Another Study Claims Government Workers Are Undercompensated

A recent study by the Institute for Research on Labor and Employment claims that public-sector workers are actually undercompensated compared to their private-sector counterparts. This is not the first such study from a pro-union think tank to argue this, and I addressed such claims made by a similar study earlier this year (see my criticisms and response here).

The conclusions about the supposedly undercompensated government employees are reached despite data from the Bureau of Labor Statistics and the Bureau of Economic Analysis that illustrate a wide gap in favor of public-sector workers (see here, here, and here), the fact that the City of Vallejo, CA was forced to declare bankruptcy because of its unaffordable public pensions and many other local governments around the nation are in danger of a similar fate, and the prevalence of public pensions in state and local governments throughout California that allow public safety employees with 30 years of experience to retire with 90% (or more) of their final salaries and get free health care for life.

In an article for the San Francisco Examiner, Steven Greenhut noted some of the study’s shortcomings.

The researchers didn’t look at, say, a private sector janitor with a set amount of experience and compare his total compensation package to a similarly skilled janitor in the public sector. “Instead, the study relied on education levels — ‘the single most important earnings predictor’ — and other factors widely found to affect compensation levels, such as gender, race, ethnicity and disability, to compare the two sectors,” reported a Bay Area newspaper. The study, “The Truth About Public Employees In California: They Are Neither Overpaid Nor Overcompensated,” produced by the Institute for Research on Labor and Employment, averaged out each group and then adjusted for education and other factors.

I know someone with multiple degrees in various subjects who has few marketable skills and therefore has a low-level job. The researchers would assume that such a person should have an extremely high salary because of his credentials. That’s the basic problem, but the study is undermined by other flaws. The researchers leave out low-paid agricultural workers and small business owners, who work long hours and have few benefits. Controlling for hours allows them to ignore the overtime abuse common in the public sector.

James Sherk, a labor economist at the Heritage Foundation, notes that the study doesn’t include federal employees in the survey, and federal workers are paid far more than others. He also noted that “This study only looks at part of the benefits paid to state and local employees. It ignores the retiree pension and healthcare benefits they get but which the government has not set aside enough money to cover.”

The researchers failed to include the value of retiree health benefits, according to an analysis by Marcia Fritz, president of the California Foundation for Fiscal Responsibility. The study, she notes, doesn’t adjust for the reality that teachers do not work a full year. It doesn’t adjust incomes even though private employees have money deducted for Social Security and most public employees do not have such deductions. She argues that had the researchers accounted for the true cost of retiree benefits that it would boost public sector wages by 15 percent.

The argument that government employees tend to be more highly-educated, and thus deserve higher salaries than those in the private sector, is an interesting one, but I think it falls short. As I noted in my criticism of the public versus private sector compensation study from earlier this year,

It would be interesting to take a closer look at the education statistics. Knowing the percentage of workers with a college degree, for example, is helpful, but not all college degrees are equal. Some fields of study are more rigorous than others, and some universities and colleges are more prestigious than others. One who earns a degree in a more rigorous field, or who attends a more prestigious (and usually a more costly) university, would expect to earn a higher salary after college than one who did not. While data with this level of detail do not seem to be available, it would be interesting to see if there are any differences in these more specific educational categories between public and private sector employees.

It is also worth asking whether higher education levels are actually required to perform many government jobs. The Bender and Heywood study presumes that we should expect public employees to be paid more because they tend to be better educated than comparable private sector employees, but is this additional education necessary?

It may be that state and local governments hire more educated people not because job duties demand more education, but rather simply because they can, as they have access to the public’s money and, as such, government budgets are not so constrained as private firms’ budgets. In the private sector, firms have strong incentives to keep costs down and pay no more for labor than they need to. The public sector, by contrast, is infamous for its lack of efficiency, and budgets are determined by political means, resulting in budgets that are usually much different-and more wasteful-than those determined by economic means (see the discussion of public-sector versus private-sector productivity below). This is why governments typically achieve significant cost savings by outsourcing the provision of services to the private sector. Thus, it may be that governments are paying higher wages to better-educated employees not because those employees’ educational skills are required to perform their job duties, but rather because they are overqualified for their jobs.

Such studies also tend to neglect to place any value on the virtually ironclad job security that public employees enjoy which cannot be found in the private sector. They also ignore that private-sector workers, on average, are significantly more productive than public-sector workers, and work more hours per year.

Even taking the study’s analysis as given, this does not mean that the value of an average government worker’s labor is equal to that of an average private sector worker with similar education and work experience. This is because private sector workers tend to be more productive. As Cato Institute Director of Tax Policy Studies Chris Edwards notes in a recent paper, according to the U.S. Bureau of Labor Statistics (BLS) National Compensation Survey, private-sector employees worked an average of 2,050 hours in 2008, 12 percent more than the 1,825 hours worked by the average public-sector employee.

Even on an hour-for-hour basis, one would expect private sector workers to be more productive due to the lack of competitive forces in government. Private sector businesses face constant pressures of competition to innovate and improve their goods and services, lest they lose business to their competitors. Government agencies, by contrast, are typically monopolies protected by law, and thus are not subject to such competitive incentives and pressures. (There is a reason for all those jokes and complaints about the efficiency of post office and DMV workers.)

The fact is that the average government employee typically earns a greater salary, in additional to substantially better benefits, than similar private-sector workers. This is because public-sector employees’ compensation is determined through the political process, rather than by economic realities. The power of public-sector labor unions, and the politicians who are beholden to them, largely insulates them from economic contractions. Thus, it should not have been surprising that governments at all levels were actually hiring hundreds of thousands of workers even as the private sector lost millions of jobs during the recession. The sooner we recognize this fact, that public-sector unions are using their political power to enrich themselves at the expense of taxpayers, the sooner governments may be brought back to some measure of fiscal responsibility.