Last week James posted at OTB on the perennial question of whether public (in this case federal) pay is lower or higher than private pay. I think it’s so difficult to come up with a reasonable answer to that question that it’s barely worth trying and I’d like to try to explain why. It comes down to two questions that you might think are easy to answer:
- What’s a public employee?
- How do you calculate compensation?
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but I think are actually quite difficult. The easy answer to the first question is that if you receive a W2 from a federal, state, or local government or agency you’re a public employee. However, there are, probably, millions of other workers who are contractors working for governments at various different levels who are either permanent, full-time, or both but who nominally work for private companies. I’ve been working for some time on a post on this very subject. It’s darned hard to calculate how many of these people they are not to mention how much they’re paid but one estimate I’ve read puts it at $500 billion.
Then there’s the thorny issue of compensation. Is a pension delayed compensation or not? Those receiving public pensions or who expect to receive public pensions argue pretty vehemently that it is. If that’s the case shouldn’t the cost of that compensation be added in? I guess what I’m suggesting is that the way we should be calculating compensation is from the moment the employee is hired possibly until death not just until termination or retirement.
@ Dave
This isn’t intended to be flippant: Why does it matter how much public employees are paid?
I know that I can’t answer that question to your satisfaction in the case of the federal government but state governments can’t produce their own fiat currencies and in general have balanced budget requirements. That puts the states in situations rather similar to those of Greece, Portugal, or Ireland.
Each year military personnel receive a “statement of total military compensation” which includes pretty much anything and everything that can be considered compensation. For example, my wife’s wages are around $75k a year, but the total compensation in that document is around $120k a year (I don’t remember the exact numbers). Some of the stuff included are tax-free pays, commissary privileges, health care, pension (assuming the member stays until retirement), etc.
It wasn’t clear to me whether James’ post included non-wage compensation; I believe as Andy suggests such information is generally available both for federal employees and state employees.
Speaking of my state, historically the retirement benefits were the primary attraction to public employment. Wages were below private sector, but the retirement benefits exceeded them. The criticism of this was that it encouraged the less-ambitious employees to stay until their pensions vested, while those who wanted money now left. Today, wages tend to be more along the line of a bell curve. I know a number of state employees who’ve indicated they will leave if their pension benefits are messed with. Which is a long of way of saying that if you don’t count total compensation, your missing out on perhaps the most important element to the employee.
Andy and PD:
What I’m suggesting is that total compensation in the public sector is understated because it’s treated statically rather than longitudinally.
“Why does it matter how much public employees are paid?”
I guess that comment is intended to be the equivalent of a market based “who cares” in the private sector. However, it denies reality. There is a symbiotic relationship between politicians, who set employment and compensation levels, and the public sector employees, who in turn vote for those pols. That ain’t no market.
That’s quid pro quo.
“..state governments can’t produce their own fiat currencies..”
Not only that, currency creation is not costless.
I’m not sure I have a nifty solution. Here in Chicago/IL there have been a number of recent exposes about slary abuses and pension set up abuses that are bankrupting each entity. The pendulum has clearly swung way to far.
As for Dave’s initial query, I think you need to start with the guy paying. That is, total cost to employ: W-s, 10099, bennies etc. The receiver will no doubt not view non-immediate cash as wages.
As for the “see through” problem with contractors. Yikes. A morass.
And another problem is that future compensation (ie. pension and health care) is not very predictable. How much pension will a person actually receive and for how long will they receive it? What about inflation and medical care cost growth, etc.?
My understanding is that the federal level, deferred benefit plans are slowly giving way to deferred compensation plans — if so, that also makes long-term compensation difficult to predict.
yikes, deferred = defined
Compensation is intended to attract and retain employees. At least at the state and local levels, the rention problem has reversed. We retain too many; there are fewer and fewer government jobs each year and fewer and fewer job openings, while total compensation rises. We pay sweeteners to get employees to retire — to move them from paying them to work to paying them not to work.
PD Shaw,
Even defined benefit plans are difficult to predict. If that were not the case, then more would be solvent. There’s also the problem of gaming the system. For example in California there are some well-publicized cases where public employees were given huge promotions with high pay for the last couple of years before retirement because it is those years that determine pension benefits. Hence they would receive much more in terms of benefits than would otherwise be the case.
@Andy, I agree. The recent Illinois scandel that I believe Drew alluded to involved a couple of guys each working a single day as a substitute teacher and as a result of that singular service to the state, they both became eligible for a six-figure pension upon reaching the retirement age of sixty. Assuming they live a few decades, each will probably get paid at least $4 million.
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Andy
“The recent Illinois scandel that I believe Drew alluded to involved a couple of guys each working a single day as a substitute teacher and as a result of that singular service to the state, they both became eligible for a six-figure pension upon reaching the retirement age of sixty. Assuming they live a few decades, each will probably get paid at least $4 million.”
But this is an argument that greater oversight is needed in Illinois rather than an argument that public employees should on average be paid less. If the average Texas public employee is earning a median income of $60,000, why is that itself something which needs to be corrected?
@Dave,
In terms of states I agree. They are currency users and therefore have to live within a budget. The only reason I can think to focus on federal employees is if salaries have become so high they are contributing to what Austrians refer to as mal-investment, though I don’t see evidence of that being a problem.
I’m dubious of the value of direct salary comparisons. By this logic, if Bill Gates were to take a job as a high school English teacher which paid him $500,000/year, he would be horribly underpaid (compared to what he could make in a private sector job) and the school district should raise his salary.
This is clearly nonsense, since optimizing his own financial situation is his responsibility, not ours, and in this particular contrived example his private sector earnings potential clearly has nothing to do with his productivity as an English teacher. If you can do better for yourself in the private sector, then by all means, do better for yourself in the private sector.
The way I look at it, a given public-sector job is overpaid if and only if lowering their compensation could improve value for the taxpayers (i.e. any reduction in value created due to difficulty attracting and retaining highly qualified employees is less than the value of the direct savings of cutting their compensation), and they’re underpaid if and only if raising their compensation could improve value for the taxpayer.
That would be 1/2 my argument. The other half would be compensation system reform focusing on removing back-loading along with vesting. Teachers, for example, should start with higher salaries but expect lower pay and benefits later in their careers. Total lifetime compensation could be roughly equivalent – it’s just distributed more evenly.
Additionally, the vesting, seniority and credential systems and requirements plus low initial pay prevent a lot of people from teaching who otherwise would. The current system is an industrial model that rewards longevity more than anything else.
A friend of mine has an engineering doctorate and a lot of education and training experience and is very interested in teaching high school but he doesn’t want to have to get an education master’s degree and he doesn’t want to start at the bottom in terms of seniority. He can’t afford to in his 40’s with three kids. The current system rewards those who enter young and stay in the career their whole lives which creates a lot of perverse incentives.
“The current system rewards those who enter young and stay in the career their whole lives which creates a lot of perverse incentives.”
Well that’s true. As someone who used to teach I think the idea of “schools” is entirely outmoded whether public, charter or private.