Likely prompted by a new CBO study that argues federal workers are overpaid relative to private sector workers, Karl presents two questions I believe meant to imply that the government cannot overpay for workers. I would answer Karl’s questions with a question of my own: if the government offered a salary of a million dollars a year for a 30 hour a week mail carrier job, what would it get it return? Even though tens of thousands of workers from around the globe with a wide variety of skills would probably apply for the position, you wouldn’t get a million dollars a year in marginal product. Yes, at some margins if you offer more than you will get higher quality applicants. But the position must allow the possibility the marginal product large enough to compensate you, the employer, for the wages.
There are a couple of things that need to happen to get your extra wages worth, and that fact that this is low-skilled government work suggests this isn’t the case.
First, you need the extra dollars offered to lead to more skilled workers in fact being hired, rather than just more skilled workers queuing up for the position and first-come-first serve or some patronage determining who gets hired.
In addition, you need the extra skills to lead to extra value. If the majority of the overpaying was happening at the high end of the distribution where skills are more heterogeneous and extra skill has the potential to create a lot of extra value, I could buy Karl’s story that extra wages was buying valuable extra skills. This could be the case if the “overpaying” was happening for financial industry regulators. But the CBO report shows that the overpayment amount is inversely correlated with the level of education, with the most overpayment coming for workers with less than a bachelors degree., e.g. those that are least likely to have heterogeneous skills that extra wages can buy, and jobs with the flexibility to have those skills pay off. If the only thing a worker is allowed to do is trim the bushes at the Pentagon, or put stamps ons envelopes, there’s not a lot of job flexibility for extra skills to pay off, even if you hire a PhD. This is to say nothing of the incentives of government workers to actually create value once they’re hired into a job that might be both very secure and poorly monitored.
In short, it is certainly possible to overpay workers. If Karl doubts this is true, then he should try hiring someone to mow his lawn for $100,000 a year. Since he can’t overpay him he’ll expect to get at least that much back in lawn-mowing services.

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Monday ~ January 30th, 2012 at 10:58 pm
david
Yes, you would be able to detect whether this is going on in the excess supply of labour – number of equally qualified applicants, say. If you’re extracting the marginal product then there should be no more than there are private-sector applicants per job.
Tuesday ~ January 31st, 2012 at 3:15 am
Jeff
This is an interesting topic, study, and blog post. The idea that government workers are overpaid to do nothing but interfere with people’s freedom is a traditional conservative hobby-horse. I notice that this study only includes the federal government and that most of the action is in benefits (which are “more uncertain”). The devil is in the details, I suppose. Nonetheless, the big picture is consistent with a story that’s been told many times: Lower educated and unskilled workers (e.g., janitors) make more working for the government than they would in the private sector, while highly educated workers (e.g., financial regulators), make less. I notice that your post focuses on the former. However, mailmen don’t make a million, so it’s less clear how relevant that is in practice, although I certainly agree with it in principle.
It seems to me the relevant questions focus on how much does the government spend on janitors, for example, and what are the negative effects of this? From a budget standpoint, how much less would the budget deficit be if they were paid the prevailing market wage? From a small government standpoint, how much smaller would the government be if they were paid the prevailing market wage? From a labor market standpoint, how much less would the total American labor market be distorted if government janitors were paid the prevailing market wage? (Is there a perspective I missed?) To be honest, I don’t know the answers to those questions, but I suspect in all three cases the answer is very, very little.
On the other hand, perhaps the other end of the spectrum could merit a little discussion as well. It has been pointed out that part of the regulatory failure leading up to the financial crisis was that most government financial regulators couldn’t keep up with the private sector–they were outgunned. All of the best people worked on Wall St., because they could make 10x as much there. When people do put in a stint with the government, it’s to bolster their resume so they can leverage the experience to get a higher-level (and much higher-paying) private sector job later (or so I’m told). Say, would that be related to the problem of regulatory capture?
At any rate, I think the big question here is which side of the continuum has contributed to more economic damage in America. Whichever side that is, that’s the side we should focus on and spend our energy complaining about.
Tuesday ~ January 31st, 2012 at 4:35 am
FT Alphaville » Further reading
[...] The million dollar [...]
Tuesday ~ January 31st, 2012 at 10:56 am
Don Gibson
I didn’t see the CBO report, but compensation is more than just salary. Some govt jobs have a great pension plan (20 years work then 40 years same pay). Some govt jobs have amazing job security. Some have no zero unpaid overtime. Those items have value. To the other extreme, I worked at JPL. Low pay (especially for L.A.) and the most brilliant people on the planet. But, you get to do space exploration, so the geeks line up!
