But We Are Still Pressured To Pamper Them
How Did We Get Here and What Can We Do About It?
by the Editor
We often hear public sector workers referred to as “public servants.” When you think about it, this is an odd term. After all, we don’t refer to private sector workers as “private servants.” It makes more sense after one realizes that this characterization is part of a cynical strategy that is often rolled out to pave the way for some proposal to dispense more money or special treatment to public sector employees. When this happens, these workers are portrayed as martyrs who are making significant sacrifices for society as they selflessly toil away in their jobs. This is deeply misleading. For one thing, public sector workers tend to be better compensated than their private sector counterparts. What’s more, public sector workers benefit from a range of very valuable non-monetary advantages over private sector workers including better job security, greater stability in compensation, and more predictable career advancement opportunities. Certainly, public sector employees are not disadvantaged, downtrodden, or in need of more advantages. Rather, the privileged position enjoyed by public sector workers is so striking that we should ask how we ended up in this situation and what can be done to remedy it.
Better Pay and Benefits for Public Sector Workers
Let’s start with the basics by comparing compensation in the public sector to the private sector. The public sector category in the United States is quite broad, ranging from approximately 2.1 million federal workers to an even bigger group of approximately 16.4 million people employed by local and state governments.
This is a large and diverse group, so it is difficult to rely on a single measure when comparing compensation to the private sector. A good place to start is by looking at the federal workforce because there is a fair degree of uniformity in the structure of compensation for this group of employees. According to the Bureau of Economic Analysis (BEA), the average wage in the civilian federal workforce was approximately $117,676 in 2020, about 67% higher than the average wage in the private sector of $70,369.[1]
These comparisons are averages from across the entire workforce, so they are not directly comparable because there are many differences in the kinds of jobs and the employees who fill them. To produce a more accurate comparison, the Congressional Budget Office (CBO) analyzed variations in compensation in the federal government versus the private sector after taking into account differences in occupations, education levels, work experience, geographic location, and certain demographic factors.
In this 2017 study, the CBO concluded that overall wages in the federal sector for similar jobs filled by comparable workers were about 3% higher than in the private sector.[2] Breaking down the results revealed significant differences based on the level of worker education. Specifically, this study determined that less-educated workers were more highly paid in the federal workforce while more highly-educated workers were better paid in the private sector.[3] As shown in the table below, this study found that wages for federal workers with a high school diploma or less were 34% higher than wages for private sector workers with similar education levels. Only when employees attained professional degrees or doctorates did private sector workers start to earn higher wages on average than federal workers with comparable educational levels.
This might occur because the private sector provides more opportunities for employees to be compensated for higher performance and unique skill sets. On the other hand, less-educated workers can benefit from certain institutional advantages in the public sector working environment, such as more rigidly defined pay schedules, employee protections provided by civil service rules, and more pervasive collective bargaining agreements.
As the table above shows, the advantages enjoyed by federal employees relative to private sector workers is even more pronounced when analyzing total compensation, which includes benefits such as health insurance and retirement plans. For example, looking at the CBO data for workers with a bachelor’s degree, federal employees enjoyed a 5% wage premium over private employees but a 21% advantage in total compensation after adding in the value of benefits. Similarly, when analyzing the entire pool of workers, the found CBO that employees in the federal government received 17 percent more in total compensation than similar workers in the private sector with comparable qualifications.[4]
Among the suite of non-wage benefits provided to federal workers, the CBO observed that the availability of defined benefit pension plans was the most important factor contributing to the greater amount of non-wage compensation received by federal workers.[5] Defined benefit plans are a highly valuable retirement benefit and have long been a significant advantage enjoyed by public sector workers relative to private sector workers.
Under a defined benefit plan, an employer makes promises to pay certain retirement benefits to pensioners and bears the financial risk of finding investments to generate sufficient returns to fund those payments, with any shortfalls made up by the employer. When the employer is a government entity, this arrangement shifts all the investment risk to the taxpayers. In contrast, under defined contribution plans, workers and their employers make contributions into the workers’ accounts. Thereafter, any future gains or losses accrue to the account holder, thereby shifting the investment risk from the employer to the retiree. Many private sector employers have transitioned to defined contribution plans for this reason.
