Friday, February 24, 2012

Government Workers: It's Not the Wages, It's the Benefits

On average, government worker are paid more than private-sector workers, at both the federal level and at the state and local level. But the comparison is not apples-to-apples. On average, government workers have much higher levels of education and experience.  When adjusting for levels of education, it turns out that average wages are very similar for government and private-sector workers. The real advantage that government workers have in their compensation is that they receive noticeably better benefits--especially in their pensions and health benefits after retirement.

The most recent article of my own Journal of Economic Perspectives has an article by Maury Gittleman and Brooks Pierce called "Compensation for State and Local Government Workers."   In January, the
Congressional Budget Office published "Comparing the Compensation of Federal and Private-Sector Employees."  Here,  I'll first summarize some of the main evidence from these studies, and then list some of the main reasons why studies that compare pay of government and private-sector workers can reach such different results.

Numbers of government workers in context

Here's the CBO summarizing patterns in total government employment in recent decades (footnotes and references to figures omitted): 

"For the past 30 years, the number of civilians employed by the federal government has hovered around 2 million people. During that period, federal employees have accounted for a declining share of the total U.S. workforce, because employment by the private sector and by other levels of government has grown along with the economy. In 1980, when about 79 million people worked in the private sector and 13 million worked for state or local governments, federal employees made up 2.3 percent of the workforce. By 2010, private-sector employment had reached 111 million and employment by state and local governments had reached 20 million."

Higher Education and Skill Levels for Government Employees

Here are some illustrations of the education differences between government and private-sector workers. From Gittleman and Pierce, here's a table showing average pay and education levels for state government employees,  local government employees, and private-sector employees. For example, 39% of private-sector workers have only a high school education, or less education than that. Among state government employees, only 18% have a high school education or less. Conversely, about 10% of private-sector workers have a post-graduate degree, compared with 29% of state government workers.

Here's some evidence from the CBO, making the same point  about federal employees. In their data sample, 41% of private sector workers have a high school degree or less, compared with 20% of federal employees. Conversely, 10% of private sector worker have a post-graduate degree, compared with 21%  of federal employees.

Similar Pay, Dissimilar Benefits

When comparing pay for state and local government employees, Gittleman and Pierce write:

"Government workers are much more likely to be offered health insurance and retirement plans, and are more likely to enroll in  such plans if offered. In addition, public sector plan structures tend to offer more
comprehensive coverage. Public sector health plans tend to require lower employee contributions and have higher employer premiums, and are more likely to come bundled with supplemental dental, vision, or prescription drug plan components. ... [T]he costs per hour worked for the various benefits collected are
much greater in the public sector (about $14) than in the private sector (around $8). Spending on health insurance in the government ($4.30 at the state level and $4.56 at the local level) is more than double that in the private sector ($2.14), while expenditures on retirement and savings are more than triple ($3.18 and $3.37 versus $1.00). ... Paid leave is also more generous in government, more than double the private sector level in state government and more than 50 percent higher in local government."

Overall, Gittleman and Pierce conclude: "After controlling for skill differences and incorporating employer costs for benefits packages, we find that, on average, public sector workers in state government
have compensation costs 3–10 percent greater than those for workers in the private sector, while in local government the gap is 10–19 percent."

In comparing the wages, benefits, and total compensation of federal workers, the CBO report finds:

"Overall, the federal government paid 2 percent more in total wages than it would have if average wages had been comparable with those in the private sector, after accounting for certain observable characteristics of workers. ...  On average for workers at all levels of education, the cost of hourly benefits was 48 percent higher for federal civilian employees than for private-sector employees
with certain similar observable characteristics ... The most important factor contributing to differences
between the two sectors in the costs of benefits is the defined-benefit pension plan that is available to most federal employees. ... Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers."

Why do comparisons of pay for government and private-sector workers reach varying conclusions?

1) Some comparisons don't adjust for education or skill level of the workers, which means that the comparison will inevitably find that government-sector workers are paid much more on average. But such comparisons are silly. It's a bit like saying that--surprise!--those with a college degree earn more than those without a college degree.

2) Some comparisons look only at wages and skip benefit. Such comparisons leave out a main advantage for government workers, and will tend to find that they are paid about as much as private sector workers.

3) Employees in larger firms tend to be paid more than employees in smaller firms. There are various theories for why this pattern holds true. Perhaps large employers do a better job of screening employees to get those with higher productivity. Perhaps in a large firm there is space for a more specialized division of labor, which leads to more productivity and higher pay for workers in those organizations. Perhaps in large organizations, pay becomes a little more detached from productivity, and workers can claim a larger share of the cash flow running through the organization. Ultimately, the question here is whether a worker who moved between the government and the private sector has a type of skill and expertise that would also lead to higher pay in the private sector--or not. If you adjust for size of employer, then it will look as if government employees should be paid more--because they work for a large employer. If you don't make such an adjustment, then pay for government workers will look relatively higher. The CBO study, for example, found that if one adjusts for size of employer (and education), federal employees get wages that are 2% above private sector workers, but if you don't adjust for size of employer, then federal employees get wages 9% above those of private sector workers.

 4) A larger share of public-sector workers are unionized, and we know that unionized workers are paid more than other workers with equivalent skills. Again, the essential question here is whether a being unionized represents a skill set that the worker would take with them into private-sector employment, or not. I think it's more plausible to say that being unionized isn't a a portable "skill set." If a study adjust for unionization, it will tend to find that government workers deserve to be paid more.

5) One problem in comparing government and private sector jobs is that the jobs themselves can be so different. For example, think of jobs in the education sector: Private sector jobs in this area tend to be either with preschool children or with college students and adults, while public-sector jobs in this area tend to be with K-12 students. Conversely, most jobs in sales or manufacturing are in the private sector, with very few in the public sector. If the researcher tries to adjust for the exact kind of job, comparing public and private-sector workers become difficult or even impossible. But if the researcher doesn't adjust in some way for the sector of the economy, you end up comparing workers who are in potentially quite different industries. An in-between approach here is to adjust for broad sectors--like "education" or "services"--but not to try to adjust for highly specific job categories.

6) Pay scales are more compressed in government. As emphasized in the CBO study, workers with lower levels of skill are on average paid more in government work than in the private sector, but worker with higher levels of skill are on average paid less. An overall comparison between all government and all private-sector workers will miss this distinction.

7) Job are more than wages and benefits. For example, government jobs in the Great Recession and its aftermath have tended to be more secure than private-sector jobs, in the sense of a lower chance of being laid off and a lower chance of pay cuts. Jobs have other characteristics, too. Certain jobs pose greater health risks, like mining and manufacturing in the private sector, or police and firefighters in the civilian public sector. I'm not aware of studies that make a serious effort to value and adjust for these kinds of factors.

In short, when looking at a study comparing government and private-sector pay, run down this checklist of
seven points and it will tell you something about whether the study is likely to be leaning in one direction or another.