Are Public Employees Overpaid?

Abstract

The research reported in this article shows that public employees, both state and local government employees, are not overpaid and may be slightly undercompensated. Comparisons with the private-sector employees that control for education, experience, hours of work, organizational size, gender, race, ethnicity, and disability indicate that the public-employment compensation (wages and benefits) penalty is relatively small. On average there is a 3.7 percent penalty in total compensation for full-time state and local employees when compared to similar private-sector employees. The data analysis also reveals substantially different approaches to staffing and compensation between the private and public sectors. On average, state and local public-sector workers are more highly educated than the private-sector workforce; 54 percent of full-time state and local public-sector workers hold at least a four-year college degree compared to 35 percent of full-time private sector workers. For college-educated labor, state and local governments pay salaries on average over 25 percent less than private employers. The public sector appears to set a floor on compensation, particularly improving the compensation of workers with high-school educations, when compared to similarly educated workers in the private sector. Benefits are allocated differently between private- and public-sector full-time workers. State and local government employees receive a higher portion of their compensation in the form of employer-provided benefits. Public employers provide better health insurance and pension benefits. National polling data indicate that the public does not believe public employees are overpaid. They oppose pay and benefit cuts, but believe pay freezes and greater employee contributions to their health and pensions plans may be appropriate. Nevertheless, thirteen states revised their public-sector collective-bargaining laws, mainly weakening employee bargaining power or severely restricting or eliminating collective bargaining, while the majority of the public opposed those changes.

Keywords

public sector compensation wages benefits

Are Public Employees Overpaid?

The research reported in this article investigates whether state and local public employees are overpaid at the expense of taxpayers. Forty-five states projected budget deficits in fiscal year 2012 totaling $103 billion (McNichol, Oliff, and Johnson 2011). Several governors have identified excessive public-employee compensation as a major cause of their states’ fiscal duress, including New York, New Jersey, California, Wisconsin, Michigan, Ohio, Iowa, and Indiana (Madland and Bunker 2010). The remedies they propose included public-employee pay freezes and cuts, benefits reductions, privatization, major revisions to the rules of collective bargaining, the elimination of collective bargaining, and constitutional amendments to limit pay increases; each reform is presented as a necessary antidote to the public-employee overpayment malady. Wisconsin has already eliminated meaningful collective bargaining for most public employees, while Ohio has seriously eroded the scope of bargaining, eliminated bargaining rights for many employees, and dismantled many dispute-resolution procedures and rights that was repealed by referendum. Each legal revision has been undertaken allegedly to reign in excessive public-sector pay and benefits to reduce public expenditures (Greenhouse 2011). As of December 2011, thirteen of the thirty-seven states that provide for public-sector collective bargaining have modified, severely restricted, or eliminated collective bargaining during 2011 (see Appendix A).

These drastic solutions presume that public employees are overpaid. The data analysis reported in this article, however, indicates that public employees, both state and local government, are not overcompensated. Comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity and disability reveal no significant overpayment but a slight undercompensation of public employees when compared to private-employee compensation costs on a per-hour basis. On average, full-time state and local employees are undercompensated by 3.7 percent in comparison to otherwise similar private-sector workers. The public-employee compensation penalty is smaller for local government employees (1.8 percent) than state government workers (7.6 percent) (Keefe 2010a, 2010b, 2011a, 2011b, 2011c, 2011d, 2011e, 2011f, 2011g, 2011h, 2011i, 2011j, 2011k; Allegretto and Keefe 2010). If public employees are not overpaid, then why do so many politicians and citizens believe they are?