In 2019, only16 percent of private sector workers had access to defined benefit plans .[6] However, within the federal workforce, almost all employees are covered by two major defined benefit retirement plans, the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS), a plan which is supplemented by Social Security. These defined benefit plans are further enhanced by “cost-of-living adjustments” (COLAs) that help protect their beneficiaries from inflation.[7] This type of built-in inflation protection is much less common in the defined benefit plans that exist in the private sector.[8]
Federal workers are also entitled to generous vacation allotments which increase with years of employment. For the first 3 years of employment, federal employees receive 13 vacation days, for years 3 to 15 they receive 20 vacation days, and after 15 years they receive 26 vacation days.[9] This is in addition to 11 federal holidays each year. By contrast, after 5 years of service, the average private sector worker at a company with over 100 employees receives 16 paid vacation days.[10] Regardless of the length of service, federal employees are allocated 13 days of paid sick leave a year, which can be accumulated and carried forward if not used.
So, we can see that federal workers often receive higher compensation than many comparable private sector workers. A similar dynamic is evident when looking at the much larger group of 16.4 million state and local government workers. For this group, the BEA found they received 16% more in total compensation than workers in the private sector.[11] Like their brethren in the federal workforce, many state and local government employees have their total compensation substantially improved by valuable non-wage perks such as defined benefit pension plans. According the Urban Institute, 83% of full-time state and local government workers participated in a defined benefit plan and 94% had access to such plans as of 2018.[12] As mentioned above, only around 16% of private sector workers had access to such defined benefit plans.
Above Average Health Insurance for Public Sector Workers
Public sector workers tend to have access to better health care plans than private sector workers. One indication of this advantage is the larger size of the health insurance premiums that are associated with plans for government workers. According to the Bureau of Labor Statistics (BLS), by 2014 public health insurance premiums exceeded private health insurance premiums by between 14% and 19% .[13] In this study, the BLS estimated that somewhere between 16% and 25% of this variation was related to the higher quality of the public sector plans, while the rest of the differential was related to other factors such as worker age, gender, marital status, educational levels, and more unionization.
According to the BLS, private sector workers had to contribute more for their health insurance by paying 25% of the premiums while local government workers only paid 13% of the premiums. This study also found that retiree health insurance was much more widely available for public sector workers, with a 40 to 50 percentage point differential in the rates at which public sector employers were offered this benefit relative to private sector workers.
Other Fringe Benefits
There are other benefits available to public sector workers that are not included in the analyses of public sector compensation previously discussed. For example, public sector workers benefit from generous student loan repayment and forgiveness programs. Under the Federal Student Loan Repayment Program, federal agencies may make payments to their employees with student loans up to $10,000 per year up to a maximum of $60,000 per worker.[14] Under another plan, the Public Service Loan Forgiveness Program, the federal government will forgive the balance of eligible student loans for borrowers who have made income-based repayments while working for at least 10 years in the U.S. federal, state, local or tribal government, the military, or a 501(c)(3) non-profit organization.[15] This program is much more attractive than the income-based repayment plans currently available for private sector workers, which require at least 20 years of payments before loan balances are forgiven.[16]
Greater Job Security, Stability of Compensation, and Predictability of Promotions
Public sector workers are fortunate in that they generally benefit from better pay and benefits than their private sector counterparts. But perhaps the most valuable advantages of working in the public sector are somewhat less quantifiable: increased job security, more stability of compensation, and greater predictability of promotions.
