Government pay vs. private wages

Chris Farrell From chief economics correspondent Chris Farrell

Are government workers overpaid relative to private sector employees? That question came up on two separate occasions recently, once when I was moderating a panel in St. Cloud and another time while giving a talk in Dassel. Both times the questioner was upset that government workers make an average of $70,000 while private sector workers pocket an average of $45,000. I’m not sure where that extreme difference in pay came from. Nevertheless, I have seen various news reports putting the government worker premium at $8,000. That’s still a large number.

But is the pay differential true? This is going to be a long post. But it’s an important topic. And while I think the wage concern isn’t warranted there is a worry, as we’ll see.

First, let’s look at pay. Peter Orszag, director of the Congressional Budget Office, convincingly argues that the pay gap is a misleading statistic for federal workers compared to private sector workers. The key is education and experience. He ran the numbers:

But the truth is that a comparison of federal and private-sector pay, even by occupation, is misleading because the employees hired by the federal government often have higher levels of education than their counterparts in the private sector – even within the same occupations. When you factor in the education and experience of the federal workforce, there is no statistically significant difference in average pay levels.

He uses the example of registered nurses working at the Veterans Administration.

They care for the complex injuries and illnesses of our wounded warriors and veterans. Partly reflecting the complexity of the care they deliver, nurses working for the federal government are more than twice as likely to have a college degree as those employed by the private sector (24 percent relative to 11 percent). As another example, database administrators are twice as likely to have a post-collegiate degree in the federal government as those working in the private sector (31 percent versus 16 percent).

He continues with an apples-to-apples comparison.

Overall, roughly half the federal workforce has a college degree, compared to about a third in the private sector. Most of the difference (82 percent) in average pay between the federal government and the private sector is explained by these differences in education. Holding education constant, federal workers earn $1,604 more than their private-sector counterparts on average. That is where the experience of the federal workforce comes into play. More experienced workers tend to earn more, and the federal workforce, by and large, is older on average than the private workforce. If you hold education and age constant – and thus have an apples to apples comparison – federal employees earn slightly less than those in the private sector on average, although the difference is not statistically significant.

In other words, after taking into account education and age the difference between the federal and the private sector disappears

What about the state of Minnesota? It’s essentially the same story. I contacted Steve Hine, research director at the Labor Market Information Office for the Minnesota Department of Employment and Economic Development. He quickly put together some state-wide numbers. The figures aren’t comparable to Orzag’s adjusted numbers, but they’re suggestive: The public sector wage premium disappears after making important adjustments, especially education and skill.

Specifically, public administration hourly wages in Minnesota are 7% higher than private sector wages, $23.08 per hour vs. $21.59. It’s a gap of $1.49. (His data breaks down employment levels by major occupational category. It’s broken out into private sector industries and the public administration industry. It doesn’t quite capture the differences between the private sector and all government workers since some government workers are in industries other than the public administration, most importantly in education and health care. Still, the total number of employees in public administration makes up a majority of employment in government.)

Yet that overall figure masks important differences. For instance, in the “protective service occupations” pay on the government side is 51% higher than in the private sector side of the ledger. But the public industry category includes state troopers and county sheriffs while security guards are on the private side. In in the management occupations, government wages are 73% of what the private sector pays.

More importantly, government has a relatively high employment concentration in the higher paying occupations that require a college education or more. Hines points out that the legal, science, business and engineering groups are all relatively high-paying and the share of government employment in these groups is higher than in the private sector. On the other hand, low-paying sales jobs and food serving jobs are under-represented in government. “I did a quick calculation and estimated that if the employment distribution in government was the same as that in the private sector, the average government wage rate would be $21.30, a percent or two below the private wage of $21.59,” he says.

In essence, the wage gap isn’t a worry. It largely reflects the rewards to education.

However, there is a big difference between the private sector and the public sector: Benefits. The recent trend shows a disturbing increase in government worker benefits vs. the private worker benefits. Economist Michael Mandel on his blog Mandel on Innovation and Growth notes that public-and private-sector worker benefits moved together until 2004. Companies started clamping down on benefits, but the public sector didn’t.

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Most of the difference has to do with retirement benefits. State and local government pensions aren’t in great shape already. It’s a worry.

  • Doug

    What about looking at the amount of state employees to do an administrative job compared the amount employed in the private sector? I would be interested in that.

