Lee Ohanian on the real wage premium for public sector workers

by on June 30, 2014 at 10:33 am in Current Affairs, Economics, Law | Permalink

For the case of the public sector, the probability of involuntary separation is just 1.3 percent, which is one-third as high as the probability in the private sector case. I then calculate the difference in compensation between the public sector (low unemployment case) and the private sector, such that a worker would be indifferent between working in either sector. I find that workers would be willing to work for about 10 percent less compensation in the public sector, given the additional benefit of much higher job security. This estimate is conservative in terms of considering today’s labor market, as average unemployment duration today is much higher than its historical average.

This analysis suggests the possibility that public sector compensation may be significantly higher than competitive levels. Moreover, the fact that public sector workers are only about one-third as likely to voluntarily leave their job as private sector workers is consistent with the conclusion that average public sector compensation rates are in excess of competitive levels, indicating that there are relatively few external employment opportunities that dominate public sector workers’ jobs. The fact that average public compensation is higher than average private sector compensation suggests that public sector worker compensation may be well above competitive levels and indicates that public sector wages could be reduced without significantly impacting public sector employment. For example, I’ve calculated the impact of a 5 percent wage reduction for all public employees in California, a state with one of the most severe fiscal crises in the country. A 5 percent wage cut would reduce state spending by $1.33 billion, which would reduce California’s 2011 state budget deficit by nearly 15 percent.

There is more here, interesting throughout.  There is further relevant information here.  Here is the news on today’s Supreme Court decision on public sector unions: “Supreme Court drastically curtails public sector unions.”

1 Michael June 30, 2014 at 10:35 am

In all seriousness, I’d like to see a calculation done for the wage premium for tenure-track professors.

2 Cliff June 30, 2014 at 10:46 am

The wage premium over what?

3 Bill June 30, 2014 at 10:58 am

Cliff,

So, by that argument, is voluntary employment as a public sector employee.

Or, doesn’t the shoe fit? Too uncomfortable?

4 Bill June 30, 2014 at 11:00 am

posted in response to wrong comment; see below

5 M June 30, 2014 at 11:22 am

Over industry…

6 Andrew' June 30, 2014 at 11:17 am

It’s huge.

7 Andrew' June 30, 2014 at 11:27 am

But the tenure part isn’t the really important thing. It is the self-direction premium. The tenure parts protects the self-direction part.

8 Andrew' June 30, 2014 at 11:21 am

You realize what that really means is that professorship isn’t as good as you think?

I’m still amazed that you can believe you are making two opposite points at once.

9 Brian Donohue June 30, 2014 at 12:03 pm

Hey, prior_approval and Bill. We get it, tenure, hahaha.

You guys relentlessly trot this crap out like it’s some kind of knockdown argument, when it is merely a side squabble with the guys who run the blog. Give it a rest.

If the conversation were about the vanishingly small share of jobs being taken up be self-absorbed academics, your point would rise above the level of drivel.

10 Bill June 30, 2014 at 7:45 pm

ha, ha. Jokes on you. Tenure is just a form of job security, in case you did not read the post which talks about needing to discount public sector wages because of the job security benefit.

11 Bill June 30, 2014 at 9:49 pm

That comment was in response to Brian.

12 Nathan W July 1, 2014 at 7:27 pm

Do you want to compare the salaries of tenure-track professors at public universities to temporary migrants working in meat packing plants, or compared to tenure-track professors working in a private university?

I’ve never heard of a public sector university professor who made any particularly large sum of money (excluding other endeavours which unsurprisingly are most often related to their existing areas of expertise, such as writing books or public speaking on an issue). But I’ve heard of academics leaving teaching and going into business and make millions of dollars, billions of dollars, trillions of … OK no one’s done that yet.

When you make a billion dollars probably you’re not very worried about job security. That is a concern for much of the 99.9% though.

13 Bill June 30, 2014 at 10:50 am

I always like the economic quizzes economists pass out at their conventions on such subjects as the minimum wage, etc.

But, you never see any questions about the labor market distortions caused by tenure, even though those tenured faculty may write about labor restrictions in EU countries making it difficult to fire people.

Wonder why?

14 Cliff June 30, 2014 at 10:52 am

Isn’t tenure both voluntary and increasingly replaced by non-tenure positions?

15 Bill June 30, 2014 at 10:59 am

Cliff,

So, by that argument, is voluntary employment as a public sector employee.

Or, doesn’t the shoe fit? Too uncomfortable?