The Myth of Overpayment Is a Diversion from the Real Problem—Lack of Jobs

Since the summer of 2007, the US economy has contracted without any meaningful recovery for most Americans. While corporate profits returned to record levels and the stock market has risen from its 2009 lows, workers income has declined (Norris 2011), the official unemployment rate remains above 9 percent, and the real unemployment rate exceeds 16 percent (US Department of Labor, Bureau of Labor Statistics July 2011). State tax revenues were substantially reduced because of the contraction in economic activity and high levels of taxpayer unemployment. Since 2007, state personal-income-tax revenue decreased by18 percent by 2010 and state corporate-income-tax revenue declined by 28 percent, with state sales-tax revenue declining by 9 percent. The revenue reductions from these three taxes account for $101.2 billion in lost state and local revenue (US Census Bureau 2011), an amount equivalent to current state deficits. The American Recovery and Reinvestment Act of 2009 partly offset these state tax reductions in Fiscal 2009 ($31 billion), Fiscal 2010 ($68 billion), and Fiscal 2011 ($59 billion) (McNichol, Oliff, and Johnson 2011), but its expiration removes federal support to the states to manage their revenue crisis. In addition, annual state expenditures for Medicaid and unemployment insurance annually increased by an estimated $6.5 billion due to the increases in unemployment (Holahan and Garrett 2009).

While the states’ fiscal problems mainly arise from reduced tax revenue due to the contraction of economic activity and the expiration of federal stimulus support, states are required by their constitutions to balance their budgets. Without adequate state revenue to maintain state services, governors and legislatures turned their focus on expenditure reductions, particularly public-employee compensation, which accounts for 44 percent of state and local expenditures (McNichol 2011).

Misusing Data to Make the Case of Overcompensated Public Employees

Conservative research institutes such as the Mackinac Center in Michigan (Hohman 2010) and newspapers (for example, Cauchon [2011a]) began publishing comparisons of average private- and public-sector employee compensation using data from the Commerce Department, Bureau Economic Analysis’s (BEA) National Income and Product Accounts (NIPA). The “data are based primarily on Census measures of compensation, and are not entirely consistent with measures based on BLS data” (BEA 2011), for example, the NIPA data counts jobs per year rather than employees. The BEA, whose mission is compiling data for national income accounts, not worker compensation, directs users to the BLS website for employment and compensation data. Nonetheless, misusing BEA data to allege public-employee overpayment became commonplace in 2011.

The newly elected governor of Michigan, Rick Snyder (Snyder 2011), for example, in February 2011 presented his own study comparing Michigan private-sector and public-sector pay conducted by the Anderson Economic Group. His deeply flawed analysis reports that the average 2009 total compensation for Michigan state employees was $85,076 and for local government employees was $57,333, while private-sector employees earned on average $39,986. There are two fundamental problems with his analysis of the BEA data. First, in the private-sector divisor he included over one-million nonemployee self-employed workers whose earnings were not reflected in the numerator. When we correct for that error, the average private-employee job in Michigan generated compensation of $52,239, or $12,350 more than the governor’s miscalculation. Secondly, the BEA data is comparing the average private-sector job with a worker who has a high-school degree with the average public-sector job with an employee who has a college education, and finds, unsurprisingly, that college-educated employees on average earn more than high-school graduates.

Similarly, using the national BEA compensation data, the average state and local public-sector job generates total compensation of $57,775, which is about $2,511 more than the average private-sector job (Cauchon 2011); however, this comparison also fails to control for education, experience, hours of work, race, gender, ethnicity, disability, or organization size. This is a meaningless exercise of comparing apples to oranges. Instead, we need to compare apples to apples. If the BEA data comparison is unsatisfactory, what is an appropriate comparison? Can we answer whether state and local public employees are overpaid, and could excessive state and local government employee compensation be a major cause of the states’ financial problems?

Who and What Is to Be Compared?

Ideally, we would compare workers performing similar work in the public sector with the private sector, but this is not always possible. There are too many critical occupations in the public sector, for example, police, fire, and corrections, without appropriate private-sector analogs. Even private and public teaching is significantly different. Public schools accept all students, while private schools are sometimes highly selective and may exclude or remove any poor performers, special needs, or disruptive students. Consequently, comparing workers of similar “human capital” or personal productive characteristics and labor-market skills is considered the best alternative, and is well accepted by labor economists. Analyses based on personal-characteristics comparisons capture most of the important and salient attributes observed in the comparable work studies (Killingsworth 2002). Prior research reveals that education level is the single most important earnings predictor (Card 1999). Education helps create work-relevant skills. People invest heavily in their own and their children’s education, by buying homes in communities with good schools and by paying or taking on debt to attend schools, colleges, and universities. Empirically, education is followed by experience in advancing earnings. People learn by doing and by working in a variety of job tasks as they advance through occupational levels. Most occupations reward experience, since experience is associated with more competent and complex performance, arising from on-the-job learning.

