Free Markets, Free People

Federal government employee compensation v. comparable private sector compensation

Are federal employees compensated better than comparable private sector employees?

Andrew Biggs an economist with the American Enterprise Institute, and Jason Richwine, an economist with the Heritage Foundation, have conducted a study which finds that yes, indeed they are. And, in fact, by quite a bit. In a conference call they outlined their methodology (you can find it in detail here in the study).

You may find their conclusions a bit startling but probably unsurprising.  Biggs and Richwine compared three areas between federal government employees and comparable private sector employees: Salaries, benefits and job security.

Salaries:

Biggs and Richwine found that on average (using the Human Capital Model which is a widely accepted model for such studies) federal government employees enjoyed a 14% salary premium over private employees at the same level.  The primary reason they found is federal employees are, on average, promoted more quickly in their jobs meaning at a comparable level with private sector employees they are usually less skilled and less experienced. 

Benefits:

In terms of benefits, they found that private sector benefits in large private corporations (500+) averaged about 50% of salary.  Federal workers enjoyed a significant advantage here, with an average of 66% of salary added in benefits.  For instance, federal employees enjoyed significantly more paid time off than do private sector types (25%).  Additionally, employee contributions to retirement are 3 times that of private sector employees.  Bottom line: federal employees enjoy a 33% premium over private employees.

Job Security:

This measures the probability of becoming unemployed.  Federal employees are much less likely to be laid off than are private sector employees.  The study calculated an 11% premium here.  Said another way, if a private sector employee was asked if he would take a 10% pay cut to be guaranteed employment no matter what, almost all would take it.

Adding all of that up (14% salary premium, 33% benefits premium and 11% job security premium) and weighting them properly, the total pay package including those three elements provides federal employees with a 39% premium over private sector employees in comparable positions.

The important question?  How much is that difference worth in tax payer dollars?  The market value of the difference is $60 billion dollars – a year.

Obviously what isn’t going to happen (reality in politics alert) is a $60 billion dollar reduction in pay and benefits.  Or layoffs to balance it out. 

But what can be planned is bringing federal compensation in line with private compensation on an apples to apples basis and eliminating that gap.

We all know how popular that will be right? Especially with the government unions (who’ve once again negotiated sweetheart deals with compliant politicians).  But this is a nice chunk that can at least be eliminated at a future date through wage and benefit parity.  Of course that means really freezing wages, rolling back benefit contributions and other unpopular fixes.

Biggs and Richwine will be testifying at a House Oversight Committee hearing on federal employee pay.  Any bets on whether or not the final verdict of the committee isn’t to kick the can down the road again and leave the problem for others?

~McQ

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11 Responses to Federal government employee compensation v. comparable private sector compensation

  • Some of the conclusions are interesting, others are baffling.  For instance I don’t see how the federal workforce can be considered more experienced yet be criticized for under-hiring and then over-promoting.

  • Annnnd, in related news

    Government payouts—including Social Security, Medicare and unemployment insurance—make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn’t taken before the majority of Baby Boomers enter retirement.

    Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

  • Interesting stuff … but hard to comment on, except maybe … it figures

  • White House moving to repair troubled relationship with Cabinet
    The headline inspires no confidence, but it get worse.
    The solution … a “Cabinet Czar”
    Next will be the “Insulation Czar” because Pres..ent Obama is too insulated.

    • If you think there is something the president should know, but he doesn’t because he’s too insulated, bring it to the attention of the insulation czar who will then screen your proposal and show it to the president if he thinks it worthy.
      Reminds me of David Spade’s administrative assistant character in Coneheads.

  • In terms of benefits, they found that private sector benefits in large private corporations (500+) averaged about 50% of salary.  Federal workers enjoyed a significant advantage here, with an average of 66% of salary added in benefits.

    That’s news to me! For years the benefits rate was held as 40% in the private sector, and of late (last 10-15 years) has been FALLING outside the Fortune 500. In smaller companies, benefits have all but dried up, and many very small companies provide NO benefits including no paid holidays, or only one week paid vacation after a year and two weeks only after FIVE YEARS.
    Note how many companies can’t provide medical coverage.
    Thomas Sowell, in a couple of his works, showed that teachers overwhelmingly come from the bottom quintile of their college graduating classes, and even with Masters degrees can’t pass simple upper level HIGH SCHOOL tests.
    Finally, the private sector produces wealth and prosperity; the public sector, overwhelmingly, just usurps and parasites it.

    • If you run into any teachers or government workers on message boards, some of them will tell you how smart they are and how they could make a lot more money in the private sector. Government lawyers are even more sure they could command larger salaries than they earn now. I don’t think they get how competitive it is out there. I think they read about hedge fund managers and think that’s normal.
      Oh, and I am sure some government lawyers using inside knowledge of the system could get higher salaries in the private sector, but that’s not quite the same as being worth that salary based on their talent and skill alone.

      • One of the reasons the authors of the study say there is a salary premium for government workers is because of the data gathered from that movement from government to private sector comparable jobs. Guess what – they don’t make as much in the private sector as they made in government. And that’s primarily because they lack the skills and experience the private sector salary demands.

  • One word explains this riddle: nomenklatura.

  • I question this sentence from the benefits section:  “Additionally, employee contributions to retirement are 3 times that of private sector employees.”  Shouldn’t it be 1/3?

    I have another comment about the oft-repeated claim that public employees are better educated.  Does that mean that the better education applies to their jobs?  A PHD in media studies may have gone to college longer but it’s useless is they are accountants.