WASHINGTON—The debate has been going on for decades, but the recessionary budget crunch has brought the issue to the fore as governments seek to cut expenses wherever possible.
The public sector payroll, which many economists say is higher than comparable pay in the private sector, became a cost-savings target for many state governors—most notably Wisconsin Gov. Scott Walker—needing to balance their budgets.
The federal government is also debating the issue of federal worker pay. President Barack Obama recently froze public sector pay for two years as a cost-savings measure.
The challenge for policymakers is to find a viable way of making the comparison.
Jason Richwine, a senior policy analyst with The Heritage Foundation, says the issue of worker pay is less about balancing a budget, and more about leveling the playing field in terms of pay: being fair.
Richwine is co-author of a working paper released by the American Enterprise Institute (AIE), “Comparing Federal and Private Sector Compensation,” which concludes that federal workers are paid 39 percent higher than comparable private sector workers. The report estimates the total overpayment to be worth around $60 billion.
“In the case of federal workers, both wages and benefits are higher. This is unambiguous, and has been the case for as long as economists have looked at the issue,” said Richwine.
The AIE report uses a detailed methodology to compare workers based on a set of factors, such as education, skill sets, abilities, and so on. The method is used by most labor economists, but not by the government.
The federal government’s Pay Agent method has long been criticized for its failure to get at the granularity of the comparisons. It compares types of jobs, but fails to take into account the individual people. The government’s General Schedule (GS) system, Richwine says, is a skewed pay scale, resulting in some federal workers getting paid more for jobs that they may not be qualified for.
Using the same logic, some workers may be getting paid less.
John Berry, director of the U.S. Office of Personnel Management, stated in testimony written for the House Oversight Committee that sometimes the work done by federal and private sector employees cannot be compared. For example, some workers, such as federal judges, are exposed to personal danger.
He did concede a need to try to pay closer attention to differences within specific occupational groups, acknowledging that labor markets change more than the Pay Agent Report takes into account.
“For every level of every job in every geographic area, we must make the best comparisons we can to determine a competitive wage to offer to get the people we need,” stated Berry.
A recent report on the Minnesota state labor market, released by Jeffrey Keefe, a labor and employment expert with the Economic Policy Institute, concluded that public workers were underpaid by 7.9 percent.
His analysis showed that public workers tend to receive more in non-wage compensation than in base pay, which is different from the private sector. Health insurance benefits, for example account for an average of 11.2 percent, versus 6.3–8.3 percent in the private sector.
He also noted the growth in recent years of these non-wage benefits. The reason is that health insurance payments and pension contributions are tax deductible. According to the U.S. Congress Joint Committee on Taxation 2006, the federal government forgoes $300 billion annually in tax revenue to subsidize these benefits.
Richwine said reports like Keefe’s fail to take into account a number of important factors, and are therefore misleading. Not included is the guaranteed growth (around 8 percent) of most public retirement plans, versus the relative instability of private 401K plans, a failure to take into account benefits that will be received in the future, and the value of job security.
State governments are facing budget shortfalls, and face an estimated $1 trillion in unfunded liabilities, some of which include public health and pension plans.
The public sector payroll, which many economists say is higher than comparable pay in the private sector, became a cost-savings target for many state governors—most notably Wisconsin Gov. Scott Walker—needing to balance their budgets.
The federal government is also debating the issue of federal worker pay. President Barack Obama recently froze public sector pay for two years as a cost-savings measure.
The challenge for policymakers is to find a viable way of making the comparison.
Jason Richwine, a senior policy analyst with The Heritage Foundation, says the issue of worker pay is less about balancing a budget, and more about leveling the playing field in terms of pay: being fair.
Richwine is co-author of a working paper released by the American Enterprise Institute (AIE), “Comparing Federal and Private Sector Compensation,” which concludes that federal workers are paid 39 percent higher than comparable private sector workers. The report estimates the total overpayment to be worth around $60 billion.
“In the case of federal workers, both wages and benefits are higher. This is unambiguous, and has been the case for as long as economists have looked at the issue,” said Richwine.