    The gov’t doesn’t seem to “trim the fat” it just gets bigger and spends more. In my opinion gov’t and unions get paid too much for what they do, and because of their “status quo” mentality knowing they have a pay/benefits raise coming with no bearings on their performance hinders any motivation or drive. I have no numbers to back this up, it is just my experience when crossing paths with them in the business world.

  • Richard Callahan

    In addition to benefits, there is also the difference in job security. A quarter of my friends and colleagues in the private sector have been severed over the last few years and if lucky, are working at much reduced wages. Those few with pensions, lost most of the benefit by being severed in their early 50′s before they could lock in the majority of the benefit. Public sector workers not only have much better pensions, they are able to stay in their jobs long enough to enjoy them.

    As it stands now, private sector workers are going to have to work into their late 60′s just to pay for the pensions of their public worker peers who retired in their late 50′s.

  • Frank Miller

    Thanks for the entry – this is an important topic, and it’s good to know the background for next time this gets thrown around in a political debate.

  • joy

    I think I read that the Bureau of Labor Statistics states that the largest percentage of union members are government workers. 52%

    What has benefits and representaton? The government job. I want one. It’s the place to be.

    The private sector just foots the bill.

  • Adam

    Government cuts are coming, I think its pretty safe to say layoff and pay freezes/cuts come along later than private sector because it takes time for the lower revenues of a down economy to reach public sector entities. It was a couple years ago almost when private sector was first experiencing cuts & layoffs, now it’s states, counties & cities that are being hit. State worker salary increases have been frozen with no cost of living adjustments. I’d agree with doug to a small extent in that pay for performance would be nice in gov’t, but the idea that salary increases are guaranteed isnt true, especially not now, expect to see layoffs all over the place. DHS only recently announced the elimination of 200 positions which I thought was reported here on mpr.

  • Margaret

    It seems too broad a statement to say govt jobs pay more than private sector jobs. I wonder if it wouldn’t be better to start first by comparing pay by industry, i.e. health care, education, construction (roads), security, mgmt, finance, etc, then compare govt vs private since those jobs are available in both sectors. Another confounder is whether that govt job is a local, state, or federal job since I suspect that can also impact pay levels.

    There are many more questions when someone says govt jobs pay more than private sector – job titles may not be comparable and paycheck amount doesn’t reflect benefits or lack of them.

    I agree that wages in business have been stagnant the past few years, so the questioner may be feeling that pinch. It’s also difficult to hear about job layoffs in business but not a peep when govt revenue is reduced.

    To say govt jobs pay more than private sectors just begs more questions about exactly what is being compared.

  • Joe

    I can’t see how this would be an issue. I often thought about getting a federal government job to compliment my 8 yrs of military experience. (I heard that working for federal government would be complimentary to military which is still federal and don’t know if thats true.) I never pursued it though because the pay and benefits from my private sector jobs made the idea unworkable. It would have been an initial pay cut, hard to swallow, and while the reirement benefits from the government are good, I think, I think if one manages their 401K or whatever they have, one could come out better in the private sector.

  • Paul

    I’m always amazed at the animosity, ignorance, and petty jealousy that emerges whenever this subject is raised.

    First, a basic basic economic observation. The “public” sector is public because it works for the public. The difference between public sector employees and private sector employees is that public workers are NOT generating profit for owners or share holders. Public employees are not “public” because their wages are paid by the public, ALL wages are paid by the public. All capital has the same origin in a capitalist economy. If you work at Target, McDonalds, Citi Bank, or Home Depot I’m paying your wages buddy. And if you’re a professional athlete I’m paying your wages even if I never buy a ticket because your industry is maintained by public subsidies.

    This complaint that “we” pay public employee salaries is the product economic ignorance, “we” pay all of our salaries, whether we’re self employed or even if we work at MPR. The difference is that the capital used to pay public employees is raised using a combination of taxes, sales, and fees, whereas the private sector relies more on sales and fees for products and services. And even that distinction is tenuous because many aspects of the private sector economy are financed with public money, construction, research, sports for example are all subsidized with tax money. And don’t forget, all these public employees pay the same taxes you do.