Other factors widely found to affect compensation include gender, race, ethnicity, and disability, although here productivity-related human capital differences are intermingled with labor-market disadvantages stemming from historical patterns of discrimination (Katz and Autur 1998). We control for all these factors in our study. When analyzing hours of work most studies exclude part-time workers, since their hours vary, they earn considerably less than comparable full-time workers, they are more weakly attached to the labor force, and they often lack benefit coverage. This study follows standard practice by focusing on full-time public- and private-sector employees, who represent over 81 percent of the nation’s labor force, and we control for hours worked per year. As is customary, we also exclude agricultural workers and the self-employed.

We are fortunate to be able to include a control for each sampled full-time worker’s employer’s organizational size, which is made possible by the Integrated Public Use Microdata Series (IPUMS) of the March Current Population Survey (CPS) data (King et al. 2009). An employer’s organizational size greatly influences employee earnings. The basic wage gap due to organizational size is 35 percent. Large firms with more than five hundred employees comprise less than one-third of 1 percent of all firms but provide jobs for nearly half of all private-sector employed persons (Oi and Idson 1999). Large organizations on average employ more educated, experienced, and full-time workers, nonetheless even after accounting for these factors, large organizations pay a size premium (Troske 1999). When we include benefits in the comparison, the compensation premium grows. Whereas the private sector has a relatively small number of large organizations, the public sector has relatively few small organizations. In the IPUMS-CPS 2009 sample, over 93 percent of state and local full-time public employees work in organizations employing more than one hundred employees.

Having decided who will be compared, the other question to be answered is what should be compared. This is a more complex issue than it initially appears. Comparing wages, which is standard practice, is insufficient, since employee compensation increasingly includes employer-provided benefits. Regardless of how employees are paid, whether in wages or benefits, the essential issue in making a comparison is what does it cost a private- or public-sector employer to employ an employee. Employer costs may include not only wages, but paid time off for holidays, vacations, personal, and sick days; supplemental pay including overtime and bonuses; insurances, particularly health insurance but also life and disability insurance; retirement-plan contributions, whether defined benefit or defined contribution, including 401(k) plans, and legally mandatory benefit contributions such as unemployment insurance, Social Security, Medicare, disability insurance, and workers compensation. Once we conclude that employer costs of employing an employee, rather than just wages, is what needs to be compared, the more difficult issue is finding the appropriate data to make the comparison.

To obtain wage and demographic data this study uses the Integrated Public Use Microdata Series (IPUMS) of the March Current Population Survey (CPS). The CPS is a monthly US household survey conducted jointly by the US Census Bureau and the Bureau of Labor Statistics. The March Annual Demographic File and Income Supplement is the most widely used source for earnings used by social scientists (King et al. 2009). For the purpose of comparability, the state and local data exclude the self-employed and part-time workers, agricultural and domestic workers, and federal workers. The analysis in this article uses national CPS data comparing private-sector and state and local government employees.

There is only one reliable source of benefit information in the United States: the Employer Costs for Employee Compensation (ECEC) survey, which is collected by the US Department of Labor, Bureau of Labor Statistics (BLS 2010). The ECEC includes data from both private industry and state and local government employees and provides data for private employers by firm size. Larger employers, with over one hundred employees, are significantly more likely to provide employees with benefits, in part because they can spread administrative costs over a larger group, and for insurance purposes they can more readily diversify risks over a larger group. State and local governments resemble larger-size private employers. The national compensation cost analysis will control for employer size in making comparisons.

Education Level: The Most Important Factor in Determining Private- and Public-Sector Earnings

There are substantially different approaches to staffing and compensation between the private and public sectors. On average, state and local public-sector workers are more highly educated than the private-sector workforce; 54 percent of full-time state and local public sector workers hold at least a four-year college degree compared to 35 percent of full-time private-sector workers (see Table 1). Table 1, column 1 reports the returns to education in comparison to workers who have not completed high school from a standard human-capital earnings equation. A high-school graduate, all else equal, earns on average 28 percent more than someone without a high-school diploma. The education premium jumps to 46 percent on average if the worker attended some college, and if the worker holds an associate’s degree the return to education increases to 56 percent. Completing college with a bachelor’s degree yields an 84 percent premium and a professional degree (law or medicine) increases average earnings by 145 percent compared to an individual without a high-school diploma. A master’s degree yields an average 106 percent pay premium and a doctorate produces a 135 percent return.