In England they struggle with how to compensate the head of RBS.
Tuesday ~ January 31st, 2012 at 11:35 am
Th
It seems this question is easily tested. If federal workers are overpaid, the applicant pool for positions in the federal workforce would be better qualified than the existing job holders and applicants in the private workforce. Right?
Tuesday ~ January 31st, 2012 at 12:11 pm
BSEconomist
I would just second Jeff, bit I also want to point out a serious bugaboo of mine that you keep bringing up. Nobody is paid their marginal product, ever. That the real wage equals to marginal product is an equilibrium condition and a arbitrage condition. Firms pay people the going rate, in other words, and hire until nobody is left who will take the offer or it is no longer profitable. To put it another way, the MPL comes to the wage and not the other way around.
Why do I bring this up? Because there is no significant queing for government jobs. If the MPL comes to the wage and not the other way around, then the smoking gun of a too high wage is queing for that job. That this is not what we see is strong evidence that they are not being overpaid. If you look at other countries like Egypt, where government overpay is not just a conservative myth, this is exactly what you see.
Tuesday ~ January 31st, 2012 at 1:33 pm
Corey Mutter
I believe people do queue up for government jobs, in depressed areas.
Also, when is job security motivational and when is it not? Having only worked in the private sector as a programmer, I find the rampant job insecurity *de*motivational (nothing I can do will save my job when they close the office and movie it all to India, for example).
Tuesday ~ January 31st, 2012 at 2:27 pm
Lord
Everyone queues up for jobs these days, the question is whether it is any worse for government which is difficult to say since there are so few openings especially at government. All jobs are overpaid by that measure. A good reason for the unskilled to be earning more is reduced turnover and training and less management and supervision needed with the reduced costs on these flowing to them. This may also be a reason for lower pay among the more highly skilled, fewer problems to deal with.
Tuesday ~ January 31st, 2012 at 9:20 pm
Karl Smith
No one queues anymore – its the decline of Western Civilization
Wednesday ~ February 1st, 2012 at 1:48 pm
Lord
Right about that. The queues are in company email boxes, at least if they haven’t overflowed.
Wednesday ~ February 1st, 2012 at 8:45 pm
govt_mule
You’re right – no lawn-mower could provide $100k value to Karl. But if he’s paying $100k he could probably hire someone who also provided great stock tips or some other service in addition to their ostensible job.
In regards to determining appropriate compensation, I think you have the heterogeneity thing backwards (i.e. “most overpayment coming for workers with less than a bachelors degree., e.g. those that are least likely to have heterogeneous skills that extra wages can buy”)
The skill levels and compensation of people with Ph.D.s are really pretty narrowly distributed – I’d estimate the 25th-75th percentile range is $80 – $120k in the sciences
The skills and compensation of people with HS educations can vary from Walmart greeter (a pulse and a smile, minimum wage, no benefits) to skilled machinist/industrial electrician/aircraft engine mechanic (years of training, 10x minimum wage, good benefits).
This heterogeneity requires valid comparisons between HS educated groups to be very carefully controlled, something I haven’t seen in any of the govt pay studies.
Thursday ~ February 2nd, 2012 at 4:43 am
Xerographica
If taxpayers could directly allocate their taxes…it would be interesting to see where the wages of government workers actually ended up. My guess is that they would probably be comparable to wages in the non-profit sector.
People at FEMA would be paid the same amount as people at the Red Cross…because…if you valued disaster relief…why allocate your taxes to FEMA if you could get more bang for your buck donating to the Red Cross?
Taxpayers, just like donors, would be less inclined to allocate their taxes to a government organization that spent too much of their money on overhead…to include wages.
Thursday ~ February 2nd, 2012 at 11:08 am
TomGrey
The right comparison should be through turnover — if gov’t people are “underpaid”, their turnover would be higher than the private, peaceful sector. If “overpaid”, the force-based government workers would have less turnover.
The turnover in gov’t jobs is much less; therefore the gov’t workers are overpaid.
Suggested Policy: longest serving government workers should be moved into half-time jobs, at half-pay, allowing more new people to be hired. And likely increasing the turnover among those who want more money and have skills which are actually valuable in the peaceful economy.
The government should lead on creating more half-time jobs, to reduce the attractiveness, but also to increase the participation possibilities.
Monday ~ February 6th, 2012 at 8:33 am
Notes From the Underground « Modeled Behavior
[...] writes Likely prompted by a new CBO study that argues federal workers are overpaid relative to private [...]
Friday ~ January 18th, 2013 at 1:43 pm
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