    The other misconception is the notion that the private sector is more efficient than the public sector. In fact many studies and history have shown that the public sector is typically more efficient than the private sector, and that much of the recent inefficiency within the public sector has actually been the result of ill conceived attempts to import the private sector into the public sector via outsourcing and privatization. The partial privatization of the student loan program is a good example of private sector “magic” gone wrong, I could produce more examples. Anyone who’s ever tried to sort out a phone bill or deal with a cable company knows that private bureaucracies are just as if not more frustrating and inefficient than public ones. The idea that efficiency is the product of profit motive instead of dedication and intelligent management is one of the most enduring myths of free market ideology. We all saw what happened when the Bush administration had it’s chance to unleash the magic of private sector ideology on the victims of Katrina.

    Are public employees overpaid? The data presented here clearly demonstrates not, but it underestimates the extent to which public employees can actually be underpaid. The highest paid public sector employee in the county is the president, his salary is around $600,000. Bill Kling, the president of MPR makes as much or more than the highest paid public sector employee in the United Sates. I don’t think there a single CEO of any hospital, or insurance company in the nation that doesn’t make at least twice the presidents salary. Yes the government has a lot of highly educated people employed, but most of them could make more in the private sector. My wife is an epidemiologist at the Health Department. She has a Ph.D and is constantly being courted as a private consultant, or faculty where she could make anywhere from 30% – $100% more. Like most of her colleagues she stays where she is because she’s dedicated to public service.

    This animosity towards people who choose to serve the public is always stunning. These people work for YOU. The private sector could not function at all were it not for the infrastructure and service that government provides. Without roads and air traffic control you and your products would go nowhere. Without the courts your contracts would be worthless and unenforceable. Without fire and police services half of your profits would be going to hooligans. Want to know what your country would look like without these public employees? Take a trip to Somalia. Your government is an asset, not a liability. People like the Pohlad’s get that, they’re playing their first baseball game in the stadium the government built for them this evening. Most tax incidence studies demonstrate that for every dollar you spend on taxes you get six to eight back in economic benefits.

    Then there’s the hostility towards public employees because of their benefits, job security, and union membership. This is odd because it typically comes from people who pretend celebrate individual accomplishment and personal responsibility. To the extent that public employees enjoy these advantages ( and they are widely exaggerated ) they are not the product of privilege or laziness. Labor contracts are contracts like any other. So maybe you decided you don’t need a contract to work for your employer, and maybe that didn’t work out for you so well… that was your choice. Public employees choose to work for the public, and they fought for those contracts and paid the price. Have you ever gone on strike like they did in 2005? It’s always strange to see people celebrate million/billionaire CEOs for all their success without acknowledging that those salaries and benefits are all mandated by labor contracts. No CEO will get within ten feet of a job without his team of lawyers and a solid contract and who complains about that? But for some reason when ordinary workers take advantage of the same right to negotiate labor contracts many people, most of which decided they needed no such contract are outraged. It’s just nasty. Unemployment and low wages are bad for everyone. The glee that some people display at the prospect of unemployment lower wages for public employees is sickening.

    Finally there’ s the issue of pensions. I’m disappointed by this article characterization of pension obligations as “worrying”. First all, these are contractual obligations like any other, and as such are no more worrying than GE’s obligation to maintain a Central Park condo for Jack Welch. Second, to the extent that there is a pension crises, it has been caused by the private sector financial markets. Throughout the 90s pension funds in the both public and private sector stopped making actual contributions because at the time investments were doing well. Pension money was diverted into dividend and bonus payments. When the various bubbles started to burst this created a crises not because they didn’t have the money, but because many companies and pension funds didn’t want to report that they’d stopped making actual contributions, a practice than in some cases may have actually been illegal. Congress actually addressed this problem in I think it was 2006 by passing a law requiring pension contributions (pesky public employees messing with the private sector again). Congress actually averted a huge crises in the nations pension system, to the extent that pensions remain in crises, it due to financial market failures, THAT’s what’s worrying. These obligations are not dark clouds on the horizon, they are contractual obligations that public employees fought for and earned. No one even thought cutting the Pohlad’s lose when Henn. County started running short. No one describes our future obligations to pay off the stadium as “worrisome”, that contract is rock solid. Our public employees who devoted their life’s work to public service deserve the same respect and support that our billionaire well fare kings get don’t you think?

  • DocJ

    “In fact many studies and history have shown that the public sector is typically more efficient than the private sector, and that much of the recent inefficiency within the public sector has actually been the result of ill conceived attempts to import the private sector into the public sector via outsourcing and privatization.”

    Wow, this may be the biggest lie I’ve ever heard on this subject by a factor of 10.