tanks have tried to portray public employees, including government workers, as underpaid. A recent report from the Economic Policy Institute concluded that Wisconsin public employees are undercompensated by about 5% compared to private workers with similar skills and personal characteristics.

When counting the full value of benefits and job security, however, public employment in Wisconsin is a very good deal indeed.

When counting the full value of benefits and job security, however, public employment in Wisconsin is a very good deal indeed.

As in most states, Wisconsin state and local workers make less in wages but more in benefits than comparable private workers. According to our analysis of the Current Population Survey, Wisconsin public workers have earned about 5% less in wages over the past five years than private workers in large firms--after controlling for age, education and many other earnings--related characteristics. (The penalty would disappear almost entirely if we compared public workers to employees of all private firms, not just the largest ones.)

Do generous benefits outweigh this wage penalty? The EPI report acknowledges that public--sector benefits are more generous than in private firms--equal to around 27% of total compensation for Wisconsin public workers vs. 19% to 23% for private employees. This already makes total pay nearly even for public-- and private--sector employees.

But the EPI study underestimates public--sector pension benefits, omits retiree health benefits and doesn't count the value of public--sector job security.

Wisconsin public employers fund their defined--benefit plans by calculating the contributions today which, compounded at an assumed 7.8% interest rate, will be sufficient to pay promised benefits at retirement. Since public--pension benefits are guaranteed by Wisconsin law even if investment returns fall short, this means that public employees receive a riskless 7.8% return on their employer's pension contributions.

Private--sector employees with 401(k) plans, by contrast, can earn only around a 4% guaranteed return by holding U.S. Treasury securities. Adjusting for this difference adds around 4% to total Wisconsin public--employee compensation.

Another overlooked benefit that most state and local employees receive is retiree health coverage. Even the simple right to buy into the employees' plan, which is what most Wisconsin public retirees receive, is a good deal compared to the cost of a 60--year old purchasing coverage in the individual market.

Finally, public--sector workers enjoy significantly greater job security. The Bureau of Labor Statistics reports that nationwide, state and local employees are fired or laid off at less than one--third the rate in the private sector. How much is this job security worth? A lot. A worker who loses his job spends an average of almost 20 weeks unemployed, during which time he must subsist on unemployment.

We can put a number on this. Assuming that Wisconsin workers would have the same probability of being discharged, and the same duration of unemployment as private workers, their extra job security is equivalent to about a 9% increase in pay.

In short, the total job package for Wisconsin public employees--salaries, benefits and job security--is roughly 10% higher than what is paid to similar private workers and in certain cases far more. Government workers should bear that in mind as they press their demands.

Andrew Biggs is a resident scholar at AEI.

Photo Credit: Flickr user OnTask

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