16 Cliff June 30, 2014 at 1:30 pm

I don’t understand the comparison you are trying to draw. First I thought it was EU labor regulations versus tenure, which is what I was responding to. Now you are trying to compare tenure to public employees somehow?

17 JWatts June 30, 2014 at 1:34 pm

I think Bill is probably not interested in a debate but is instead just trying to pick an argument.

18 Bill June 30, 2014 at 2:35 pm

JWatts,

Have you thought about what you said: because it sounds silly.

What is the difference between pick an argument and have a debate?

Your comment was aimed at trying to discredit the argument without addressing it.

19 JWatts June 30, 2014 at 4:17 pm

When you make a vague and unreadable statement such as: “So, by that argument, is voluntary employment as a public sector employee.”

And then follow them up with attacks such as: “Or, doesn’t the shoe fit? Too uncomfortable?” You aren’t attempting any kind of legitimate debate or discussion.

“What is the difference between pick an argument and have a debate?” If your response is basically an attack on the poster versus a legitimate response to the question asked, then your starting an argument not a debate.

20 Bill June 30, 2014 at 7:42 pm

JWatts,

Next time you make a statement…that tenure is a voluntary agreement…and then claim not to understand my comment: So is employment as a public employee, either I am unclear or you cannot follow a thread.

So, to be very clear…I will write slowly…you defended tenure as a voluntary contract…and I defended public employee benefits as a voluntary contract using your argument.

I suspect you do not understand the argument because it hurts.

21 Cliff July 1, 2014 at 1:26 am

Bill,

It’s not JWatts who made that comment, it is me. And I was distinguishing EU labor regulations from the practice of tenure. I took no position on public sector employees.

No one is saying public sector employees are bad, but since they are not negotiating with a for-profit employer, there is obviously the potential for them to be overpaid by market standards. What that has to do with tenure I am not sure.

22 Bill June 30, 2014 at 10:54 am

How many economic studies have you seen on the distortionary effect of tenure for college professors?

How many studies have you seen about the inability of colleges to refresh their curricula (lay off the French prof to hire a Chinese language prof to create a Chinese language department) because of tenure? Some of these guys teach into their 80’s, teaching what they learned in graduate school 50 years ago.

23 Brian Donohue June 30, 2014 at 10:56 am

Duh. Fortunately, as we are constantly told, public servants are motivated by loftier goals than money-grubbing, so I don’t see any resistance here.

24 Apiarist June 30, 2014 at 11:07 am

Some of these people are unbelievable; they have bought. I once worked for the gov’t in a short-term position. (Let me assure you that there was no wage premium, I was comically underpaid.) Anyway I was signing up for benefits on the first day and I told the lady no, I don’t need to sign up for retirement, I won’t be working here long enough to collect.

I will never forget the withering, haughty look she gave me, complete with the nose up. “Oh. Then I suppose you won’t be interested in a life of Public Service,” she said, including the capital letters. I almost bust out laughing. What noble service to sit in a fluorescent-lit room and fill out HR paperwork for a local bureaucracy. Truly, these are the heroes upon which civilization is built.

25 Nathan W July 1, 2014 at 7:29 pm

Did your private sector job pay more or less? Offer better or worse job security?

26 Apiarist July 2, 2014 at 10:32 am

Paid way more, triple-ish. Probably less job security but I fortunately haven’t had cause to find out yet! But certainly the people at the private sector job don’t think of themselves as noble heroes, at least out loud.

27 Ostap June 30, 2014 at 10:57 am

My wife works for local government. She’s just a few years away from vesting for a pension. There is an approximately 0.000000000% chance she’s going to change jobs before she vests. And in my humble opinion, she is anything but overpaid.

28 M June 30, 2014 at 11:24 am

Please find me someone who thinks they are overpaid.

29 anon June 30, 2014 at 2:10 pm

+1

30 Floccina July 10, 2014 at 11:12 am

I had a friend who worked for the Post Office who liked to say “I am under worked and over paid.”

31 Dan Weber June 30, 2014 at 12:09 pm

Government workers tend to break into two camps:

1. The people really there to make a difference; they want to do “X” and the government is the only place to do it. Their reservation wage could likely be below minimum wage.

2. The hangers-on.

Group 1 will tell you many tales of Group 2.

32 Marie June 30, 2014 at 12:19 pm

And group 1 shrinks as group 2 makes it more and more difficult to make that difference in government work.

33 picker June 30, 2014 at 12:23 pm

what is that assumption based on?

34 Willitts June 30, 2014 at 12:43 pm
35 RAstudent June 30, 2014 at 12:53 pm

That settles it then, its “the” law, based on an assumption by some guy writing speaches for Reagan. Consider me convinced.

