Are Government Employees Overpaid? Still No.

Something that is strongly implied in the Bowles-Simpson chairman’s mark is that government employees are overpaid (see here). The evidence from any number of sources is that this is completely false, even when you include benefits and control for everything imaginable. Reihan Salam brought up a corollary argument, Andrew Bigg’s argument that you have to include unfunded benefit liabilities in these comparisons.   This argument was taken apart months ago by the National Institute on Retirement, so let’s review that.

To get there, I’m going to first run through EPI’s Debunking the Myth of the Overcompensated Public Employee (pdf), a pretty fantastic paper.  Lots of people have also done this research at the state level.  Jeffrey Thompson and John Schmitt of CEPR for New EnglandCalifornia from the Center on Wage and Employment Dynamics at the University of California-Berkeley, etc.

We can break the entire argument about government employee compensation in three steps.

First

The first is an apples-to-apples comparison of workers among education levels. The government’s workforce is more educated than the private workforce. For instance, the government’s “college plus” level is 54%, while all private workforce is 35%. “Some college” is 14% of government workers, 19% of the private workforce. So this is important to control for.

Here is the penalty government workers take when you include all benefits across both categories:

On average, government workers make 3% less total compensation when you control for education levels. As someone who once considered doing regulatory work with his professional Master’s degree work, I can completely agree that there’s a 30%+ pay gap between the public and private sector.  Tom Ferguson and Rob Johnson had a good paper at INET comparing the evolution of regulatory salaries and industry salaries – the results were in line with the real incentive for regulators to be joining the industries they regulated.

Some groups make more in government.  This appears to be more the result of the declining wages and benefits over the past 30 years for non-colleged educated workers in this country than the idea of runaway government compensation.  The paper notes: “The public sector appears to set a floor on compensa- tion particularly improving the compensation of workers with high school educations, when compared to similarly educated workers in the private sector. This result is due in part because the earnings floor has collapsed in the private sector” citing Lee 1999.  But on average, no.  There’s a compensation penalty for working for the government.

Two

So on the first approximation, government workers are underpaid. So are we done? No. Two more steps. Beyond education, there are other things we need to control for. State and government workers are “slightly less experienced (21 years compared to 23 years); are more likely to be female (57% to 43%); work fewer hours (42.6 to 43.3); are more likely to be black (14% to 12%); are less likely to be Asian (3% to 6%); and are less likely to be Hispanic (10% to 13%). [p. 9]”

We need to control for all of these factors, as they impact the comparison of wages. Government workers leave 8.4 minutes earlier each day, women make 80 cents on the dollar as the result of systemic gender discrimination men make $1.25 on the dollar because they are compensated for their evolutionary-derived risk-taking, aggression and promiscuity, older works make more than younger workers, etc.

So the paper controls for all that (they put some time into this), and this is what they find:

Once again, controlling for everything imaginable, government workers make less in total compensation than regular workers.  The results is less pronounced at the local level (1.8% less rather than 7.5% at the state level), though still significant.

Three

Last step. Now there is a third critique, lead by Andrew Bigg of AEI, which says that doesn’t get the entire costs of providing benefits because “most state and local employees also become eligible for defined-benefit pensions and health benefits in retirement. But state and local governments haven’t come close to fully funding these obligations. That means that the amount government employers spend today may be well less than what employees will actually receive when they retire.” He believes this is not the case for private employers, hence government workers are likely overpaid.

Let’s hand the microphone to the National Institute on Retirement, which is specifically addressing Bigg’s claims (my bold):

Some have argued that because many public pension plans around the country are not fully funded, the entire cost of defined benefit (DB) pension benefits is not recognized in the data we used in our study, which comes from the National Compensation Survey (NCS).  While the NCS, like any survey, does have some limitations, it remains the definitive source researchers use for assessing the cost to employers of non-wage benefits…

In other words, if an employer fails to fully pay for the benefits accrued in any given year, than it is possible that the cost of the pension benefit—and therefore, the full cost of employee compensation—may be slightly understated in the data.  The corollary to this is that if an employer’s contributions to a pension plan exceed the cost of benefits accrued in that year, the NCS will overstate the cost.  Because employer contributions can vary with the funded status of the plan, which in turn, is driven by macro-economic factors like theperformance of stock and bond markets, there may be a cyclical bias in the data.  Over time, though, these over- or under-estimates should average out, which is why we used an average (from 2004 to 2008) of benefit costs, rather than a point estimate in our analysis.  Moreover, it is important to note that any bias (positive or negative) would apply equally to public or private sector employers.