Table 1.

Comparison of Returns to Education and Education Levels in Private-Sector Employers by Size and State and Local Government

Highest Degree Earned	Earnings Return to Education Compared (%)	All Private Employers (%)	Private 1 to 99 Employees (%)	Private 100 to 499 Employees (%)	Private 500 and More Employees (%)	State and Local Government (%)
Less than high school	0	6	9	6	5	2
High school	28	29	33	30	27	19
Some college	46	19	19	18	19	14
Associate’s	56	11	9	11	11	10
Bachelor’s	84	24	20	22	26	28
Professional degree	145	2	2	2	2	2
Master’s	106	8	6	8	9	21
Doctorate	135	1	1	1	2	3
College plus	—	35	29	33	38	54

State and local governments pay college-educated labor on average 25 percent less than private employers (Table 2). The earnings differential is greatest for professional employees, lawyers, and doctors. On the other hand, the public sector appears to set a floor on compensation. The compensation of workers with a high-school education is higher for state or local government employees when compared to similarly educated workers in the private sector.

Table 2.

Comparison of Private- and Public-Sector Annual Wage Earnings and Total Compensations

	Annual Wage Earnings
A	Private	Public	Public-Private	Public Penalty (%)
All Workers	$55,132	$49,072	−$6,061	−11
Less than high school	$29,135	$24,378	−$4,757	−16
High school	$38,269	$36,640	−$1,630	−4
Some college	$43,152	$42,108	−$1,044	−2
Associate’s	$47,894	$45,247	−$2,647	−6
Bachelor’s	$71,781	$48,874	−$22,906	−32
Professional degree	$152,733	$88,629	−$64,105	−42
Master’s	$93,918	$60,263	−$33,655	−36
Doctorate	$119,878	$88,625	−$31,253	−26
	Total Compensation
B	Private	Public	Public-Private	Public Pemium/Penalty (%)
All Workers	$71,109	$69,108	−$2,001	−3
Less than high school	$38,918	$36,407	−$2,511	−6
High school	$50,596	$53,880	$3,284	6
Some college	$56,279	$61,210	$4,930	9
Associate’s	$62,162	$65,165	$3,003	5
Bachelor’s	$91,256	$68,290	−$22,966	−25
Professional degree	$192,977	$121,192	−$71,785	−37
Master’s	$118,918	$82,297	−$36,621	−31
Doctorate	$151,875	$120,642	−$31,233	−21

Benefits are also allocated differently between private- and public-sector full-time workers in the United States (see Table 3). State and local government employees receive a higher portion of their compensation in the form of employer-provided benefits, and the mix of benefits is different from the private sector. Some benefits are more generous in the public sector, but it is a serious error to imagine that comparability requires that each and every element of compensation is the same. What is important when considering both the employer-provided benefits and direct pay is whether state and local government workers have a total compensation package that costs what they would receive if employed in the private sector. It is the total cost of compensation package—not the mix of cash and benefits—that is important in making a comparison.

Table 3.