Public sector workers have a high degree of job security while private sector workers are much more exposed to the vicissitudes of the economic cycle and the performance of their individual employers. This can be seen by looking at the level of layoffs and discharges in the public sector, which is around one-third of that in the private sector.[17]
Public sector workers tend to benefit from greater stability in their compensation mainly because their wages are usually determined in accordance with pre-established pay schedules, such as the General Schedule (GS) pay scale which applies to about half of federal workers.[18] In addition, public sector workers often receive promotions in a lockstep manner. According to the CBO, “most federal workers compensated under pay schedules move to progressively higher pay levels as they become eligible for those levels on the basis of their years of federal employment.”[19]
The combination of higher compensation, enhanced job security, more stability in pay, and greater predictability of promotions results in a much attractive employment proposition for public sector workers than for private sector workers. This is not just an extrapolation from the litany of advantages enjoyed by public sector workers discussed above. The proof is in the pudding. Public sector workers stay in their jobs to a much greater extent than private sector workers. This can be seen by looking at the quit rate for government workers, which is consistently less than half the rate for private sector workers.[20]
How Did We Get Here?
The most important factor driving the significant advantages enjoyed by public sector workers is their position within the overall employment structure of the economy.
For example, the politicians and bureaucrats who determine the compensation for public sector workers do not directly bear the actual costs of these labor agreements. Rather, they are able to pass on these costs to the taxpayers. In this process, the politicians and bureaucrats are able to draw on a huge pool of financial resources that they perceive as having very little practical limitation. Conversely, the ability of companies in the private sector to compensate their workers is ultimately constrained by the capacity of those businesses to generate value in the competitive marketplace.
Another factor favoring public sector workers is their ability to organize themselves into highly effective lobbying groups, such as unions, which often mobilize votes and political contributions for the very politicians who are ultimately responsible for determining their compensation. This problem has gotten worse over the years as unionization in the U.S. has undergone a steady transition away from the private sector to the public sector. By 2021, the percentage of workers represented by unions in the public sector (37.6%) was more than five times the rate in the private sector (7%).[21]
More broadly, the general design of public sector working arrangements, with pre-set wage schedules and lockstep promotions, has the negative result of putting too many aspects of the government’s employment relationship with its workers on autopilot. This means public sector workers tend to be somewhat insulated from the free-market forces that would otherwise provide market-based feedback on appropriate compensation levels.
Over the years, the advantages enjoyed by public sector workers over private sector workers have continued to build. Unfortunately, this is a predictable example of the harmful outcomes which usually result when there is a group that is highly motivated to capture certain concentrated benefits while the related costs are more widely dispersed. In this case, the costs are spread across the entire cohort of taxpayers. Because the amount falling on each individual taxpayer is relatively small, taxpayers are less motivated to object or perhaps to even notice. This problem is compounded by the tendency of politicians to design some aspects of public sector compensation in a very opaque manner. For example, the real costs of defined benefit pension plans are often obscured because the accounting of pension liabilities is very complex, making it difficult for taxpayers to understand the ultimate cost. Also, a significant portion of these pension payments are deferred far into the future, allowing the issue to fall down the list of urgent matters for both the politicians and taxpayers.
What Can Be Done to Reduce this Unfairness?
The problem of making public sector workers better off than private sector workers is deep and longstanding, so it should be attacked on multiple fronts. One of the main drivers of this disparity is the temptation for politicians to favor public sector workers in exchange for votes or campaign contributions. This impulse could be limited by increasing the involvement of independent third parties in contract design and negotiations. Also, these issues could be mitigated by improving the process for benchmarking public sector compensation to the private sector, for example by using independent consultants to provide more robust analysis.
Unfortunately, experience tells us these types of approaches are likely to be of limited effectiveness. For example, the Federal Employees Pay Comparability Act of 1990 requires that federal salaries should be set at rates that are comparable to salaries for nonfederal workers “for the same levels of work within the same local pay area.”[22] Historically, these attempts to benchmark public sector compensation to the private sector have fallen short. In the future, these benchmarking efforts need to be pursued with greater rigor to combat the deep-seated factors driving favoritism toward public sector workers.
