As Governments Face Bankruptcy, Study Claims Public Employees Are Underpaid

A recent study published by the Center for State & Local Government Excellence and the National Institute on Retirement Security argues that state and local government workers are undercompensated compared to private-sector workers with similar education and experience performing similar job duties. This claim seems incredible on its face, especially considering that many state and local government employees in California and elsewhere receive free health care for life and may retire as young as 50 or 55 years old with pensions equal to 90% of their final salaries. Indeed, the analysis suffers from a number of omissions and other deficiencies, as I noted in a response to the report.

While the recent study from the Center for State & Local Government Excellence and the National Institute on Retirement Security comparing public sector and private sector compensation levels correctly notes that aggregate comparisons of average public and private wages and benefits can be misleading, its conclusion that state and local government employees are undercompensated, compared to private-sector employees, is suspect at best. The analysis ignores the value of virtually ironclad job security and certainty of pension benefits, features that are notably absent in the private sector. It also overlooks the greater efficiency and productivity of private sector workers, which is a result of competitive pressures not experienced in government agencies. The conclusion that public-sector workers are more highly educated than comparable private sector workers, upon which higher pay and benefit levels is justified, is called into question by the fact that not all college degrees are equal (and may vary between public and private sector employees) and the possibility that governments are hiring overqualified workers because they face looser budget constraints than private companies (i.e., governments are overpaying for their labor).

There are other considerations outside the scope of the report that affect discussions of the cost of government services. Since retiree health care costs are expected to continue to rise rapidly, and public employees’ retiree health care benefits are significantly greater than those of private sector employees, this will increase government workers’ total compensation relative to comparable private sector employee compensation. Furthermore, even if we assume that public employees are underpaid, or at least not overpaid, that does not mean that the number of government workers is necessary or desirable, or that the cost and scope of government is not excessive.

The fact is that state and local government labor costs are continuing to escalate drastically. There is a reason why the City of Vallejo, California, cited skyrocketing pension costs as the chief cause of its fall into municipal bankruptcy, and why many other local governments in California and elsewhere are on the brink of bankruptcy. There is a reason why California’s pension costs have been described as unsustainable by everyone from the chief actuary of the California Public Employees’ Retirement System to Republican Gov. Arnold Schwarzenegger, to Democratic State Treasurer Bill Lockyer. There is a reason that governments at the federal, state, and local levels achieve significant cost savings by contracting with private sector businesses to provide a wide variety of services previously performed by government workers. State and local governments in California and across the nation must address public employee compensation levels if they are to maintain any sense of fiscal responsibility, particularly in these difficult economic times.

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