Compensation and Benefits for Private and State and Local Government Employee

Employer Costs	Government
December-09 National	Employees 1 to 99 (%)	Employees 100 to 499 (%)	Employees 500+ (%)	State and Local Employees All (%)
Total compensation	100.0	100.0	100.0	100.0
Wages and salaries	73.7	70.2	66.9	65.9
Total benefits	26.3	29.8	33.1	34.1
Paid leave	5.5	6.9	8.6	7.6
Vacation	2.8	3.5	4.5	2.9
Holiday	1.9	2.2	2.5	2.3
Sick	0.6	0.8	1.1	1.9
Personal	0.2	0.3	0.4	0.5
Supplemental pay	2.8	2.7	3.6	0.8
Overtime	0.8	1.1	1.0	0.4
Shift differential	0.1	0.3	0.5	0.1
Nonproduction bonuses	1.9	1.4	2.1	0.3
Insurance	6.7	8.6	9.0	11.6
Life	0.1	0.2	0.2	0.2
Health	6.3	8.0	8.3	11.2
Short-term disability	0.1	0.2	0.3	0.1
Long-term disability	0.1	0.1	0.2	0.1
Retirement and savings	2.5	3.4	4.8	8.1
Defined benefit	0.9	1.4	2.2	7.2
Defined contribution	1.6	2.0	2.6	0.8
Legally required	8.9	8.2	7.2	6.0
Social Security	6.1	5.9	5.8	4.7
Medicare	4.9	4.7	4.6	3.6
Federal unemployment insurance	1.2	1.2	1.2	1.0
State unemployment insurance	0.2	0.1	0.1	0.0
Workers’ compensation	0.7	0.6	0.3	0.2
Workers’ compensation	1.9	4.0	1.7	1.1

Public employers contribute on average 34.1 percent of employee compensation expenses to benefits, whereas private employers devote between 26.1 percent and 33.1 percent of compensation to benefits, depending on the employer’s size. Public employers provide better health insurance and pension benefits. Health insurance accounts for 6.3 percent to 8.3 percent of private-sector compensation but 11.2 percent of state and local government employee compensation. Retirement benefits also account for a substantially greater share of public-employee compensation, 8.1 percent compared with 2.8 percent to 4.8 percent in the private sector.¹ Most public employees also continue to participate in defined-benefit plans managed by the state, while most private-sector employers have switched to defined-contribution plans, particularly 401(k) plans. On the other hand, public employees receive considerably less supplemental pay and vacation time, and public employers contribute significantly less to legally mandated benefits.

To assess private and public relative employment costs we will use the national microdata from the IPUMS-CPS, which provide us with a sample of private and state and local government employees with demographic characteristics including full-time status, education level, and years of experience as a function of age, gender, race, disability, and employer organizational size. Compared to private-sector employees, state and local government employees on average are slightly less experienced (twenty-one years compared to twenty-three years); are more likely to be female (57 to 43 percent); work fewer hours (42.6 to 43.3); are more likely to be black (14 to 12 percent); are less likely to be Asian (3 to 6 percent); and are less likely to be Hispanic (10 to 13 percent).

This research estimates standard earnings equations and uses the Employer Cost of Employee Compensation (ECEC) data to markup CPS wages for benefit costs to calculate to total compensation costs. The markups are undertaken by sector, organizations size, and major occupations group (see Appendix B).

Organizational-size variables are included in the wage- and compensation-estimating equations. Organizational-size variables help compensate for unobserved productive characteristics. In the United States, large organizations, both public and private, spend considerable resources in recruiting and selecting the appropriate employees. Large firms and governments through their human resources departments recruit applicants, and then go through elaborate procedures that may include aptitude and capability tests, physical evaluations, drug tests, medical screens, background and reference checks, a review of licenses and certifications, structured assessments and simulations, and a variety of other evaluations. In the public sector large organizations not only undertake these assessments, but they may to do additional reviews required by civil service regulations. In the United States in 2009 there were 198,190 employment, recruitment, and placement specialists employed on both the demand and supply sides of the labor market with another sixty-one thousand human-resource managers having some demand-side responsibility for staffing their organizations, according to the BLS Occupational and Employment Statistics (US BLS 2009). This investment in employee selection demonstrates the importance large organizations in the United States place on employing workers with the appropriate specific knowledge, skills, and abilities. In this research, organizational size variables are a proxy for labor quality not captured by standard human capital variables.

A standard annual-wage equation indicates that full-time state and local public employees earn 14 percent less than similar private sector employees. State employees earn 18.6 percent less, while local employees earn 11.8 percent lower wages than comparable private sector employees. The estimates reported in Table 4 are robust and statistically significant across all reported specifications. Since public employees work fewer hours per year, the wage penalty is lower for hourly wages than annual earnings. Hourly comparisons indicate that public employees earn 11.5 percent lower wages, with state employees earning 15.6 percent less in hourly wages and local employees receiving 9.5 percent lower hourly earnings.

Table 4.

