Government pay vs. private wages

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).

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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.

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.