36 Jeff R. June 30, 2014 at 2:06 pm

It’s not like we have any recent examples like the VA to draw on or anything, so your skepticism is well warranted, RA.

37 Marie June 30, 2014 at 7:32 pm

Not a thing but personal observation, of my own situations and those I know and have read about, in several public service fields.

I think the public, for example, probably doesn’t quite get that when they are served poorly by, for example, the police department it’s partially because a lot of the good guys who go into policing to defend and protect get sick to death of working side by side with bad guys who get into the field for the wrong reasons, and they quit. Thus leaving space available for more of group #2 to move in.

38 JosieB July 1, 2014 at 11:31 pm

Been to the post office lately?

39 Jan June 30, 2014 at 7:25 pm

The baby boomers who occupy most of the senior positions in government and I think you will start to see a lot of fresh(er) blood in there.

I guess my question is when did Group 2 start to grow and make it harder for Group 1? Is this just a recent phenomenon? Was there some time when you think gov workers were all idealistic servants?

40 Jan June 30, 2014 at 8:17 pm

That is, when those baby boomers retire. 🙂

41 Marie June 30, 2014 at 11:01 pm

Always with us.
However, I think as the systems became more systems, this started a bit of a cascade effect.
Systems are very hard to work for. It can be frustrating and irritating to work for a boss, or for a family, or for a board or a committee, or for a church or cultural leader, etc. All sorts of things to gripe about there. But there’s nothing like a “system” to suck the life out of you.

It’s not just a public phenom, but it’s worst there. You have policies. It’s rough when the boss tells you to do X, and you think it’s dumb, and you have to do it. But at least you have a person to direct your ire at, and there’s some vague chance that if it’s important enough to you that you can change his mind, or threaten to leave to change his mind. But when an institution, a system, a bureaucracy has a “policy”, there’s not a thing you can do. Rant, rave, threaten to quit. A system will lose it’s best employee before it will change a policy.

It’s the dehumanizing, depersonalizing, anti-individualization of it all that saps the life out of you. Then there you are, you can quit (but where do you go?) or you can stay, and stop caring. And now you are group #2.

42 Spencer June 30, 2014 at 11:00 am

Don’t forget that the GMU profs are also public sector employees.

Maybe we ought to judge their wage premium the same way Lee Ohanian did, without adjusting it for such things as different education levels of the work force. I’m sure all the PhDs in the GMU economics department would not object to having their wages being compared to the average hourly wage series.

43 Bill June 30, 2014 at 11:02 am

The problem with the VA right now is that they are not able to attract doctors with the pay they can offer.

Public sector pay is different for different occupations. They probably overpay for a secretary, and underpay for a doctor, but the study above doesn’t correct for this.

44 Guest June 30, 2014 at 11:14 am

Yes – the government overpays at the bottom and underpays at the top

45 M June 30, 2014 at 11:26 am

Govt has no problem attracting top talent to AUSA positions. Most associates working at big firms would kill to get into a fed position.

46 Dan Weber June 30, 2014 at 12:11 pm

AUSA is extremely high-prestige. Like POTUS or SCOUTS, it’s not the pay that attracts them.

Working the local public defender’s office isn’t high-prestige.

The government should enough to get quality workers. For things like banking regulators, that may mean $250,000.

47 chuck martel June 30, 2014 at 9:06 pm

The public defender’s office is a welfare program for incompetent attorneys.

48 Jon June 30, 2014 at 11:37 am

The tendancy of government to pay more than the private sector for the lower wage workers likely reflects the popular belief that the income distribution is more unequal than optimal. Also, would the government save much if it hired a lot of people at lower wages, but then ended up having to given them more subsidies–earned income tax credit, food stamps, etc….

At the higher wage scales, the private sector has greater ability to pay for premium performance; as misjudgments there would ultimately punish the owners of the firm.

49 Nathan W July 1, 2014 at 7:39 pm

Compare CEO salaries to salaries of director of public sector agencies with similar numbers of employees, budgets, etc., and it seems that they underpay at the top.

I know that secretaries in the public sector often earn at least as much as in the private sector. But they don’t want temps in every other week because there would be too many mistakes. This makes it easier to find a secretary who speaks Cantonese, can also understand enough about Autocad to get the instructions right when talking to the printers, or who knows what else. These aren’t ladies who just answer phones, make appointments and file files.