Comparison of Annual and Hourly Private and Public Employee Earnings

	Employees Annual Wages (%)	Employees Hourly Wages (%)	Employees Annual Total Compensation (%)	Employees Hourly Total Compensation (%)
US public employee	−14.0***	−11.5***	−6.3***	−3.7***
US state government employee	−18.6***	−15.6***	−10.7***	−7.6***
US local government employee	−11.8***	−9.5***	−4.1***	−1.8*

obs 43558; year 2009

p < .05

***

p < .00010

A total compensation earnings equation produced a surprising result: full-time state and local employees are annually compensated by 6.3 percent less than comparable private-sector employees. Full-time public employees, however, work fewer hours, particularly, employees with bachelor’s, master’s, and professional degrees. A reestimated total compensation equation controlling for work hours of full-time employees demonstrates that there is still a statistically significant public-sector penalty of 3.7 percent in total compensation between full-time state and local employees and private-sector employees. Upon closer examination, the hourly compensation penalty shrinks to 1.8 percent for local government employees, but remains larger for state workers, who had a 7.6 percent hourly compensation penalty.

Discussion: What Does the Public Perceive?

The earnings equation estimates indicate that public employees, both state and local government employees, are not overpaid and are slightly undercompensated. When we make comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, and disability, the public-employment compensation penalty is relatively small but there remains a significant difference between private- and public-employee compensation costs.

The analytical debate over private- and public-employee compensation has not been merely an academic debate. These studies have been used to influence policy makers, politicians, the news media, and the public’s perception of public employees and their compensation. Examining the poll data from early 2011 reported in Table 5, the framing of the questions about compensation appears to be critical in shaping the responses. If the question is freeze pay or increase employee contributions for health care and pensions, the public supports these changes as reflected in the Wall Street Journal/NBC and the Quinnipiac Polls. On the other hand, the public clearly opposes cutting public employee and benefits as reflected in the New York Times/CBS and Gallop/USA polls. In general, a plurality of the public believes public employees are paid just right as reflected in the New York Times/CBS poll. The public has a nuanced understanding that recognizes public employees are not overpaid, but there is a fiscal crisis that requires sacrifice including pay freezes and increased benefit contributions. The public basically agrees with the comprehensive assessment of the total costs of employing of state and local government employees that they are not overpaid and may be slightly underpaid when compared to comparable private-sector employees.

Table 5.

National Polls on Public Employees and Collective Bargaining

	WSJ/NBC February 2011		New York Times/CBS February 2011			Gallop/USA March 2011		Quinnipiac
2011 Polls on Public Employees and Collective Bargaining	Acceptable (%)	Unacceptable (%)	Too High (%)	Right (%)	Too Low (%)					Favor (%)	Oppose (%)
Compensation
Freeze public employee pay	58	40
Increase employee contributions for health care	63	34
Increase employee contributions for pensions	68	29
Public-employee pay			26	36	25
			Favor (%)	Oppose (%)		Favor (%)	Oppose (%)
Do you favor cutting public employee pay and benefits?			37	56		44	53
Favor public employees paying more for pension and benefits										63	31
Public-employee collective bargaining
Eliminate bargaining over health care and pensions*	33	62
						Governors (%)	Unions (%)
Who do you support on proposed restrictions of collective bargaining?						39	48
			Favor (%)	Oppose (%)		Favor (%)	Oppose (%)
Take away some collective-bargaining rights			33	60		33	61
								Walker (%)	Unions (%)
Support for governor or unions in Wisconsin								31	42
Support or oppose limiting collective bargaining for public employees										45	42

Sources: “Majority in Poll Back Employees in Public Sector Unions,” Michael Cooper and Megan Thee-Brenan, 2011; “Wisconsin Union Fight: Which Side Does US Public Support?” Peter Grier, 2011; “WSJ/NBC Poll Strong Support for Bargaining Rights,” Patrick O’Connor, 2011; “More Side with Wisconsin Unions than Governor,” Pew Research Center for the People and the Press, 2011.

