The public-sector/private-sector pay differential

Uncategorized

| April 13, 2012

Remember the days when individuals, in choosing a life of public service, received increased job security in exchange for not making quite as much as could be available to workers in private industry?

If you do, you’re probably at least entering retirement age, because the last time that was true for any sustained period was prior to 1970, according to data compiled from the Bureau of Economic Analysis by Cato scholar Chris Edwards.

The difference today is not that public servants no longer enjoy increased job security – the layoff rate of public-sector workers remains about one-third that of workers in private industry. (Check out the nifty chart compiled here by Reason’s Adam Summers, which shows that 98,000 government jobs were added during the Great Recession while private industry lost 7.34 million jobs.)

No, the difference is that, today, those employed through taxes levied on private industry now enjoy compensation far greater than what the average worker in private industry can hope to achieve. Data from the Bureau of Labor Statistics shows that total worker compensation in state and local governments today amounts to $40.90 per hour, on average, whereas total worker compensation in private industry amounts to only $28.57 per hour.

Moreover, the gap between public-sector and private-sector pay has been growing throughout the past decade, sparking some resentment from the poor, working saps who are forced to subsidize, through taxes, what they see as a more extravagant lifestyle for the privileged government class.

In response, labor unions (whose membership is increasingly composed of public-sector workers) have spent the past few years publishing compensation studies (like this one) designed to downplay this pay differential. They claim that straight-up comparisons of employee compensation using hard numbers are unfair because they fail to account for the special training and certifications that government workers achieve (as if private employers don’t, also, provide their employees with specialized training particular to their specific job function).

Tim Cavanaugh over at Reason Magazine has a great article detailing the arrogance and short-sightedness of these studies over at Reason Magazine.

The long and short end of it comes down to this:

1) It’s difficult to put a value on job security, which is three times greater in the government sphere, and which all of these studies fail to account for in their “adjustments.”

2) In the real world, labor compensation is a function of labor productivity. The possession of a degree or some other government-approved certificate does not necessarily mean the worker is more productive. As Cavanaugh points out, public school teachers are more likely to hold state-approved credentials than private school teachers, but the evidence shows that private school teachers, on the whole, are far more effective. (Note: I said “on the whole.” Of course there are some outstanding teachers working in government schools, too.)

3) The kicker: Cavanaugh points out that it’s the workers with the lowest skill set who enjoy the largest pay differential between the public and private sectors–undermining the entire apologist argument.

Take a look. It’s worth your time.

Geoffrey Lawrence

Geoffrey Lawrence is director of research at Nevada Policy. Lawrence has broad experience as a financial executive in the public and private sectors and as a think tank analyst. Lawrence has been Chief Financial Officer of several growth-stage and publicly traded manufacturing companies and managed all financial reporting, internal control, and external compliance efforts with regulatory agencies including the U.S. Securities and Exchange Commission. Lawrence has also served as the senior appointee to the Nevada State Controller’s Office, where he oversaw the state’s external financial reporting, covering nearly $10 billion in annual transactions. During each year of Lawrence’s tenure, the state received the Certificate of Achievement for Excellence in Financial Reporting Award from the Government Finance Officers’ Association. From 2008 to 2014, Lawrence was director of research and legislative affairs at Nevada Policy and helped the institute develop its platform of ideas to advance and defend a free society. Lawrence has also written for the Cato Institute and the Heritage Foundation, with particular expertise in state budgets and labor economics. He was delighted at the opportunity to return to Nevada Policy in 2022 while concurrently serving as research director at the Reason Foundation. Lawrence holds an M.A. in international economics from American University in Washington, D.C., an M.S. and a B.S. in accounting from Western Governors University, and a B.A. in international relations from the University of North Carolina at Pembroke. He lives in Las Vegas with his beautiful wife, Jenna, and their two kids, Carson Hayek and Sage Aynne.