I think a main difference in public sector is that “I’m working on something, I think it’s going somewhere, look this is what I’m doing” might be enough to buy time, whereas in the private sector, many projects will be quashed if you cannot show a strong probability of returns (real money, in the bank, now) within 2 quarters. This makes it hard to have good metrics, and so it’s difficult to know whether a six figure salary is very truly ‘earned’ in the public sector, whereas in many cases it can be demonstrated very precisely in the private sector.

How much is the award winning design for the “don’t dive here shallow water” sign that also communicates this message to Chinese or Brazilian tourists? It may have taken ALL YEAR! And cost $50,000! It’s an outrage!. It might have saved many lives. And the private sector may never have done it.

50 Marie June 30, 2014 at 12:06 pm

I doubt the pay is anywhere near the biggest disincentive for doctors to work for the VA.

51 Willitts June 30, 2014 at 12:47 pm

The VA has all the doctors it needs, and they typically hold joint appointments with other hospitals.

The problem with the VA is that our government has overpromised healthcare. If the VA served only those with service connected disabilities, they would have enough resources. The VA is a de facto Medicaid/Medicare program. The VA bills private insurers and M/M when it can. The problem isnt lack of funds.

52 Bill June 30, 2014 at 2:43 pm

Willi,
Not true. There is an acute doctor shortage at the VA because of comp levels. My son in law is a VA doctor and they have been unable to fill positions because of salary limits.

Here is an article about this in the NYT:http://www.nytimes.com/2014/05/30/us/doctor-shortages-cited-in-va-hospital-waits.html

Change you to cite to anything showing that there is not a doctor shortage at the VA.

53 Bill June 30, 2014 at 7:43 pm

That should read “challenge you to cite”

54 Jan June 30, 2014 at 7:40 pm

Of course if you cut the eligibility that would free up doc time. But that isn’t how things work. We promised a certain level of coverage for our veterans and now we need to pony up the money to fulfill that promise. The VA is still a very good deal a on per-patient cost basis, but we need to allow the system to grow around the size and scope of the health problems veterans face.

I predict outsourcing the care would be much worse because we still wouldn’t have the capacity to properly oversee those services and cost more.

55 Guest June 30, 2014 at 11:06 am

My federal agency just hired one programmer and two software engineers for $200k each, plus benefits. The salaries at the FDIC, Federal Reserve and SEC are mostly $150k to $200k, plus benefits. The pensions aren’t impressive – one percent multiplied by years of service.

56 Marie June 30, 2014 at 12:11 pm

Are you using this information to make a case that government workers aren’t paid well?

57 Guest June 30, 2014 at 12:21 pm

No – federal workers are paid extremely well

58 picker June 30, 2014 at 12:25 pm

Not compared to their private sector equivalents. How many senior executives managing thousands of employees and billions of dollars do you know making under 300k?

59 Willitts June 30, 2014 at 12:49 pm

How many senior executives in the private sector have qualified immunity?

60 RAstudent June 30, 2014 at 12:54 pm

I would say most executives on wall street.

61 Jan June 30, 2014 at 7:51 pm

Heh, that’s been pretty well established.

62 Cliff July 1, 2014 at 1:30 am

? By them going to jail and getting sued??

63 Jan July 1, 2014 at 6:17 am

By them _not_ going to jail. Did ya think a bunch of people went to jail after the financial crisis, Cliff?

64 Marie June 30, 2014 at 12:27 pm

Thanks, sometimes I have a reading comprehension issue!

65 Nathan W July 1, 2014 at 7:42 pm

Did they find someone good enough to do what needed to be done?

They wouldn’t have offered 200k if 150k was enough to reliably attract the talented applicants they needed for the project.

66 Marie July 3, 2014 at 8:14 pm

@Nathan W,

Why do you think that?

67 Ricardo June 30, 2014 at 12:55 pm

I want to know what agency you work for. A GS-15 tops out at $155K, so you are saying that you just hired three SES-level programmers. Please provide more info; I want in.

68 RAstudent June 30, 2014 at 1:06 pm

+1

69 Guest June 30, 2014 at 1:29 pm

They were hired as SI-16s – the SI scale is for the securities industry (FDIC, Federal Reserve, SEC) and that scale is higher than the GS scale. Ecen though they are 16s they have no supervisory responsibilities.

70 Ricardo June 30, 2014 at 3:46 pm

Thanks for the info. I am going to pursue this!

71 Jan June 30, 2014 at 7:55 pm

Just a note that this level of pay is extremely anomalous. This is an elevated pay scale that only a handful of agencies operate on and for a specialized type of job where the employees could probably make more in the private sector.

72 ThomasH June 30, 2014 at 11:31 am

If the issue is that public sector compensation is given partially in the form of sub-optimal “security” then the solution is to remove that component of the compensation package.