So, claims that our analysis systematically understates costs for public employers are invalid on this basis.

Similarly, claims that our study should have added the value of the entire unfunded liability (of state and local government DB plans) onto a single year’s compensation costs are completely off base. Any analysis that does so will reach conclusions that are equally inappropriate and flawed.

First, an unfunded liability represents all accrued benefits, from all years past, that are not currently funded.  Yet the point of the analysis is to compare the cost of annual compensation.  Therefore, it is inappropriate to include the entire unfunded liability from all prior years into the calculation of the cost of benefits in a single year.

Second, even if one felt that incorporating the cost of unfunded liabilities served a purpose (notwithstanding that this is not how economists define current compensation), one would have to apply the same standard to the private sector side of the analysis, too. Currently, many private sector DB plans have unfunded liabilities—a result of the recent stock market downturn that affected investors of all stripes. If the idea is to compare public and private pension costs in a fair, “apples to apples” manner, then the unfunded liabilities of private sector pensions should be calculated as well.

Third, adding the expected annual cost of paying off unfunded liabilities (even under the worst-case scenario) would not change the result.

The Center for Retirement Research at Boston College recently calculated that it will cost states on average just 2.2% of payrolls to pay off their entire unfunded liability over 30 years. In the Out of Balance report, we found that total compensation is 6.8% lower for state government employees and 7.4% lower for local government employees than for comparable private sector workers. So, even if we were to add 2.2% of payroll to state and local employee compensation—which would pay off the entire unfunded liability—state and local workers would still be paid 4.6% and 5.2% less, respectively, than their private sector counterparts.

In conclusion, the results of the Out of Balance study stand up to scrutiny. Even acknowledging the additional contributions that will be required to restore pensions to full funding does not alter the ultimate findings of the study. State and local employees still receive significantly less total compensation than their counterparts in the private sector.

Posted on July 19, 2010 by: Keith A. Bender, Associate Professor and John S. Heywood, Distinguished Professor; Department of Economics, University of Wisconsin-Milwaukee.

The idea that the private market pensions are in tip-top shape doesn’t strike me as accurate, and piling on the entire unfunded liability into a single year is, of course, going to distort the scales and not focus on the specific hypothesis testing that is being carried out.   And yes, even if we were expecting to pay off the entire unfunded liability we are talking about 2.2% of payroll, still less than what NIR, EPI and others found as the pay gap.

Again, there’s simply little fat to cut here.   Government workers are less compensated than private workers – cutting more will simply mean a weaker workforce with less human capital, which will lead to weaker government services.  Which will discredit the idea of government, which I guess is the point for some people.

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29 Responses to Are Government Employees Overpaid? Still No.

  1. gaius marius says:

    good work, but there’s a control missing that’s probably rather important.

    we’re talking average salaries, but what of the distribution as a whole — point being, there’s no analog in the public sector for rapacious and bloated CEO pay. remove the top 1% of each sample (and bottom 1% as well if you like) and i wonder if the private sector looks remotely so well compensated “on average”.

  2. Milton Recht says:

    Without a productivity measure, pay measurements are meaningless. For example, if three government engineers are needed to do the same work of two private sector engineers, then even at the same salaries and benefits, the government employees are overpaid.

    In the private sector, it is fairly common to hear about someone skipping lunch, working late, coming in on a day off or postponing vacation to finish a project. How often does that happen in government?

    • Miracle Max says:

      “In the private sector, it is fairly common to hear about someone skipping lunch, working late, coming in on a day off or postponing vacation to finish a project. How often does that happen in government?”

      And the answer is . . . you have no idea.

      I’m from the Government and I’m here to correct you.

    • Julian says:

      As the child of a government employee, I can attest that such behavior is the norm. Government workers are always on call save on one-day government holidays.

    • Nicole says:

      It happens quite often. There are many that skip lunch or work at their desk. There are many that work extra hours or stay late, or come in on their day off. It is a complete myth that government employees only work their scheduled hours. The more education a government employee has, the more they work.

