A Closer Look at the Government/Private Sector Compensation Gap

NOTE: The following represents the analysis-based opinion of the author and do not reflect those of his employer or any other affiliations.

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By Kenneth Hunter, Guest Blogger

Reports on the growing gap in compensation between government employees and their private sector counterparts, specifically focusing on the higher salary and benefit levels enjoyed by government workers, is not surprising. The present economic climate, along with the increased prominence of government involvement in life and society engineered by the Obama administration since it took office last January, easily facilitate the opportunity for the media and pundits to make quick note and judgement of a situation that, from an economic standpoint, does not bode well for the general public and their desire for economic growth.

Of course, the media and political focus is on the basic and the present. By now, we have all heard that total (salaries and benefits) Federal employee compensation was approximately $117,780 in 2009 (according to the Bureau of Economic Analysis). This is 93% greater than the comparable average (per FTE) in the private sector ($61,051).  Respectively, state and local government employees’ average compensation is only 14.5% greater than the private sector.

(Click here for “2009 National Average Employee Compensation”)

For most of the public, recent media reports are the first time they have ever seen evidence that government employees, on average, earn more in benefits and salary than private sector employees.   Many have been long aware of the gap government employees enjoy with respect to the value of their benefits, but the fact that Federal workers now possess significant advantage in direct earning potential is a discovery that shocks, and angers, most people who learn of it.

The reality, however, is that this compensation gap has existed for a while. Looking at the BEA’s sector compensation data for the past 80 years, we see that average compensation levels between the three employment groups remained close until 1970.

Between the end of the second world war and the end of the 1960’s, government employees lagged behind private sector employees in salary and acrruals (i.e., vacation, sick time, etc.), but saw greater value associated with their benefits. With the arrival of significant inflation in the late-60’s (precipitated, in large part, to increased Federal spending and monetization), indexed government salaries kept up with the cost of living, while private wages did not. Between 1968 and 1973, Federal employee wages (which started out this period close to private sector and state/local government) rose 10.5% per year, while private wages grew only 6.3% annually (growth for state and local was 7.1%/year).

In 1970, average Federal wages climbed ahead of the private sector, and they have remained there since. State and local wages continued to remain relatively close to the private sector until 1983 (once again influenced by inflationary indexing).

There are other factors, of course, that contribute to these disparities. Federal civil service reform in the 1970’s, especially the establishment of the Senior Executive Service, providing not only higher base salaries for thousands of select positions, but also the opportunity for annual performance awards and greater annual increases. According to Office of Personnel Management reports for FY 2009, more than 6,200 SES employees earn base salaries averaging more than $160,000, with performance bonuses averaging more than $15,000 (see http://www.opm.gov/ses/facts_and_figures/data_trends09.asp for more information).

Another factor, not discussed much, is the impact of salary “accruals”, including sick and vacation time. Workforces across the board are aging, but Federal workforces are in good position with respect to longevity-based allowances for vacation and sick time. Given that these accrued compensation days (along with the potential for comp time for certain salaried positions) is valued at ever-growing levels of pay, the impact to overall compensation (and its potential impact on short-term liabilities the government incurs on behalf of its workers) is magnified.

Benefit disparity requires much less an explanation. The same economic pressures that forced the private sector to limit growth in employee wages also contributed to the implementation of additional efficiencies to constrain growth in benefit costs. While private workers labored through reductions in health insurance coverage and the transition from defined-benefit pensions to defined-contribution retirement programs, government employees across the board relished in more generous provisions, mostly inherited from the pre-1969 era.  Naturally, the cost of these benefits skyrocketed, especially on the Federal employee level. More than likely, without significant reduction measures, the value of these benefits will continue to grow, only increasing the compensation gap with private industry, even if salary growth is curtailed out of economic, fiscal and political necessity.

From a political perspective, the compensation gap serves to increase the level of anger and dissatisfaction citizens have with the government that, in our country at least, is supposed to reside in the position of humble, respectful servant. While we can get into a litany of discussion about the roles and responsibilities that government employees play in our modern society and economy (to the detriment and benefit of individual liberty and free market opportunity), this ignores a more salient reality. If government workers are compensated better than those in the private sector, is the condition desirable, or even viable?

