The American Spectator : Those Underpaid Government Workers
Feature
By Andrew G. Biggs & Jason Richwine from the September 2010 issue
What recession? Government workers are probably wondering what all the fuss is about. The private sector has lost 2.5 million jobs since the Obama administration's stimulus bill was passed, while the public sector -- federal, state, and local government combined -- has added 416,000 jobs over the same period. Although 85 percent of Americans work for private employers, the administration's own Recovery Act database admits that four out of five jobs "created or saved" were in government. Likewise, average pay has risen in the federal, state, and local government, while private sector wages have fallen. More jobs, better security, and rising wages -- it's boom time in the public sector.
Ordinary Americans, along with a small group of elected officials from both parties, have finally been stirred to action. New Jersey's Republican governor Chris Christie is a leader in taking on public sector unions over performance, pay, and pensions, and California governor Arnold Schwarzenegger has cajoled public employee unions into accepting pension reductions. Even some Democratic appointees -- such as Washington, D.C., public schools chancellor Michelle Rhee, who recently took the unprecedented step of firing 241 underperforming teachers -- seem to have had enough.
Despite this, defenders of public sector workers continue to argue that they are underpaid. Union representative Colleen Kelley, in a recent letter to the Wall Street Journal, cited federal statistics claiming that federal workers are paid 22 percent less than private sector employees doing similar jobs. Likewise, recent studies from liberal think tanks claim state and local employees receive significantly lower pay and benefits than private workers. Until these arguments are addressed, fully and directly, the group of policy makers with the mettle to tackle public sector pay will remain small.
A raw comparison between the wages of federal and private workers suggests there is no contest at all. The typical federal employee received a salary of more than $79,000 in 2008, with benefits raising total annual compensation to more than $119,000. The typical private sector worker, by contrast, received pay of around $50,000 and total compensation of just under $60,000. Moreover, USA Today recently reported that federal employees receive higher average salaries than private sector workers in 180 of 216 comparable occupations. These numbers seem to speak for themselves.
Defenders of federal pay are quick to point out, however, that federal employees are more skilled than the typical worker in the private sector -- in other words, they deserve more money. As OMB director Peter Orszag argued, "A comparison of federal and private sector pay...is misleading because the employees hired by the federal government often have higher levels of education than their counterparts in the private sector."
Orszag is right: we do need to account for skill differences in the federal workforce, which is older, more educated, and more white-collar than workers in the private sector. But the question then becomes whether these differences are enough to account for the huge disparity in pay. Using the Census Bureau's Current Population Survey, which includes earnings and demographic data on tens of thousands of workers spread across the public and private sectors, we can control for differences in education, work experience, race, gender, marital status, immigration status, region of residence, and several other variables. After doing so, we can see whether the pay gap between federal and private sector workers remains.
This "human capital" approach to explaining wage variation, the overwhelming preference of labor economists, assumes that in competitive labor markets individuals with the same productivity will command similar salaries, even if they work different jobs. The human capital method is commonly used by economists in other contexts -- such as determining whether union members receive higher pay than similarly qualified non-union members, or whether women and minorities receive lower pay than comparable white males.
Even after including the full range of control variables in our own analysis, we found that federal workers continue to earn a pay premium of around 12 percent over private workers. In other words, someone in the private sector has to work an average of 13.5 months to earn what an equally skilled federal worker makes in 12 months. This is not a novel result by any means. Academic economists have been studying federal/private pay disparities since the 1970s, and they generally find a premium in the range of 10 to 20 percent.
Though the data are less precise, benefits like retirement contributions and health insurance rates are also more generous for federal employees. We have calculated that the annual overpayment of salary and benefits to federal workers comes to more than $14,000 per worker, totaling nearly $40 billion per year.
This does not mean everyone in the federal government should get an automatic pay cut. In fact, our data suggest the brightest people -- research scientists, for example -- receive no premium and may even suffer a penalty when they work for the government. If the federal government rewarded skills the way the private sector does, wages would adjust in different ways for different workers. Overall, however, total compensation would go down by around 12 percent, taxpayers would save tens of billions of dollars each year, and the federal government would regain some much-needed fiscal credibility.
BUT WHERE DO CLAIMS THAT federal workers are underpaid come from? From the President's Pay Agent -- not an actual person, but an obscure function headed by the Secretary of Labor and the directors of the Office of Management and Budget and the Office of Personnel Management. Relying heavily on the recommendations of the Federal Salary Council, a panel of labor union representatives, the Pay Agent submits an annual report to the president suggesting how much to increase federal pay. The 2009 report claims, remarkably, that federal workers are underpaid by more than 22 percent relative to the private sector.
Before we discuss the reasons for the large discrepancy between the Pay Agent's results and ours, consider how implausible the 22 percent figure actually is. Why would millions of federal employees accept such a low wage if they could earn thousands more in the private sector? A desire to serve the public can go only so far. High-ranking government officials are no doubt attracted to the power and prestige of their jobs, but what about the vast number of unremarkable paper-pushing jobs the government offers? What is so attractive about these positions that justifies taking 78 cents on the dollar?
Barring an almost unbelievable level of civic-mindedness on the part of federal employees, either federal positions offer non-wage compensation that outweighs a 22 percent salary gap -- in which case these workers aren't truly underpaid -- or the 22 percent salary gap figure is wrong to begin with. We think both are true.
The Pay Agent's figure is inaccurate because of the method it uses to compare pay in each sector. Rather than using skills like education and experience to identify productivity, as most economists recommend, the Pay Agent relies on a survey of job descriptions in various localities. For example, suppose the federal government employs an accountant in Chicago. In order to determine how much to pay him, the government would look at the job descriptions of private sector accountants in the Chicago area. It would try to find the subset of accountants who seem to have the same responsibilities as the government hire, then take the average salary in that set.
Though it sounds reasonable enough, the process is highly subjective. Positions that seem "comparable" on paper could be much different in practice, and some federal jobs have no private sector counterparts. How much should an intelligence analyst be paid based on his job description? Most importantly, unlike the human capital approach, the Pay Agent cannot distinguish between high- and low-productivity workers in the same position. It is just assumed that a particular job description leads to a certain level of output."
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