    • ECON says:

      As a former civil servant and private sector consultant, it is too easy to stereotype public workers. Government is much more transparent (the fish bowl) than private sector businesses
      as we have witnessed for the last 30 years or so…doesn’t the Wall Street terror on the USA provide ample proof…? and Enron and hundreds of more companies.

    • Lori says:

      It happens all the time Milton. Unless you work in government and I suspect you don’t, then you don’t know. My husband works in CPS (Child Protection Services) and I can tell you that they are understaffed and overworked. Because of budget cuts over the years, vacancies are never filled and workers are required to do more and more. They work through their lunches and after 5pm and are NEVER compensated as overtime is not given. So they work for free basically. All so children are kept safe. But you will NEVER see THAT story in the news. The government Social Worker is ALWAYS the bad guy. Always. My husband has served 25 years and the only pat on the back he has received is furlough days and pay cuts and benefit cuts. You would be a fool to work for the government. It pays much less than the private sector and where this crap notion that they are overpaid got started is beyond me. It is rhetoric started by politicians looking to be elected.

      This was a great article. Thank you.

    • Racam Kendi says:

      Very often.

    • Brian Kitt says:

      In my organization it happens all the time. On average people in my shop work a 55 hour week. Many of us take work home at night to compensate for the drastic reductions in the workforce that have taken place over the last 6 years.

      Prior to this job I worked for the Air Force and on one project was asked by the base to look at a contractors proposal to them for an electronics communication installation. Total costs for that installation were $2.5 Million. It was the same system I was designing and installing for them at a cost of $225 thousand. You must consider the savings that public sector employees provide over contractors when you evaluate who is more cost effecctive.

  3. Mike says:

    Milton Recht,

    You can get your second question from “hours worked”, which the paper breaks down by education and the second part above controls for. You are correct, government workers work 8.4 minutes less a day (I messed it and wrote 6 minutes in the original draft) averaged.

    That number is larger for higher educated workers, with the maximum being professional degrees working 2,520 hours in private business vs 2338 hours in government work. So they work 42 minutes less and take a 37%+ pay cut. I imagine if they could increase their salary that 37%, they’d work the extra 45 minutes a day.

    • Anal_yst says:

      I’m less concerned with proxies for productivity than actual productivity. I realize such data is hard to come by (and/or possibly suspect), but without that, these figures are relatively unsurprising/revolutionary.

      Just to clarify, my hypothesis is that in both the public and private sectors there is – at virtually every education level – a wide range in employee productivity. Further, I’d venture to guess employees in both public and private sector that handle primarily routine tasks are less productive (however you want to measure that) than those whose job is more dynamic.

      The question then becomes, which sector employs more (or a greater % of) people in routine tasks. I don’t have the answer, but I’m certainly curious…

    • Milton Recht says:

      Mike,
      Assuming the 37% underpayment for 7 percent fewer hours worked is correct, would not private sector employers be willing to pay a premium for workers that they can fire at will, lower wages easily during hard economic times and reassign without due process requirements? Would not private sector workers demand a pay premium for the risk of business bankruptcies and other business discontinuance events that could lead to unemployment? One needs to adjust for that flexibly and business risk premium to draw conclusions.

      A wage difference between private and public workers does not mean one is over or under paid. There maybe valid job characteristics difference between public and private, unspecified in the various studies that account for the difference, in addition to productivity and output.

      Also, what is the value of government contacts and experience developed from working in the government. The private sector will pay a premium for a worker if, in addition to skills and experience, there is a business value to government contacts and government experience.

      For example, for many years prior to the current crisis, government bank examiners jumped for higher pay to banks and government lawyers jumped to private law firms for higher salaries. It is easy to argue and document (probably incorrectly) that the jump is due to underpayment at the government agencies and departments. However, private sector employers can afford to pay a premium over a higher government wage until it is uneconomical for them.

      Maybe the private sector banks and law firms are willing to pay a premium for the government experience of bank examiners and lawyers. Even if salaries are raised and paid to these government employees, the private sector will pay a premium until the government sector overpays these employees because their government salaries include the value to the private sector that cannot be realized by the government and is more than the underlying skills and experience are worth to the government.

      My underlying philosophy, which colors my thinking about the research, is that is normal economic times, workers move between government and private sector jobs and adjust the supply and demand and wages until their total compensation values ( including salary, benefits, productivity, risk, and other innumerable job characteristics) are approximately equal.