If the

73 Andrew' June 30, 2014 at 11:38 am

By the way, some of us even agree with the Kochs’ broad preferences. We even agree to an extent with the right of people to form associations to affect government. This is probably why while, sure, we chuckled at Paul Krugman’s obscene salary to man a fictitious inequality post, you have never seen this type of vague concern trolling here. I guess you think “Koch!” is both an accusation and a verdict, but I don’t understand why any more than I would say “Soros!” after some vein witch hunt into his associations. I’ll have to talk to Bill Moyers personally I guess, if I want to ever understand unevenhandedness. But until then, we have you.

I think I speak for at least a few people when I say we don’t even understand your point, let alone believe in it.

74 Andrew' June 30, 2014 at 11:41 am

I’m serious. I’m an LRC guy. I’d love to hate the Kochs. It’s weird you feel no need to explain what the fuck you are talking about.

75 Jan June 30, 2014 at 7:57 pm

Is this to Tyler? What is LRC? Assume some libertarian thing, but what?

76 Jan June 30, 2014 at 8:24 pm

Oh, I see. You were probably arguing with Prior Approval and Tyler deleted his posts because the Kochs were mentioned.

77 Andrew' June 30, 2014 at 11:55 am

Huh?

Anyway, back to the world of reality and relevance, because if Soros wants to peddle his reflexivity or open society stuff I don’t care. I don’t have to rely on a vague sense that insinuating a guilt by association undermines the arguments.

78 Andrew' June 30, 2014 at 11:56 am

And we notice you continue to dodge the point.

I’ve known about the Kochs since before you were born. Or at least you act like it.

79 JWatts June 30, 2014 at 11:55 am

“Supreme Court drastically curtails public sector unions.”

That seems like a ridiculous headline. The ruling was pretty narrow and only effects people who were paid by government funds for a service but aren’t actually government employees and weren’t represented by the union in any capacity.

80 RAstudent June 30, 2014 at 11:57 am

If public sector employees are overpaid, why do private sector contractors doing the same job get paid much more for the same exact work?

81 picker June 30, 2014 at 12:31 pm

what are you talking about? why are all of those blackwater employee’s ditching the private sector to enlist in the military… oh wait…

82 Glenn June 30, 2014 at 12:38 pm

because they work harder and are more productive

83 RAstudent June 30, 2014 at 12:48 pm

if by working harder and being more productive you mean, working the exact same hours doing the exact same job for 2 times the pay, then ok.

84 JWatts June 30, 2014 at 1:39 pm

“If public sector employees are overpaid, why do private sector contractors doing the same job get paid much more for the same exact work?”

There are plenty of government contracts for janitorial services whereby the employees are paid considerably less in total compensation than they would be if they were direct government employees.

85 RAstudent June 30, 2014 at 1:52 pm

Sure, the janitors (the employees) are paid less than their public sector equivalents, but thats because the company getting the award siphons off 50% or more of that compensation. The total cost, however, is higher than the public sector equivalent.

86 Boonton June 30, 2014 at 2:47 pm

Why couldn’t the gov’t put the contract for janitorial services out to bid and then competition should force down that price (If company A is paying janitors $100 and charging $200 then company B could grab the contracts by paying $110 and charting $190…..)

Or might this be a ‘make.v.buy’ decision? If you’re company may move it’s headquarters a few years from now, why invest in homegrown janitors? Why not just hire a temp company to do it? Then if you move around hire another company in the new location.

Since gov’ts don’t move around it may make more sense for them to directly hire the janitors and leave them in place for decades at a time.

87 Spencer June 30, 2014 at 3:00 pm

The government puts many of the lower paid jobs out to private contractors to save money in their budgets. In government agency after another the janitors and security guards all work for private contractors.

It is part of the problem, the federal government overpays at the lower levels and underpays at the higher levels.

But Tyler should be ashamed of pointing to articles those like this one.

Who does he really think he is fooling?

88 Boonton June 30, 2014 at 4:30 pm

But if gov’t is putting lower level jobs out to contract then how can it be overpaying? There’s few barriers to competition when it comes to low level service contractors it seems pretty hard to set up a comfortable business where you underpay the workers and overbill the gov’t. Esp. if many gov’ts are bound to take the lowest bid contract.

I can see the argument for underpaying at the highest level but I’m unsure even there. Running a billion dollar business is NOT the same skill set as running a billion dollar agency. A billion dollar business is a very high risk affair. Tomorrow it may be killed, who knows how many will last another ten years or more. A billion agency, though, like the DMV of a state, is not operating under the same types of risk and instability. We have cars and drivers licenses today, ten years from now we’ll probably still have them…even 20 years from now. Can you say the same for the guy running Android?