The answer to both, in my honest observation, is “absolutely not.” As the graph above shows, the government workforce (as a share of total employment) is about 4 percentage points lower than where it was 40 years ago. However, government employees’ share of total compensation in the national economy is actually greater than 40 years ago. Given that government resources are primarily derived from taxes and levies assessed in the private sector, the disparity in compensation represents a profound, destructive impact on the fiscal health of this country.

Prior to end of the 1960’s, relative balance existed between private sector and government employee compensation. The growing disparities with these sectors, especially with respect to the significantly higher values for Federal employees, reflect a trend that needs to reverse course as quickly as possible. We cannot ignore the need to compensate government employees for the services they provide of value to the citizenry, and political shorthand goals of paying government employees the private sector “average” may not necessarily work. The reality, nevertheless, is that respective balance between sectors in compensation must be restored.

State and local governments have some work to do, mostly with respect to benefits. For the most part, if history holds true, their close proximity to the citizenry and its will should enable necessary adjustments. There is also the fiscal reality that smaller governments face, unable to buy their way out of a crisis through borrowing and printing money.

On the Federal level, bringing back balance will require significant civil service reforms, especially with respect to reducing the scope of government employee benefits. Unions and public employment advocates will fight tooth-and-nail to stop the efforts, regardless of and in deference to the financial ruin we face if nothing is done. However, if we remember that government in America exists at the bequest of its citizens, that they are the natural inheritors of power through their God-given rights, we are morally obligated to prove ourselves as the humble servants we are supposed to be.

ASPA Member Kenneth Hunter is an MPA Graduate of The University of Georgia with more than a decade of experience in local government finance. Kenneth is the Budget & Evaluation Manager for the City of Rocky Mount, North Carolina, and serves on the Executive Committee of the Association for Budgeting & Financial Management and is a Board Member and Webmaster for the North Carolina Local Government Budget Association.

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5 thoughts on “A Closer Look at the Government/Private Sector Compensation Gap

  1. There is also a wealth of scholarly research that proves that employee motivation simply goes far beyond compensation packages.

    That being said, another question for discussion is the lower compensation for public sector employees in local government who have residency requirements for urban areas with high costs-of living. Does this prevent many who are qualified and ambitious towards a position from taking it simply because of the burden that their paycheck’s power is decreased due to the restriction of residency?

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  2. First, “true” Americans can disagree about the verve – or nerve – of “no limits” laissez-faire capitalism.

    If you’re analysis is deliberately slanted to vie for a job at a think tank funded by those Tea Party founders (who inherited their billions), fine. Otherwise, Kenneth, your use of Fox News rhetoric undermines your work. I have no bias against capitalism or self-made money and I respect individuals who have embraced opportunity and made their millions; I admire those who choose to embrace social responsibility (there are plenty, Bill Gates, Oprah, even Mark Zukerberg, et al).

    Obviously, McDonald’s does not employ 310,000,000 people and I apologize if the sentence I wrote could be misread. I will be clearer: Educated, qualified and accountable people will not be attracted to public employment if you offer them compensation that is comparable to that which is offered unskilled labor.

    Someone typically becomes a public employee by meeting certain basic educational criteria, then by taking and passing an exam designed according to Civil Service regulations and specifications, they must score high enough to be among the top three reachable on a title list; then they must interview well enough to get the job (my initial, mid-level title took three interviews, a special project, and a visit to our state capital). Then, if there is any interest in retention, the government must entice the individual to stay. In my experience, the lure of contractually negotiated salary increases, good health insurance, life insurance, job security and a retirement pension work to that end. That’s capitalism, sir.

    My point is that the public had better compete with compensation packages or the quality of public servants –and public service – will suffer. There are 7,800,000 millionaires in the United States; none of them made their fortunes from a civil service job.

    Transparency in government is important but statistics can be made to say anything. Today, think tanks, depending on their funding source, obviously do. The public is not served when pre-suppositional bias drives results. Sooner or later, legitimate analysis must prevail because, to paraphrase Gandhi, “there is no God higher than Truth.” I’d prefer sooner because, today, there are too many riding the rhetorical bandwagon with facts and figures changing by the hour. These individuals will drive public discourse, public policy and –if left unchecked– our lives.