  4. The whole thing is so stupid. Why does the right believe in paying for quality employees only in the private sector? Government employees often control millions of dollars, even billions. You don’t want to pay for a very skilled, competent person for that? And do you want these people to be so low paid that they’re poor, disgruntled, and feeling unappreciated, and thus highly susceptible to bribes and corruption?

    • Obviously the Republicans don’t want government to work well; they don’t want people liking government; so they do their best to make it work like crap as we’ve all too painfully seen when they’re in power.

    • Miracle Max says:

      Reagan’s OPM directors, Donald Devine, once said he did not want the government to attract or retain the most qualified persons; if it did, he worried, people would become too attached to public services.

      I’ve never been able to find proof of this on the web, but here is something close:

      “One OPM official, Terry Cutler, wrote in The Wall Street Journal in 1986, “Government’s goal should not be employee excellence but employee sufficiency.”

      (http://www.washingtonmonthly.com/features/2000/0011.thompson.html)

      • This is a good addition.

        Mike, if you have time, this is something to research. Are there right wingers directly saying they want to cut government salaries so that government gets worse people, and therefore functions worse, so the public thinks poorly of it and supports it less?

  5. Guy says:

    Most of this article is based on the notion that private-sector defined-benefit pensions exist. Nearly no major employer in this country offers a defined-benefit pension any longer. Almost none.

  6. Dirck Noorman says:

    Are all graduate degrees equivalent? Is someone with a graduate degree automatically better educated than someone with only a college degree?

    I bet most people with MPA degrees go into government. And most people with a masters degree in computer science go into the private sector. These are not equivalent degrees.

    The same applies for undergraduate degrees. Govt bureaucracies are teeming with people with undergraduate degrees in Sociology, “xyz Studies”, and other majors that make them effectively unemployable in the private sector.

    A better screen: separate undergraduate and graduate degrees that require a post-high school level science class. So the lawyers and economists and sociologists and basketweaving majors would be separated from the computer scientists and engineers and physicians. I think your results will be dramatically different.

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  9. JCD says:

    The very first comment nailed it. A comparison of average salaries is incredibly misleading. Look at the average compensation rates – they are way above median compensation rates.

    The study lists average earnings in the private sector for a professional degree at $152k and for a bachelor’s degree at $71k, while in the public sector it is only $88k and $48k respectively. I am sure that someone more informed than I could provide even more recent numbers, but a quick google search turned up 2006 census data that revealed that median personal income for full time employed persons 25+ (who will usually be earning more than someone younger) with a professional degree is $100k, and with a bachelor’s degree is $50k.

    The study completely ignores the fact that average income in the private sector is skewed by extremely high income individuals that drive the mean up. This is a factor that simply is not present in the public sector. For example, MBAs and BAs getting paid multi-million (or more) dollar bonuses could skew the average.

    Some other commenter’s note regarding lack of granularity in lumping degrees together is germane as well.

    Overall, more granularity is exactly what is needed. There are some public sector employees that are overworked and underpaid, while there are other public sector employees that are, unquestionably, overpaid. Similarly, there are some private sector employees that are underpaid, while there are some private sector employees who are overpaid.

    To me, the most troubling part of public sector compensation is the proposition that an employee is entitled to continual pay raises the longer he works at a job, regardless of whether or not his additional “experience” provides any benefit.

    • RA says:

      and the counter argument is that the mean is also brought down by the large amount of individuals who work low paying jobs, like behind the counter retail or service. And those individuals would be found in private sector work at massive levels, but hardly at all in government work.

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  12. James says:

    It may also worth noting that some unions forgo Social Security benefits for their pension. As a teacher in California What I would pay in SS goes to my pension, so when there was that pay roll tax cut I did not get that tax cut.

    I would honestly love to see people in the private sector work as much as I do as a teacher. It kills me when I see people who make twice what I do, with less formal education, spending their work hours on facebook joking about how they only do about an hour of real work a day.

