The challenge of determining fair pay for government employees

This article was a part of a debate featuring three sets of statements on the question of government pay and benefits. The full debate is available as an Adobe Acrobat PDF below.

THE GREAT GOVERNMENT PAY DEBATE

Download PDF

The public sector pay controversy has touched every level of government over the past few years, playing out in political campaigns, newspaper headlines and Internet blogs. But even as the political debate over reform continues, we believe that the purely empirical issue regarding the relative generosity of public sector compensation has been settled: On average, public employees receive higher combined wages and benefits than they would receive in the private sector.

The average, of course, does not apply to all workers or to all jobs. Wages and benefits differ at the federal, state and local levels, between different cities and states and between different types of jobs and employees. The challenge for policy makers is not to simply reduce total public sector compensation but to cut back in ways that ensure fair market compensation for all public employees rather than just for the average employee. 

Careful reform will not be easyand developing the perfect system is not realisticbut even minor steps toward a more rational compensation system can help balance government budgets.

When comparing wages among different types of workersfor example, testing for discrimination based on race or gender, or looking for a pay premium for union membersmost labor economists rely on what is called the "human capital model." This approach is based on evidence that the main drivers of pay differences among workers are differences in their human capitalthat is, their education, work experience and other traits related to productivity. Specific work tasks, unless associated with different levels of employee skill, are less important drivers of pay.

Using regression analysis, economists can analyze the effect on wages of being employed by the government while controlling for human capital differences between the public and private sector workforces. These analyses generally show that state and local government workers receive wages slightly below those of similar private sector workers, while federal employees receive slightly higher wages.

Other economists have approached the problem by analyzing how wages differ between public and private jobs that require the same levels of skill. In a recent academic study, two BLS economists compared salaries in state and local government to private sector positions demanding the same job skills. State government employees receive salaries 2.3% below those for similar private sector jobs, while local government employees were paid 9.2% more than private jobs demanding similar skills. The study did not attempt to analyze federal employee wages, as the BLS data set does not grade the skill requirements of federal jobs.

Whether the relevant comparison is worker-to-worker or job-to-job, the suggestion that public sector workers receive vastly lower salaries than they would receive in the private sector is not supported by the most rigorous research.

The clear difference maker in public-private comparisonsis fringe benefits, particularly retirement packages. Most government employees continue to participate intraditional "defined benefit" pensions, which can be several times more generous than the defined contribution 401(k) plans common in the private sector. For example, an Illinois school teacher who retired in 2010 after 30 to 34 years of service would collect a pension of $60,756 a year, a benefit that is guaranteed against market risk and also exceeds the income of 95% of retirees in Illinois. To match that, a private sector employee with the same salary would need to contribute roughly 45% of his or her earnings to his or her 401(k).

On top of pensions, most federal, state and local employees continue to be eligible for retiree health coverage, which can be worth thousands of dollars per year. In California, for instance, the cost of accruing retiree health benefits is equivalent to over 10% of wages. Public employees have protested recent reductions in the generosity of retiree health care, but most private sector workers receive no coverage at all.

Generous fringe benefits can push public sector compensation well ahead of private sector pay.

A common rejoinder to this empirical argument is that instead of reducing benefits for government workers, benefits in the private sector should be increased. Unfortunately, this is not a viable option for private sector employers.

In a competitive labor market, employers cannot pay workers significantly more than they produce without risking bankruptcy. Employers also cannot pay workers significantly less than they produce without losing employees to rival firms. Without changes in worker productivity, total employee compensation—meaning salaries, benefits, taxes paid on workers' behalf and so forth—is not very flexible.

While legislation could raise private sector benefits by fiat—for example, by mandating health or pension coverage—private employers would need to offset the added cost by lowering salaries, leaving the public sector compensation advantage unchanged. Mandating higher private sector benefits is no solution to public-private pay disparities.

In contrast to the private sector, governments are not limited to paying their workers according to their productivity. The public sector is restricted not by profit and loss but only by voter-imposed constraints on taxing and borrowing. Given the ability of the public sector workforce to influence policy—directly through collective bargaining and indirectly through political organizing—it should not be surprising when government workers receive a compensation premium.

Restricting collective bargaining and union influence will help change the political dynamics that lead to excessive average compensation and rigid salary structures.Union membership and dues should be made optional, not required. Direct reforms to benefits, such as raising retirement ages to match private sector norms and shifting public employees to 401(k)-style plans also would help restore pay parity. 

Andrew Biggs is a resident scholar at AEI and Jason Rishwine is a senior policy analyst at the Heritage Foundation. 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Andrew G.
Biggs
  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org
  • Assistant Info

    Name: Kelly Funderburk
    Phone: 202-862-5920
    Email: kelly.funderburk@aei.org

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.