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The US pays its public sector better than the private sector — and other countries, too.
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Amid the recent hubbub over municipal bankruptcies and rising public-employee pension costs, pay for state and local government employees has gotten a great deal of publicity. Lost in the press attention, however, is that federal-employee compensation remains a problem, too, and new data again indicate that Washington, D.C., may be overpaying for the two million workers it employs.
In a 2011 AEI paper with Jason Richwine, I concluded that federal workers receive salaries and benefits around 37 percent higher than do private-sector workers with similar levels of education and experience. This prompted congressional requests for the Congressional Budget Office to conduct its own analysis, which, the requesters hoped, would rebut ours. Using slightly different methods, the CBO showed a smaller wage premium for federal workers. They omitted a $2.3 billion per year federal subsidy to government workers’ accounts held by the Thrift Savings Plan, but still reached qualitatively similar conclusions: Federal workers receive pay and benefits 16 percent above private-sector levels.
There are other ways to assess government-employee pay, such as analyzing how a given person’s pay changes when he switches from a private-sector job to a public-sector one. Contrary to myth, most federal workers take a pay cut when they switch to private jobs, and most private-sector workers receive a salary increase when they move into the federal workforce. Likewise, we can look at the low rates at which federal employees quit, which may indicate that they consider their jobs superior to the alternatives. All of these measures point to the conclusion that federal employees receive higher pay and benefits than they would in private-sector jobs.
But here’s another approach, thanks to data from the Organization for Economic Cooperation and Development, the “rich man’s club” whose membership includes most of the world’s developed, high-income countries. The OECD figures let us compare how U.S. federal-government employees are paid relative to central-government employees in 18 other countries.
The OECD analyzed the salaries, benefits, and paid leave for government employees; the combined value of these three categories equals total compensation. The OECD looked at four main categories of public employees:
•Senior management. These are top-level public employees classified at the D1 and D2 levels. D1 designates a civil servant immediately below cabinet level; D2 managers are immediately below the D1 level. These are the highest-paid civil servants in most governments.
•Middle management. These civil servants, whose positions are designated D3 and D4, are far more numerous than senior management and often oversee professional staff.
•Professionals. The OECD examined two specific professional positions, statisticians and economists/policy analysts.
•Secretarial staff. This category is made up of two groups, senior/executive secretaries and office secretaries/general office clerks.
The results aren’t surprising. U.S. federal employees receive significantly higher total compensation than do central-government workers in other countries. For instance, in the U.S. federal government, a secretary receives total annual compensation of over $69,000; in the central government of the average OECD country, less than $48,000. With apologies to my friends in federal-policy shops, U.S. economists, policy analysts, and statisticians appear to do best of all, earning nearly twice the OECD average.
One twist is in how U.S. federal employees are paid. Their salaries are higher than those of their counterparts in other countries, but not outrageously so. And federal employees work longer hours and receive fewer holidays than government employees in most other countries. The key factor is benefits: U.S. federal employees don’t merely receive more generous benefits than do private-sector workers, they receive much more generous benefits than do public employees in most other developed countries. The OECD data show that U.S. federal employees’ total benefits add up to 37 percent of their wages, compared with 16 percent for central-government employees in Australia, 25 percent in the Netherlands and Belgium, 27 percent in Great Britain, and 23 percent across the OECD as a whole.
While federal-government workers earn a lot more than public-sector employees do in other countries, average incomes in the U.S. are a lot higher as well — for everyone, not just in government. To account for this, I compare the compensation of government employees in a given country to average wages for all workers in those countries. This gives some indication of the pay of public-sector workers relative to the taxpayers who support them.
Average salaries by country are gathered from OECD data and then combined with the amount of employer-paid social-insurance contributions, as these can be seen as a form of compensation and otherwise would likely have been paid as wages. Average annual wages also are adjusted for the length of the work year, which is shorter in most OECD countries. Compensation for government occupations is then divided by the average wage in that country.
The OECD data show that, with the exception of the very highest-ranking civil servants, U.S. federal employees do better than central-government workers in other countries. U.S. public employees ranked as D1 — a level immediately below cabinet secretaries, making up around 0.2 percent of federal workers — receive lower pay relative to the average citizen than in other OECD countries. But in every other category, U.S. federal-employee pay is even with and sometimes substantially ahead of that paid in other developed countries. On average, U.S. federal employees receive 16 percent higher total compensation than do similar workers in other OECD countries, even after accounting for differences in the countries’ average income levels.
Now, do these results prove that federal-government employees are “overpaid” — that is, that they receive higher pay than do similar private-sector workers? Not necessarily. If the U.S. federal government recruited higher-quality employees — say, with better education and experience than individuals filling the same jobs in other countries have — then the federal government’s relatively higher pay might be justified.
But the evidence points against that conclusion. First, we know from previous research that federal employees have less education and experience than do U.S. workers filling the same jobs in the private sector. So for federal employees to be significantly better qualified than their OECD counterparts, foreign-government workers would have to be even further down on the ladder. But that seems unlikely, given anecdotal evidence that many top European students aspire to careers in the public sector rather than in business. And finally, public-employee advocates in the U.S. often argue that the federal government isn’t able to recruit the best and brightest, supposedly because of low pay but perhaps for other reasons — say, the unattractiveness of working in a bureaucracy. In any case, all of this would hint that U.S. federal employees are on average relatively less skilled than their foreign counterparts, not more skilled. And yet the pay gap persists.
We’re not going to balance the budget on the backs of federal employees — nor should we. But, as at the state and local level, federal taxpayers should be able to feel confident that they are not overpaying for the services they receive. Liberals who favor activist government should support pay parity as a means to maintain support for government programs, just as budget hawks should do so to contribute to deficit reduction. But the evidence, from a variety of different angles, suggests we are still far from that goal.
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