Free Markets, Free People

Andrew Biggs


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