Also as I pointed out in my previous comment it may be that many gov’t functions are set up to best be done by very stable people willing to put in years or decades on a job. If that’s the case an upper level manager does not have as challenging a job as in the private sector where the entire business model may be brand new and long term ‘veterns’ may not be very helpful to an enterprise.

89 chuck martel June 30, 2014 at 9:35 pm

All public employees should be required to bid for their jobs annually, low bidder winning the position. That’s how all other purchasing is done. Why should labor be any different?

90 JWatts June 30, 2014 at 4:23 pm

“RAStudent – Sure, the janitors (the employees) are paid less than their public sector equivalents, … The total cost, however, is higher than the public sector equivalent.”

Do you have any evidence that the total cost of janitorial services that are contracted out are more expensive than direct governmental hiring?

“Under Mayor Richard M. Daley, the city of Chicago privatized a variety of services, including janitorial services, parking at O’Hare Airport, parking enforcement, street resurfacing, engineering, purchasing, vehicle towing, and delinquent tax collections. According to city estimates, Chicago saved approximately $56.6 million from 1989 through 1995 through privatization and consolidation of services.

http://www.encyclopedia.chicagohistory.org/pages/1011.html

91 Guest June 30, 2014 at 4:50 pm

In my federal office we contract all non mission critical positions (secretaries, paralegals, IT). These folks earn the same salary they would have earned if they were federal workers but they don’t get pensions and they can be terminated easily. When you factor in the fees paid to the vendor that provides the contractors the office spends more than it would have if it directly hired the workers but the agency can now claim it didn’t grow in size – it is just spending more money. And we don’t take on pension liabilities.

92 Nathan W July 1, 2014 at 7:45 pm

But then the government would have had to manage them. Is that more or less expensive than paying some other company to take on all management, liability, etc.? You don’t outsource if you expect it to be more expensive than doing it internally … unless something really dodgy is going on.

93 Nathan W July 1, 2014 at 7:46 pm

But of course if the practice is to outsource, there will be times where the best suitable contractor is more expensive than theoretical internal alternatives, were they to be available (with less specialized skills).

94 prognostication June 30, 2014 at 6:03 pm

And there are plenty of white-collar contractor positions where the payscale is not so different from the federal scale and the benefits are much worse and the 40-hour work week is a fiction to a far greater degree than it is for direct government employees. I speak from experience.

95 Marie June 30, 2014 at 7:39 pm

Folks I know that live off government contract work go from job to job, often with big gaps between and a lot of time into paperwork for bids, etc. whether they get the contract or not.

But I’ve never received the impression that they make more under these conditions than they would if they were full time hires with benefits. Not sure where the idea comes from that contracted private workers are paid more than government employees.

96 Jan June 30, 2014 at 8:41 pm

Because it’s usually true. Contractors can make a lot more than fed employees. Theoretically, you’re paying a premium for the extreme flexibility that comes with contracts. For very technical, high skill work the government pays high contractor salaries because it would be hard to recruit and afford to keep them as permanent employees. I know people who are under 30 and make over $125k per year as government contractors.

97 Marie June 30, 2014 at 11:08 pm

@Jan,
I know people over 60 making under 50 as government contractors.
Do you have reason to believe your guy and mine aren’t the outliers? I mean, is this something I’m just not familiar with because I’m not in those circles, is this publicly recognized on all sides as a truth? And we’re talking benefits and taxes, too, right? Not the contractor gets paid more because he has to pay his self-employment taxes and buy his own insurance, right?
Just not something I’d ever heard before.

98 Jan July 1, 2014 at 6:31 am

Well, you are asking where the idea came from that contracted private workers get paid more than government employees. There are a lot examples, at least anecdotally, of people making some big bucks. That’s where I think it comes from.

I realize there are also contracted custodians, data entry staff and others who don’t make so much. But above I’m explaining a theory behind why those people on average probably make more than the equivalent gov worker. I don’t think you’re missing anything in particular–I haven’t seen a study or anything on this phenomenon, so I may well be wrong!

One thing I should clarify is that most of the contractors I know work as employees for mid-larger size companies that win contracts. These people have normal benefits built into to their jobs, so they aren’t actually dealing with all the headaches that a self-employed person has to. They aren’t personally contracted by the government, but their companies survive on government contracts, sometimes exclusively.

