Public-employee Compensation vs. Private-employee Compensation

Commentary

Public-employee Compensation vs. Private-employee Compensation

Government employee compensation has attracted increasing attention in the wake of growing pension and healthcare costs for public workers. Many argue that since government employees receive lower salaries than their private counterparts, it makes sense to reward them with higher benefits, including pension benefits and health insurance. In a paper at the American Enterprise Institute (AEI), Andrew Biggs and Jason Richwine look at compensation data in each state and compare non-public safety state government employees with comparable workers in the private sector.

Rather than merely comparing salaries between the two groups, the authors look at total compensation, which consists of salaries and employee benefits, including pensions and retiree health plans. They also control for differences in education, experience, and other factors to ensure comparability. In addition, they analyze non-monetary aspects of public employment, with an emphasis on job security.

The authors find that while public-employee wages may be on average lower than those paid in the private sector, state government workers in most states receive greater total compensation than comparable private-sector ones who work for large employers. The authors state:

“The numbers themselves tell the story. But the results confirm intuitive judgments in one important respect: in states in which public-sector compensation is a significant political issue, the data tend to show that state government employees receive a premium relative to private-sector workers. In states in which public-sector pay is less controversial, the data tend to show that state government employees are fairly paid or, at times, even underpaid.”

Additionally, fringe benefits are significantly more generous in government than in the private sector. The compensation differential is even more pronounced when the value of job security is included, as government employees enjoy greater job security than they would likely enjoy outside of government.

These findings are not too surprising. Reason Foundation’s Adam Summers once pointed out how a previous study on public vs. private compensation failed to take into account job security and benefit protection enjoyed by public workers, and hence likely underestimated public-sector compensation. But even if the differences in benefits and job security did not exist, government would still likely overpay its employees. The reason is that private sector workers tend to be more productive than their public counterparts due to the constant competitive pressure faced by private businesses. And even if the productivity difference were negligible, it would not imply that the number of workers employed by government is at the right level. Since political processes, rather than supply and demand, determine the size of government employees, it is likely that government hire more people than necessary.

The AEI’s study also finds that those states with higher public-employee total compensation relative to the private sector tend to have lower economic freedom scores. States that have a more business-friendly environment tend to pay public employees a lower compensation premium.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Reform Project.