The public clearly opposes the changes undertaken by the governors who sought to weaken or eliminate public-employee collective bargaining by clear majorities. Only the Quinnipiac poll suggests an equal split in the public on collective bargaining, but the question is too abstract by asking whether the respondent supports or opposes “limiting collective bargaining” for public employees. When the question instead focuses on what the governors were presently doing the majorities clearly oppose their efforts to weaken collective bargaining rights for public employees.

Nevertheless, in the first seven months of 2011 thirteen states adopted legislation that reshaped public-employee collective bargaining (see Appendix A). In several states collective bargaining has been abolished or banned—Oklahoma, Tennessee, and Indiana—while in others such as Wisconsin, Ohio, and Idaho, collective bargaining has been greatly limited. Some states, such as Illinois and Utah, weakened collective bargaining for teachers. Massachusetts and New Jersey eliminated collective bargaining over health insurance. Only one state extended collective bargaining rights in 2011; Maryland provided collective bargaining rights to independent home health aides. The main political thrust in twelve other states has been to restrict collective bargaining, and in both Wisconsin and Ohio there are major efforts underway to undo the new restrictive legislation, which will be key tests of whether these governors politically overreached with their drastic recasting of public-employee collective bargaining, as the poll data strongly indicates.

This article does not address the debate on underfunding of some public-employee pensions,² which is an issue separate from compensation. Some plans have failed to make adequate contributions over the last twenty years, creating a potentially large pension unfunded liability ranging from $700 billion to $3 trillion, depending on the method of assessment. In part the problem arises from the economic crisis and the fall in investment values (Baker 2011) and in part from the misfeasance by some states. It should be noted the public pensions were fully funded as recently as 2001.

Union status was omitted from this study and earnings comparisons, since it has been a focal point of the compensation controversy. This means that, in essence, we are statistically comparing unionized public-sector workers with all private-sector workers—both union and nonunion—rather than with their union counterparts. Unionized private-sector workers have both better pay and higher benefits, of course, so our standard of comparison is very conservative.

Conclusion: Public Employees Are Not Overcompensated

The myth of the overcompensated public employee is inconsistent with the evidence. The earnings equation estimates indicate that public employees, both state and local government employees, are not overpaid and may be slightly undercompensated. When we make comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, and disability, the public-employment compensation penalty is relatively small, but there remains a significant difference between private- and public-employee compensation costs. On average there is a 3.7 percent penalty in total compensation for full-time state and local employees when compared to similar private-sector employees. This finding is consistent with two other national studies (Schmitt 2010; Bender and Heywood 2010).

The data analysis also reveals substantially different approaches to staffing and compensation between the private and public sectors. On average, state and local public-sector workers are more highly educated than the private-sector workforce; 54 percent of full-time state and local public-sector workers hold at least a four-year college degree compared to 35 percent of full-time private sector workers. For college educated labor, state and local governments pay salaries on average over 25 percent less than private employers. The earnings differential is greatest for professional employees, lawyers, and doctors. These earnings differences may create opportunities for cost saving by reviewing professional outsourcing contracts to examine what work might be performed by lower-cost public employees.

The public sector appears to set a floor on compensation particularly improving the compensation of workers with high-school educations when compared to similarly educated workers in the private sector. This result is due in part because the earnings floor has collapsed in the private sector (Lee 1999). Benefits are allocated differently between private- and public-sector full-time workers. State and local government employees receive a higher portion of their compensation in the form of employer-provided benefits. Public employers provide better health insurance and pension benefits. Health insurance accounts for 7.4 percent of private-sector compensation but 11.2 percent of state and local government employee costs, a 50 percent greater share of employer costs. Retirement benefits also account for a substantially greater share of public-employee compensation: 8.1 percent compared to the 3.7 percent in the private sector. Public employees also continue to participate in defined-benefit plans managed by the state (which many states have inadequately funded), while private-sector employers have switched to defined-contribution plans, particularly 401(k) plans.

The polling data indicate that the public does not believe public employees are overpaid. They oppose pay and benefit cuts, but believe pay freezes and greater employee contributions to their health and pensions plans may be appropriate. While thirteen states revised their public-sector collective-bargaining laws, mainly weakening employee bargaining power or severely restricting or eliminating collective bargaining, the majority of the public opposed those changes.

Footnotes

Appendix A

Appendix B

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Notes

References

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