99 Nathan W July 1, 2014 at 7:53 pm

Contracted workers don’t get benefits, etc.

Say it costs $20,000 do do part A of project Z. You could get someone internal to do it, and it would take 2 months of their time, but that time would be spread out over 12 months and you need it done in 6, and anyways, he’s not really the best guy for the job, although he could probably do a decent enough job. So you spend $20,000 to get this 2 months of work done by the contractor. You compare it to the salary of $6,000 a month and say “look, it costs $20,000 for the contractor and $12,000 for the employee”.

But you don’t consider that they wouldn’t have started looking for contractors if available human resources were already on board (except perhaps well beyond the pay scale by people doing much more expensive work). And you don’t count their pensions, the cost of the office space, holiday pay, etc., etc. At which point in time you realize that $12,000 staff salary is much more expensive than the $20,000 contract. And if it takes more time? It’s the contractor’s problem. If it takes less time? Contractor’s gain, some of which is likely to be reapplied into quality rather than Facebooking time.

100 Darren Johnson June 30, 2014 at 12:11 pm

This 85 year old I know has a good story. He worked in a steel mill during boom times in the 60s. Made a living wage, owned his home, paid for three daughters to go to college in cash, had plenty of money to be an outdoorsman. He joined the fancy athletic club in his second rate town. Marathons were also a hobby. None of the lawyers or other professionals there liked the fact that some steelworker could afford club membership and were rude to him. Their daddy’s money had built the club after all. Can you legislate every last bit of equality?

101 Nathan W July 1, 2014 at 7:54 pm

These days, steelworkers have pretty specialized skills, so even though the industry doesn’t employ many people any more, probably most of them can pay for those same memberships. But it’s a lot less likely to work in a steel mill these days.

102 Boonton June 30, 2014 at 12:42 pm

And yet why do gov’t jobs have such a bad reputation? If they are overpaid you’d expect a lot of people to push to get them…..

Perhaps we have to consider other factors besides a ‘stability premium’. Yes a job you don’t have to worry about being downsized or fired from is a good thing. It might also be a bad thing. To really reap the benefits your life plan must be one of remarkable stability. Don’t expect to move very far, don’t expect to hop from job to job trying break into a big leap up the ladder. Likewise many public sector jobs are capped in their career path. Start at the bottom in the Federal Reserve, no matter how hard you work, how much talent you demonstrate, you’re not going to be making millions ever. And even if you climb to the top the topmost positions are held for political appointees making it hard for you, worthy public servent of great talent, to break in. Contrast this to working at an investment bank, a brokerage or even just as a real estate agent…you can potentially make millions. A serious con to the public sector is that you’re going to pay for ‘stability’ with lost opportunity. If you start bringing those factors together I’m wondering if the wage premium for public sector workers starts to get thinner.

On the flip side we aren’t considering marginal benefits. IMO the private sector has little to gain from low to medium skilled labor that’s dedicated to a particular enterprise on a decades long level. A ‘file clerk’ for IBM whose been around since the 1980’s is probably not much more valuable to IBM than a file clerk just out of school looking for a job to break into the market. I could see a file clerk keeping track of deeds, judgements, lawsuits and so on for a town which has been around for a hundred years and has every reason to expect to be around a hundred more might be more valuable being on the job for 20+ years. But unlike IBM, the value is NOT 20 years of filing experience, the value is 20 years of doing that towns’ filing. A person whose spent 5 years filing for 4 different towns each will not be as good. If this is the case then it may not make sense to try to figure the premium out by comparing what IBM pays for file clerks with 20+ years experience compared to town halls.

103 Willitts June 30, 2014 at 12:58 pm

Lots to agree with in the article, but isnt it obvious that higher nominal pay in some states like CA is a result of the high cost of living?

$70K is not astounding pay in CA. The median income in the state is $61K, 15% higher than the nation. Guarding prisons is dangerous work. Id expect an econ prof to be more careful about this.

104 Eric377 June 30, 2014 at 1:05 pm

I’d think that an analysis based on voluntary separation rates, particularly prior to being fully pension vested, might make for better sense about compensation levels. If nobody is leaving for greener pastures, maybe that particular pasture is a bit too green. My sense is that their are better cases to be made at state level than at the federal level of overcompesation.

105 Donald Pretari June 30, 2014 at 1:13 pm

I read the Edwards piece: http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2010/1/cj30n1-5.pdf It’s okay, but it needs updating given the public sector job losses since 2008, and changes in public sector benefit programs over the same time ( the largest difference between public sector and private sector compensation ), and needs to address even more clearly regional differences in this issue. As Ohanian notes, the The California Correctional Peace Officers Association (CCPOA) falls into the public sector, and any discussion of California’s public sector compensation needs to begin with it. As a question of Political Economy, this issue has more variables that at first sight.

