Public Sector Compensation

A recent study confirmed that public employees earn less on average than those in the private sector after adjusting for education levels.  Government is largely a service industry.  As such, government jobs typically require higher levels of education.  Therefore, degree holders are better off financially in the private sector.  Conversely, governments tend to compensate labor-intensive positions that require less education at rates higher than the private sector.

I surmise that this phenomenon has much to do with the social equity outcome of government (one of four primary outcomes of government).  Most officials believe that government should provide a living wage even if the exact definition of that term may vary from person to person.  We want everyone to make a good living – but not too good.  So, the pay scales in government are much more compressed from lowest to the highest compensated positions relative to the private sector.  In other words, the line workers may do better; but the middle and upper managers generally do not earn six and seven-figure salaries like their private-sector counterparts.  Hence, public sector employees earn less  ”on average.”  This is probably not a bad thing given recent stories on the Great Recession and the recent, highly-publicized wage scandal in Bell, California that involved various elected and appointed city officials.

Here is an excerpt from the study.

Jobs in the public sector usually require more education than private sector positions. Thus, state and local employees are twice as likely to hold a college degree or higher compared with private sector employees. Only 23% of private sector employees have completed college compared with about 48% in the public sector.

Wages and salaries of state and local employees are lower than those for private sector employees with such comparable earnings determinants as education and work experience. Typical state workers earn 11% less and local workers 12% less.

During the past 15 years, the pay gap has grown. Earnings for state and local workers have generally declined relative to comparable private sector employees.

The pattern of declining relative earnings remains true in most of the large states examined in the study although there does exist some state-level variation.

Benefits make up a slightly larger share of compensation for the state and local sectors. But even after accounting for the value of retirement, health care, and other benefits, state and local employees earn less than their private sector counterparts. On average, total compensation is 6.8% lower for state employees and 7.4% lower for local employees than for comparable private sector employees.

These findings are contained in the report released this year, Out of Balance? Comparing Public and Private Sector Compensation over 20 Years, by Keith A. Bender and John S. Heywood (http://tinyurl.com/outofbalance). It was commissioned by the Center for State & Local Government Excellence, Washington, D.C. (www.slge.org) and the National Institute on Retirement Security, Washington, D.C. (www.nirsonline.org).

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