I’m fairly certain that almost everyone is tired of reading about comparisons of public sector and private sector pay, but a new paper in the Journal of Economic Perspectives is worth reading if you are at all interested in the issue. They lay things out very clearly, and bring some new evidence to bear using micro level data from an employer based survey that includes non-wage compensation. Their main result is that, compared to the private sector, state public sector workers are paid 3-10% more, and local public sector workers are paid 10-19% more.
The paper includes a useful discussion of the issues that divide many papers on this topic and which explain why different researchers often find different answers to these questions. It boils down to what should and shouldn’t be controlled for in the regression analysis. While it’s not always clear which is which, there are broadly speaking to kinds of factors:
….skill-related factors that an individual can transfer from job to job and a second set of variables that are descriptive of the job or sector and possibly indicative of noncompetitive pay differentials such as rent-sharing.
Studies will differ in whether they consider employer size and union wage premiums as reflecting skill-related factors or non-competitive pay differentials. The authors agree with that I have argued in past blog posts, that neither should be controlled for in the regression:
We treat union status and organizational size as not reflecting worker skills. Controlling for union coverage seems inappropriate, because union wage premia probably do not refl ect ability differences, and those in the public workforce would not likely take their public sector unionization rates with them if they were to move to the private sector… Troske (1999) tests several explanations of the employer size-wage effect and a significant unexplained premium remains. This and other evidence leaves the door open for the possibility that rent-sharing may be involved. Absent evidence that larger public sector organizational size reflects unobserved ability, we do not control for employer size.
That union status should not be included seems pretty clear, but as the authors acknowledge the firm size issue is not so certain. As a recent CBO report points out, the size premium could reflect a higher degree of specialization at larger firms. However, even if this is the case, the higher specialization may not be transferrable between jobs. In the end, I would agree with the authors of the JEP paper that the best approach is to not control for firm size.
I don’t think regression analysis like this can answer the public sector compensation premium question with certainty, but it is informative. And to the extent that it is useful, I believe these authors take the correct approach and provide the best estimates that the available data can give us. If you’re going to cite empirical analysis on the public sector compensation premium, this is the study you should cite, not other studies that make questionable assumptions or lack sufficient data.
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Sunday ~ February 19th, 2012 at 3:52 pm
Curt Doolittle
I just gave it a quick read, and I see how they accounted for compensation TOWARD retirement, but not the total compensation DRAWN from retirement. The average private sector worker must save an extra, what, 450K to compensate for the public sector retirement advantage?
(Perhaps I’m biased from personal experience. In the short time I worked for the Judiciary — the division shall remain nameless — I was so disgusted by rampant avoidance of work, laziness, lack of respect for the public, and bureaucratic incompetence that I had to quit or I couldn’t face myself in the mirror.)
Sunday ~ February 19th, 2012 at 4:33 pm
Axel
is it possible that the fact that the ggovernment is old and is supposed to have an infinite life expectancy bias the comparison with a private sector in which many enterprises are dying and many are relatively young. intuitively both very young and next to death private employers do pay less than other firms the market position of which is perceived as safe but without huge upside (Microsoft should.pay more than facebook to attract talented it engineers and I guess Alcatel lucent don t pay very well just because they want to reduce costs and recount to survive…).
if this makes sense public compensation should be compared to Microsoft kind of firms payroll not just the average.
does it make sense?
Sunday ~ February 19th, 2012 at 4:49 pm
BSEconomist
I don’t know why you keep harping on this, except for the size and the relationship to skills premia no one really questions the existence of a government premium. Rather, to quote one of my favorite movies, I don’t think that premium means what you think it means.
First of all, as I tried to point out in another comment, the existence of a pay differential is not the same thing as being “overpaid”. The later being what we think of as the wage being held above the market clearing level. Now, I did some labor stuff analyzing the Egyptian labor market and there, as you would expect, a wage offering above the market clearing level induces “queing” for government jobs. I don’t think you appreciate the clear lack of queing in the US–otherwise you would recognize this argument for the red herring that it is.
After all, there are all sorts of reasons for a pay differential to exist, not least because of bargainging and institutional factors… Also many people just don’t like working in the public sector (like Curt Doolittle above, apparently), maybe they don’t like job hazard (cops) or uncontrollable teens (like teachers).
As an aside just let me say that it probably makes a ton of sense to pay cops (or regulators for that matter) to keep the temptation to accept bribes as low as practical. Frankly, a little inefficiency in the form of queing would be worth that if it were necessary.
And one last note, you really keep harping on these issues, and I have to start wondering why. What is the big deal for you? We are not Egypt. If you are worried about slothful gov’t workers, that is a completely separate issue from pay (slothful gov’t workers may not be earning their pay even at much lower wages, for example).
Sunday ~ February 19th, 2012 at 5:03 pm
Adam Ozimek
It’s definitely not true that everyone agrees with this conclusion. See my previous posts or the linked paper for specific studies making the opposite claim.
As I’ve said, this isn’t proof positive evidence, but it is still useful evidence nonetheless. You’ll note that citations of studies like but finding the opposite conclusion this are very popular among those arguing the public sector isn’t overpaid. So this study is supportive of claims the public sector is overpaid simply from the perspective of countering those claiming the opposite.
If this issue doesn’t matter to you that must mean you think the government has low opportunity costs, and that getting the highest value for each dollar of government spending doesn’t matter. I happen to disagree with that, and if you’re right than we should be cutting government spending in any case.
Monday ~ February 20th, 2012 at 4:18 am
FT Alphaville » Further reading
[...] Comparing pay in private and public sectors, and college students vs ad costs, and bosses vs [...]
Monday ~ February 20th, 2012 at 11:02 am
P.K.
Interesting study. However, I would submit a different perspective is in order. Given that business profits and executive pay keep going up, is it not fair to ask, maybe private sector workers are UNDER-paid, vs. public workers?
Wednesday ~ February 22nd, 2012 at 12:20 am
govt_mule
I found this study and post very disappointing.
They undermine the notion that economics is a serious science. In an actual scientific field you can publish an analysis of publicly-available data fit to a linear equation with a few simple assumptions that “seem appropriate” once, in a low-quality journal. Then you’d have to get off your ass and acquire more detailed and accurate data, run through your analysis with multiple sets of assumptions, validate your model, analyze the errors, quantitatively compare your results with others, and draw useful conclusions. But in economics, it seems, you can just plug the same data that others have looked at dozens of times into a simple equation with a slightly different set of assumptions, arrive at conclusions that match your politics, get published, and get uncritical praise from those who only want their pre-conceived notions confirmed.
As a federal researcher, I’m very disappointed by Gittleman and Pierce. Mankind’s knowledge was not increased by finding that employees in large organizations that historically provide good benefits make more than employees in mostly small organizations that frequently don’t provide benefits at all. The idea that ignoring union status, firm size, and job responsibilities (most local employees are school teachers, cops, and firemen, jobs not typically found in the private sector) in comparing public and private labor forces is not a significant intellectual advance.
Thursday ~ March 1st, 2012 at 7:13 am
JMH
Hey,
Sorry, maybe I’m being a bit stupid here, but if you don’t control for union status, aren’t you basically measuring that people in unions make more than people not-in-unions, rather than any public-private distinction?
Yours,
JMH
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