106 chuck martel June 30, 2014 at 9:39 pm

California Correctional Peace Officers? Is that the same as prison guards?

107 Barkley Rosser June 30, 2014 at 1:29 pm

Yes, obviously we should get rid of all tenure and job security for all public sector and higher ed workers. Get rid of the civil service system and bring back the spoils system so that we can have proper political control of these worthless parasites. And as for academics, they need to kowtow to whomever is running things right now, whether it is inflamed legislators on benders over something some professor has said, or some wealthy alum who wants his line parroted in classes without some lowly scum prof disagreeing with his pet line. This is what we need for sure.

108 Barkley Rosser June 30, 2014 at 1:32 pm

And those worthless profs need to kowtow to their worthy administrators, whose soaring salaries show that they are worth as much as CEOs, whose compensation without a doubt reflects their marginal productivity absolutely. These worthless scum profs need to understand who their betters are and keep up with whatever current line these wise and superior beings are handing down.

109 anon June 30, 2014 at 2:14 pm

Tyler is on a troll roll today.

110 msgkings June 30, 2014 at 4:46 pm

2011 was a while ago. California has a budget surplus now.
That said, there’s probably some amount that can be trimmed from public sector employee expense, although you could do it sneaky with lower inflation adjustments and pension reform.

111 Sam June 30, 2014 at 6:36 pm

I wonder how much of this is due to teachers? If you want to be a middle school teacher in a given town, the labor market is pretty much a monopsony, so of course people don’t switch schools often. Plus, the few private school jobs often pay worse because of compensating differentials – teaching at a private school is way easier than teaching in any big city’s public school district.

112 Brian Donohue July 1, 2014 at 7:20 am

Mention public employee compensation, and suddenly all the lefties turn into ummm. Gone are worries about stagnation and minimum wages. Suddenly, the private sector is all Wall Street and CEOs. Nice pivot.

This much is clear- the public sector rear guard will not go quietly. Ask Scott Walker.

113 Merijn Knibbe July 1, 2014 at 9:23 am

Germany, around 2004, and a whole bunch of other European countries after 2008 (Greece, Italy, Spain,Portugal, UK, to an extent the Netherlands) performed this experiment. (Real) wage decreases were concentrated in the public setor, more specifically education. Increase competitivety of manufacturing by slashing wages of teachers, or something like that, but in essence these were of course not micro economic policies but measures aimed at restricting aggregate demand, to create a surplus on the current account.

114 byomtov July 1, 2014 at 10:39 am

Any such comparison needs to take into account the mix of jobs held in the public sector, as well as their location. Those things have a potentially huge effect.

I don’t think you can just comapre public vs. private en masse and come to any sort of reasonable conclusion. I don’t knwo if Ohanian did this or not, but if not then he is just creating a talking point, rather than doing serious analysis.

115 Don July 1, 2014 at 11:37 am

Love the website and this is (I think) my first time commenting (I rarely do this).

Couple of comments. Why do we assume that the private sector “does this right”. How about instead of saying “The fact that average public compensation is higher than average private sector compensation suggests that public sector worker compensation may be well above competitive levels”, might we say “The fact that private sector compensation is lower than average public sector compensation suggests that private sector worker compensation may be well below competitive levels especially considering lack of negotiation power on behalf of workers in the private sector.”

Also, did this include military personnel who do seem to be paid more than their private sector counterparts (not saying its good or bad, just saying that this is what the research says).

116 Nathan W July 1, 2014 at 7:22 pm

Or we could just conclude that people value job security.

It’s a little harder for a private company to convincingly promise that they will be there 20 years down the road to offer a job, but it’s hardly in doubt in the public sector so long as you don’t manage to get fired, which is quite unlikely in a union environment unless you’re almost trying.

But comparing the work of a registered nurse in the public sector and an accountant in the private sector is quite different. Nursing is an emotionally heavy duty job, and many people will need to take personal time of months or longer, or will want to take 6 months or a year or two off to do other things. Accountants build relationships with clients, and thus their job security is packaged in a little differently.

Who has more secure income? The nurse with a union going to bat for her, but in an industry with high burnout, or an accountant with no “job security” but a client base with no reason to go anywhere else so long as a) he doesn’t screw up or b) some Indian software developer doesn’t manage to find a way to make him entirely obsolete (he will probably have to upgrade software skills continuously)?

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