Another reform that could potentially help to address this problem is to significantly increase the transparency of public sector working arrangements. For example, there could be requirements for regular public reporting of the advantages accruing to government workers relative to the private sector. This disclosure should cover not only compensation comparisons, but also advantages with respect to other working arrangements such as better job security, stability of pay, and predictability of promotions. Such disclosures would give taxpayers the data they need to hold accountable the politicians who want to favor public sector workers as a way to gain votes or campaign contributions.
Another commonsense reform would be to transition public sector workers from defined benefit pension plans to defined contribution plans. As discussed above, defined benefit plans are a large contributor to the compensation advantages enjoyed by public sector workers, so transitioning public sector workers to defined contribution retirement plans would achieve greater comparability with private sector workers. This reform would also reduce the amount of investment risk that is shifted to taxpayers. In addition, defined benefit plans are quite pernicious because they allow politicians to obscure the true costs of these plans with complex pension accounting and by deferring large payments far into the future. Thus, moving to defined contribution plans would make it more difficult for politicians to hide from taxpayers the actual costs of the retirement plans provided to public sector workers.
In general, public sector pay and promotion procedures are overly rigid, resulting in overpayment and too many lockstep promotions. Improvements could be pursued by reducing overcompensation and promotion of underperforming employees while at the same time increasing compensation and promotion of strong performers.
However, to fundamentally deal with the problem of overcompensating public sector workers, we must address the main structural driver of this asymmetry, which is that public sector contracts are not negotiated on an arm’s-length basis. Rather, these agreements are made with bureaucrats and politicians who don’t bear the costs but are incentivized to be agreeable in public sector labor negotiations in order to gain political support from these powerful interest groups. As long as these dynamics continue, we can expect that public sector workers will be advantaged relative to private sector workers.
To directly address this root cause, the most effective remedy would be to aggressively reduce the size of the public sector workforce. This can be achieved by outsourcing to the private sector many of the functions currently performed by the public sector. Because this approach would involve the private sector submitting bids to perform designated services, it would impose market discipline and provide a mechanism to fairly determine overall levels of compensation. A process should be institutionalized that includes an established procedure to examine every function of government and pursue outsourcing to the private sector if at all possible.
Conclusion
Public sector workers benefit from a long list of advantages relative to workers in the private sector, ranging from easily quantifiable categories such as higher salaries and more generous benefits, to less tangible ones like enhanced job security, greater stability in compensation, and more predictable promotion opportunities. These non-monetary advantages are so valuable that one could reasonably argue that public sector workers should receive lower overall compensation than comparable private sector workers to bring the two groups into greater balance.
We can start to rectify these disparities through a variety of initiatives, including better benchmarking, improved transparency, transitioning public sector workers from defined benefit pensions to defined contribution plans, and reforming the process for negotiating working arrangements between the government and its employees. However, these types of reforms will only have a marginal impact unless we address the root cause of these inequities – namely, that public sector workers are insulated from market forces. As part of this dynamic, public sector workers benefit from an unhealthy feedback loop whereby politicians continuously direct advantages to government employees in exchange for votes and campaign contributions. This problem can be mitigated by outsourcing government functions as much as possible to the private sector to allow market forces to determine the fair levels of overall compensation. Not only would this result in greater equivalence between the public sector and the private sector, this approach could start to break the cycle of politicians dispensing favors to public sector workers in exchange for political support. Greater private sector involvement through outsourcing would have the added benefit of increasing overall productivity, efficiency, and growth in the economy.
In the meantime, we should resist further special government handouts to “public servants” at the expense of private sector workers and taxpayers. It is important to remember public sector employees don’t take their jobs because they are altruists intending to make sacrifices for the greater good. They take those jobs because they have concluded that the benefits they receive are a good deal in exchange for the work they provide.
[1] U.S. Bureau of Economic Analysis, “National Income and Product Accounts,” Tables 6.2D, 6.5D and 6.6D, last revised July 30, 2021, www.bea.gov/iTable/index_nipa.cfm. Data are for civilian federal workers, excluding postal workers.
