Public Sector Compensation Part 3

Finally, I have arrived at my long overdue summary of the Minnesota Public Sector Compensation Report, which was procured by the Minnesota Chamber of Commerce, and prepared by the Minnesota Taxpayers Association.  Thus far, I have reviewed two studies, both at the national level.  One study found that public sector employees earn less than their private sector counterparts when controlling for education levels, experience, and other demographic characteristics.  The other study noted many of the same characteristics; yet reached the opposite conclusion.  Both studies found that public sector employees are on average more skilled, more educated, more experienced, older, and more diverse.  And, both agreed generally that upper management positions are less compensated in the public sector, while lower-skilled positions tend to be better compensated in the public sector.

The findings of the Minnesota Taxpayers Association (MTA) are similar to other study findings, except that it provides a Minnesota-specific study population.  Some of the key findings of the MTA report are as follows. 

  • The MTA found a “double imbalance” in public sector compensation.  The researchers define a double imbalance as lower-skilled employees receiving higher levels of pay while higher skilled and management positions receive lower pay relative to the private sector.  The MTA also agrees with the above studies that public sector employees tend to be more educated and more experienced. 
  • Minnesota ranks 31st in overall number of public employees.  But, Minnesota is 5th in total compensation (9th for local government).  One should note, however, that this only 3.5 percent above the national average.  In statistical terms, the standard deviation is quite small.
  • Benefit levels are higher in the public sector; although the difference in benefit levels between the public and private sectors is less for families than it is for single employees.
  • Overall public employment in Minnesota declined in the last decade.  That decline is even higher on a per capita basis when factoring population growth.
  • Benefit costs grew by over 4 percent per year since 2002.
  • Public pensions are generous relative to private-sector 401(k) plans.
  • Roughly 2/3 of the study population had higher salaries than their private sector counterparts. 
  • The trends are similar for local government in Minnesota; although local government employees rank slightly lower than their state counterparts in most compensation areas.

The conclusions above are not wholly inaccurate given the study population. The devil, as they say, is in the details.  For example, the study only analyzed about 9400 out of over 30,000 statewide positions – or less than a one third of total state employment.  For local governments, the lack of population was even more staggering with just 12,561 positions studied out of over 200,000 local government employees in the state.  Therefore, it is difficult to draw summary findings from the entire state when the study analyzes just a small fraction of the total employment base.

The MTA study used a position-specific approach rather than a person-specific approach.  These methods were discussed in Part 1.5 of this series.  The MTA study attempted to match similar positions in the public and private sectors by matching closely-aligned Standard Occupational Codes (SOCs) from the Department of Labor. On the surface, this seems to be a rational approach.  However, the researchers filtered out the vast majority of public sector jobs through this process by eliminating all public safety employees, all jobs that with fewer than 10 FTEs, and all upper management positions, plus any jobs for which the researchers could not find a close match.  After the filtering was complete, the remaining study population was almost exclusively low wage positions that everyone agrees are better paid in the public sector.  The misleading summary extrapolates this phenomenon to all public employment, and hopes to leave the conclusion that the public sector en masse is overcompensated. 

Finally, some other conclusions deal with benefit plans, namely pensions.  The study finds that public pensions are much more generous than private sector 401(k) plans by assuming a five percent growth rate on private plans.  Regardless of talk about a “new normal” economy, most financial planners would view five percent as quite low, even if the glory days of 10 percent-plus growth are behind us.  By assuming a low growth rate in private sector plans, the study artificially skewers public sector plans as being too high.  Granted, a guaranteed return of approximately 7-8 percent per year is a pretty good deal for public employees once they are vested.  But, the study exaggerates the advantages of the MnPERA system.

In certain sections, the authors unfortunately revealed their bias.  For example, the authors noted that retired public employees who receive pensions are “still receiving social security.” State and local employees (except public safety) pay into the social security system to the exact same levels as private-sector employees.  Why should they not receive social security? This statement (which was repeated in both the state employee and local employee sections of the report) added nothing to the study findings.  But, it spoke volumes about the authors’ preconceived notions of public sector compensation.

Overall, the MTA report largely tells us what we already know.  Lower level employees get paid more; while higher level employees generally earn less in the public sector.  Is this a bad thing?  Previous posts in this series discussed the social equity component of government.  Should maintenance workers only make an adjusted $25,000 per year as they do in the private sector (as opposed to $34,000 in the public sector)?  Should these workers not receive health coverage?  On the flip side of the coin, should government upper managers make six, seven and eight-figure salaries with double-digit annual bonuses?  If government pay scales truly mirrored the private sector, labor costs would likely increase. And, those increases would all be in management.  Imagine the headline “Management salaries increase at expense of subordinates.”

Related Blog Posts

Public Sector Compensation, Part 1

Public Sector Compensation, Part 1.5

Public Sector Compensation, Part 2

Referenced Articles/Studies

Out of Balance, Comparing Public and Private Sector over 20 Years, Keith A Bender et al, Center for State and Local Government Excellence

The Paralysis of the State, David Brooks, New York Times

The Trouble with Public Sector Unions, Prof. Daniel DiSalvo

Minnesota Public Sector Compensation, Minnesota Tax Payers Association (commissioned by Minnesota Chamber of Commerce)

Government Unions vs. Taxpayers, Governor Tim Pawlenty (R –Minnesota)

Governor’s rants about public employees don’t stand up to scrutiny, Jim Miller, League of Minnesota Cities Executive Director

Are Public Employees Pampered? MPR Insight Now Forum

Are Federal Workers Over Paid, Fact Check web site