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  14. Tammy says:

    The problem you wrote about is everywhere not just in NY. Go to your local DMV or take a closer look at your local law enforcement officers in the donuts shop – these people are paid upward of $60K-$100K a year plus huge retirement compensation. I dare you to look into the defense spending and see how bloated they are with people doing nothing. Take a peep at NAVAIR, NAVSEA, and NAVFAC (all Navy facilities), which have been hiring large amount of engineers that couldn’t figure out how to get their head out of their ass. These so call JP or junior professional come mostly from wanna be engineering school liked CSU Northridge, CSU Channel Island, CSU Fresno, U of Hawaii and whatever school you can think of that rank at the bottom in engineering study. Next time you visit your local government agency, see how many fat asses work in that facility. Those are the fat asses that sit on their ass all day stuffing their faces with twinky and pretend to be doing work. If we want to bring down our deficit, we need to remove these wasted unqualified people out of our government. We don’t need 5 monkeys to do 1 monkey work. The system is broken and Obama needs to look deep into this. But I’m sure he will not do anything about it, because no politician dares risking their neck to improve the country. It’s better for them to lie and let the dummies among us believe that the US financial crisis is improving. Spilling the lies about reduction in unemployment rate, when very small amount of small businesses did any hiring. Seriously people, look at the example below and tell me how unemployment is improving.

    10 out of 100 people are out of work, that’s 10% unemployment. Then 1 person got a job, which drops the unemployment rate down to 9%. But the government claims that unemployment rate is actually 8%, and the reason for that is 2 people are no longer claiming the unemployment benefit. Well that 1 other person happen to be on unemployment for so long that she no longer qualify, thus is then remove from the system. That person is now out on her luck and is now moving from one homeless shelter to the next, but what the heck! Unemployment is down 2 freaking percents. Now replace that 10 people with 4 million people and take a quick calculation to see how many people are now moving from homeless shelter to the next. The number is 40,000!!!! some odd people are now out of their house and living on the street. When a single income mom ended up on the street, their children are also on the street with them. Now what kind of problem do you think we have. No politicians care about this. Nobody talks about this. It doesn’t make good rating and don’t get them new vote. But you, the tax payers will continue to suffer. So all you fat selfish greedy government employees that continue to strike, rally, and wasting my tax money, you better think about how much work you actually do for your country. You ain’t worth it!!!! We don’t need to be paying these people to sit on their fat a$$.

  15. Tammy says:

    The problem you wrote about is everywhere. Go to your local DMV or take a closer look at your local law enforcement officers in the donuts shop – these people are paid upward of $60K-$100K a year plus huge retirement compensation. I dare you to look into the defense spending and see how bloated they are with people doing nothing. Take a peep at NAVAIR, NAVSEA, and NAVFAC (all Navy facilities), which have been hiring large amount of engineers that couldn’t figure out how to get their head out of their ass. These so call JP or junior professional come mostly from wanna be engineering school liked CSU Northridge, CSU Channel Island, CSU Fresno, U of Hawaii and whatever school you can think of that rank at the bottom in engineering study. Next time you visit your local government agency, see how many fat asses work in that facility. Those are the fat asses that sit on their ass all day stuffing their faces with twinky and pretend to be doing work. If we want to bring down our deficit, we need to remove these wasted unqualified people out of our government. We don’t need 5 monkeys to do 1 monkey work. The system is broken and Obama needs to look deep into this. But I’m sure he will not do anything about it, because no politician dares risking their neck to improve the country. It’s better for them to lie and let the dummies among us believe that the US financial crisis is improving. Spilling the lies about reduction in unemployment rate, when very small amount of small businesses did any hiring. Seriously people, look at the example below and tell me how unemployment is improving.

    10 out of 100 people are out of work, that’s 10% unemployment. Then 1 person got a job, which drops the unemployment rate down to 9%. But the government claims that unemployment rate is actually 8%, and the reason for that is 2 people are no longer claiming the unemployment benefit. Well that 1 other person happen to be on unemployment for so long that she no longer qualify, thus is then remove from the system. That person is now out on her luck and is now moving from one homeless shelter to the next, but what the heck! Unemployment is down 2 freaking percents. Now replace that 10 people with 4 million people and take a quick calculation to see how many people are now moving from homeless shelter to the next. The number is 40,000!!!! some odd people are now out of their house and living on the street. When a single income mom ended up on the street, their children are also on the street with them. Now what kind of problem do you think we have. No politicians care about this. Nobody talks about this. It doesn’t make good rating and don’t get them new vote. But you, the tax payers will continue to suffer. So all you fat selfish greedy government employees that continue to strike, rally, and wasting my tax money, you better think about how much work you actually do for your country. You ain’t worth it!!!! We don’t need to be paying these people to sit on their fat a$$.

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