March 9, 2011

March 9, 2011 | Commentary on Labor

Are They Paid Too Much?

Amid the rage over Wisconsin Gov. Scott Walker’s proposals to shrink government worker compensation, one question predominates: Are these workers overpaid? If so, it makes sense for them to accept less, rather than force taxpayers to give up more.

In recent weeks, left-leaning think tanks have tried to portray public employees, including government workers, as underpaid. A recent report from the Economic Policy Institute concluded that Wisconsin public employees are undercompensated by about 5 percent compared to private workers with similar skills and personal characteristics.

When counting the full value of benefits and job security, however, public employment in Wisconsin is a very good deal indeed.

According to our analysis of the Current Population Survey, Wisconsin public workers have earned about 5 percent less in wages over the past five years than private workers in large firms — after controlling for age, education and many other earnings-related characteristics. (The penalty would disappear almost entirely if we compared public workers to employees of all private firms, not just the largest ones.)

Generous benefits

Do generous benefits outweigh this wage penalty? The EPI report acknowledges that public-sector benefits are more generous than in private firms — equal to around 27 percent of total compensation for Wisconsin public workers, versus 19 percent to 23 percent for private employees. This already makes total pay nearly even for public- and private-sector employees.

But the EPI study underestimates public-sector pension benefits, omits retiree health benefits, and doesn’t count the value of public-sector job security.

Wisconsin public employers fund their defined-benefit plans by calculating the contributions today which, compounded at an assumed 7.8 percent interest rate, will be sufficient to pay promised benefits at retirement. Since public-pension benefits are guaranteed by Wisconsin law even if investment returns fall short, this means that public employees receive a riskless 7.8 percent return on their employer’s pension contributions.

Private-sector employees with 401(k) plans, by contrast, can earn only around a 4 percent guaranteed return by holding U.S. Treasury securities. Adjusting for this difference adds around 4 percent to total Wisconsin public-employee compensation.

Another overlooked benefit that most state and local employees receive is retiree health coverage.

Finally, public-sector workers enjoy significantly greater job security than private-sector workers. The Bureau of Labor Statistics reports that nationwide, state and local employees are fired or laid off at less than one-third the rate in the private sector. A worker who loses his job spends an average of almost 20 weeks unemployed, during which time he must subsist on unemployment benefits.

Assuming that Wisconsin workers would have the same probability of being discharged, and the same duration of unemployment as private workers, their extra job security is equivalent to about a 9 percent increase in pay.

The total job package for Wisconsin public employees — salaries, benefits and job security — is roughly 10 percent higher than what is paid to similar private workers.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Jason Richwine is a senior policy analyst at The Heritage Foundation.

About the Author

Jason Richwine, Ph.D. Senior Policy Analyst, Empirical Studies
Domestic Policy Studies

Related Issues: Labor

First moved on The McClatchy News Wire service