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The Government Pay Bonus

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Pay cuts, layoffs and the highest unemployment rates in decades have reignited a debate over the relative treatment of public and private workers. USA Today reported in March that federal workers earn substantially higher wages than private sector employees who work the same types of jobs.

White House budget chief Peter Orszag responded that these pay differences merely reflect the superior skills of federal workers, not government largess. Adjusting for education and experience, he said, federal workers make about the same salaries as private workers. Mr. Orszag also correctly pointed out that public and private job categories aren't directly comparable, so we shouldn't necessarily expect them to have the same pay.

Nevertheless, salaries are only one part of total compensation. Government employees may also receive more generous health and pension benefits than Americans working for private enterprise. So are federal employees overpaid? Data from the March Current Population Survey (CPS) suggest they are.

Conducted for the Bureau of Labor Statistics, the CPS is a long-running survey that couples earnings and employment information with detailed demographic characteristics of the survey population. At first glance, the CPS data show that the average hourly wage for a federal worker is about 48% higher than a private worker's. Yet because federal employees tend to be more educated and experienced than their private counterparts, as Mr. Orszag noted, one has to control for these skill differences. This reduces the public-private salary gap—but it does not eliminate it. The federal wage premium for workers who have the same education and experience stands at 24%, still a windfall for public employees.

Even using all the standard controls—including race and gender, full- or part-time work, firm size, marital status, region, residence in a city or suburb, and more—the federal wage premium does not disappear. It stubbornly hovers around 12%, meaning private employees must work 13½ months to earn what comparable federal workers make in 12.

Most academic studies dating back to the 1970s have found similar pay differences. In addition to the wage premium, federal workers enjoy more generous fringe benefits than do private workers. For instance, federal workers receive a defined benefit pension with benefit levels comparable to those from private 401(k) plans, except that federal workers contribute only 0.8% of pay and are not subject to any market risk. They also receive employer matches to the defined contribution Thrift Savings Plan that significantly exceed the typical private employer match.

If the overall generosity of federal benefits matches that of federal salaries (which seems quite likely), total compensation for federal workers may easily exceed $14,000 per year more than an otherwise similar private employee.

The pay premium is probably the main reason federal workers quit their jobs at a far lower rate than do private employees. At the beginning of 2010, federal workers were only about one-third as likely to leave their jobs (a ratio not much different than in 2006, before the recession), implying that no private employer could offer them better compensation.

Federal employment also carries significant nonfinancial benefits—in particular that layoffs and firings are much rarer. If you think these aspects of federal employment lack value, ask any private employee who is now looking for work. A federal pay premium is unfair both to private workers, who receive less than their government peers, and to taxpayers who must cover the difference. Given our 2.7 million-strong federal work force, the government effectively overbills Americans by almost $40 billion every year just on labor costs.

Worker compensation is hardly the largest driver of current and future federal deficits. The biggest threat comes from the rising entitlement benefits of Social Security, Medicare and Medicaid. Nevertheless, if Washington demands "painful sacrifices" to make these programs solvent, as the slogan goes, it must first re-establish its credibility. Giving federal workers salaries, benefits and terms of employment comparable to those received by private workers would be a good start.

Mr. Biggs is a resident scholar at the American Enterprise Institute. Mr. Richwine is a senior policy analyst at the Heritage Foundation.

First appeared in The Wall Street Journal

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