[2] Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees: 2011 to 2015,” April 2017, pp. 2, 3, (https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52637-federalprivatepay.pdf).
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Bureau of Labor Statistics, “Employee Benefits Survey,” last modified April 23, 2020, https://www.bls.gov/ncs/ebs/factsheet/defined-benefit-frozen-plans.htm.
[7] Congressional Research Service, “Federal Employees Retirement System: Summary of Recent Trends, updated January 10, 2020,” https://sgp.fas.org/crs/misc/98-972.pdf.
[8] Minnesota Legislative Commission on Pensions and Retirement, “COLA Study Report First Draft Addendum,” November 20, 2020, https://www.lcpr.mn.gov/documents/2020COLAStudy/Addendum.COLA.Study.Report.1st.Draft.Private.Sector.COLAs.Sec.VII.E.
[9] U.S. Government Accountability Office, “Benefits,” accessed June 2022, https://www.gao.gov/about/careers/benefits.
[10] Bureau of Labor Statistics, “TED: The Economics Daily,” June 28, 2018, https://www.bls.gov/opub/ted/2018/private-industry-workers-received-average-of-15-paid-vacation-days-after-5-years-of-service-in-2017.htm.
[11] U.S. Bureau of Economic Analysis, “National Income and Product Accounts,” Tables 6.2D and 6.5D, last revised July 30, 2021, www.bea.gov/iTable/index_nipa.cfm. Data are for civilian federal workers, excluding postal workers.
[12] The Urban Institute, “State and Local Government Pensions,” urban.org, accessed June 2022, https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-and-local-backgrounders/state-and-local-government-pensions.
[13] Alice M. Zawacki, Jessica P. Vistnes, and Thomas C. Buchmueller, “Why are employer-sponsored health insurance premiums higher in the public sector than in the private sector?,” Monthly Labor Review, U.S. Bureau of Labor Statistics, September 2018, https://www.bls.gov/opub/mlr/2018/article/employer-sponsored-health-insurance-premiums.htm. By 2014, public health insurance premiums exceeded private health insurance premiums by 14 percent when comparing local government premiums to private sector premiums and 19 percent when comparing state government premiums to large-firm private premiums.
[14] U.S. Office of Personnel Management, “Policy, Data, Oversight: Pay and Leave,” accessed June 2022, https://www.opm.gov/policy-data-oversight/pay-leave/student-loan-repayment/.
[15] Federal Student Aid, an Office of the U.S. Department of Education, “Public Service Loan Forgiveness,” accessed June 2022, https://studentaid.gov/manage-loans/forgiveness-cancellation/public-service.
[16] Federal Student Aid, an Office of the U.S. Department of Education, “What is Income-Driven Repayment,” accessed June 2022, https://studentaid.gov/app/ibrInstructions.action.
[17] Bureau of Labor Statistics, “Job Openings and Labor Turnover Summary (JOLTs), Table 5. Layoffs and discharges levels and rates by industry and region, seasonally adjusted,” last modified June 1, 2022. https://www.bls.gov/news.release/jolts.t05.htm.
[18] “Federal Government Jobs: Federal Employee Pay and Benefits,” federaljobs.net, accessed June 2022, https://federaljobs.net/benefits/.
[19] Congressional Budget Office, “Comparing the Compensation of Federal and Private-Sector Employees: 2011 to 2015,” April 2017, p.23. (https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52637-federalprivatepay.pdf).
[20] Bureau of Labor Statistics, Table 4, “Quits levels and rates by industry and region, seasonally adjusted,” last modified June 1, 2022,https://www.bls.gov/news.release/jolts.t04.htm.
[21] Bureau of Labor Statistics, Table 3, “Union affiliation of employed wage and salary workers by occupation and industry,” last modified Jan. 20, 2022, https://www.bls.gov/news.release/union2.t03.htm.
[22] Federal Employees Pay Comparability Act of 1990, 5 U.S.C. §5301 (2012).