The AIE report uses a detailed methodology to compare workers based on a set of factors, such as education, skill sets, abilities, and so on. The method is used by most labor economists, but not by the government.
The federal government’s Pay Agent method has long been criticized for its failure to get at the granularity of the comparisons. It compares types of jobs, but fails to take into account the individual people. The government’s General Schedule (GS) system, Richwine says, is a skewed pay scale, resulting in some federal workers getting paid more for jobs that they may not be qualified for.
Using the same logic, some workers may be getting paid less.
John Berry, director of the U.S. Office of Personnel Management, stated in testimony written for the House Oversight Committee that sometimes the work done by federal and private sector employees cannot be compared. For example, some workers, such as federal judges, are exposed to personal danger.
He did concede a need to try to pay closer attention to differences within specific occupational groups, acknowledging that labor markets change more than the Pay Agent Report takes into account.
“For every level of every job in every geographic area, we must make the best comparisons we can to determine a competitive wage to offer to get the people we need,” stated Berry.
State Budgets
A recent report on the Minnesota state labor market, released by Jeffrey Keefe, a labor and employment expert with the Economic Policy Institute, concluded that public workers were underpaid by 7.9 percent.
His analysis showed that public workers tend to receive more in non-wage compensation than in base pay, which is different from the private sector. Health insurance benefits, for example account for an average of 11.2 percent, versus 6.3–8.3 percent in the private sector.
He also noted the growth in recent years of these non-wage benefits. The reason is that health insurance payments and pension contributions are tax deductible. According to the U.S. Congress Joint Committee on Taxation 2006, the federal government forgoes $300 billion annually in tax revenue to subsidize these benefits.
Richwine said reports like Keefe’s fail to take into account a number of important factors, and are therefore misleading. Not included is the guaranteed growth (around 8 percent) of most public retirement plans, versus the relative instability of private 401K plans, a failure to take into account benefits that will be received in the future, and the value of job security.
State governments are facing budget shortfalls, and face an estimated $1 trillion in unfunded liabilities, some of which include public health and pension plans.
Next: House Hearing
House Hearing
On Wednesday, March 9, the House Oversight Committee is holding a hearing on the issue of public sector worker pay.
Based on the published testimony, while perspectives vary on the reasons why there should be reform, there seems to be significant agreement on the need for some reform of the GS system.
“Over three-quarters of federal pay increases are based on time served, not performance. This systematically inflates federal pay,” stated James Sherk.
Colleen Kelley, president of the National Treasury Employees Union, representing 160,000 federal employees, suggests more supervisor training and attention to “implementation concerns before abolishing a system [of promotions] that has proven transparent, nondiscriminatory and understood and respected by those who labor under it.”
“We need very fundamental reform for pay. I think it needs to be completely different. There are merit systems being passed around,” said Richwine.
“Our pay system is not perfect. I have said before that the system is six decades old and could use a re-examination. ... But even if the system is not perfect, we must reject misleading uses of data that perpetuates the myth that federal employees are as a whole overcompensated. As a whole, the wages that the federal government pays its employees are fair and the benefits it offers are competitive,” stated Berry.
Based on the published testimony, while perspectives vary on the reasons why there should be reform, there seems to be significant agreement on the need for some reform of the GS system.
“Over three-quarters of federal pay increases are based on time served, not performance. This systematically inflates federal pay,” stated James Sherk.
Colleen Kelley, president of the National Treasury Employees Union, representing 160,000 federal employees, suggests more supervisor training and attention to “implementation concerns before abolishing a system [of promotions] that has proven transparent, nondiscriminatory and understood and respected by those who labor under it.”
“We need very fundamental reform for pay. I think it needs to be completely different. There are merit systems being passed around,” said Richwine.
“Our pay system is not perfect. I have said before that the system is six decades old and could use a re-examination. ... But even if the system is not perfect, we must reject misleading uses of data that perpetuates the myth that federal employees are as a whole overcompensated. As a whole, the wages that the federal government pays its employees are fair and the benefits it offers are competitive,” stated Berry.