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  3. I want to disclaim, and I should have before, that my work is “first step” to look at a serious issue that does have a significant impact on our economy and the overall relationship between government employees and the citizens we serve at their will.

    Statistical averaging does a great job of distorting actual incidence, and I really do not like using averages where I can find more descriptive data. That BEA datasets do not provide distributions within each sector. I do plan to evaluate the BLS statistics, though I have already found variances with respect to geography, especially at the state and local level.

    Please note that my work may have been inspired by recent media reports, but serves as a work of original research. Simply critiquing by quoting interest group reports that have already been noted by others is not sufficient.

    My decision to focus on the aggregate of total compensation distribution does address the macroeconomic reality we face with respect to the compensation gap. People do make more or less depending on their marketability, driven primarily by personal skills, experience, and the actual market value of their abilities. There are many in government, as you note, who have advanced educations. While this does often result in them receiving higher compensation in government pay plans, it does not mean that their “education” can be directly correlated to the actual value of the service they provide (it’s not true in the private sector, either).

    To conclude, I want to criticize you specifically for making the stereotypical cutdown of the American people, referring to them as “310,000,000 people at the McDonald’s fryer”. As a public servant in a practitioner capacity, I find references like this incredibly insulting and shameful. The American people, whom we as public administrators have an obligation to serve and respect, represent a diverse group of skill levels, personal challenges, and abilities.

    Some of them, yes, work as fryers at McDonnald’s. You know what? I am thankful, because I like a Big Mac and a nice order of french fries. Some of those fyers (who I have known personally) will become managers and franchise owners. Many will move on to other jobs, and trust me, the experience will serve them well.

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  4. There are many complications to this discussion. One undeniable complicator is our society cannot exist without a private sector making as much money as they can. AS Much As They Can. No limits, then and only then, provides the opportunity for taxes to even be earned. Wall Street is not some evil bane of society and businesses making profits cannot and should not be condemned by any true American.

    Also, think about this scenario: The government has been – and always will be – in a recruitment drive for the biggest, bestest(excuse the bad grammar) and smartest of our society to work for them (the well-educated & intelligentsia types). And those specific people had, until the 70’s, been recruited on A) the greater good of serving our country and B) the opportunity for greater pay with a respectable employer in the future. There was no equal or greater pay option to compete with private or self-made income.

    TODAY: it’s we(Government) want you, we’ll pay you more and don’t even try to benefit the private sector with your income-earning, tax-generating talents. Over an extended period of time, say 40 years, you would almost certainly see a shift of a “quality” workforce working for, making more, and staying with a government position. Throw in benefits that have not degraded nearly as much in the last 20 years as the private sector (those greedy bastiches!) and … here we are.

    Mr. Cooke – have much personal bias against capitalism and self-made money? Why should I have to work so hard to earn my own money when I could live off the government – oh, I mean the PEOPLE’s – dime in public employment? That is the new reality of government, especially Federal, employment.

    And of course at the local/state level you obviously employ more unskilled, lower-payed labor than the Federal agencies – they don’t need garbage collectors and soccer referees. So, in comparison to the private sector as a whole their compensation would indeed be less than. That does not dismiss the greater point being made here, tinged with rhetorical opinion or not: In a capitalistic society fueling government with revenues generated by taxes, is it wise or valid, is it necessary or appropriate to over-earn as a government employee vs. the private sector?

    That has nothing to do with any biases against Wall Street.

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  5. What a great post to coincide with the opening of “Wall Street 2.”

    You say it yourself, “We can get into a litany of discussion about the roles and responsibilities that government employees play in our modern society and economy.” Your next leap, however, “to the detriment and benefit of individual liberty and free market opportunity” is a big one — and makes the litany you don’t discuss, essential.

    You ask, “If government workers are compensated better [sic] than those in the private sector, is the condition desirable, or even viable?” Your answer: “Absolutely not,” and thereafter reflect that the supposed disparity between government and private sector is bad because one is fueled by taxes and the other, free market so — ipso facto — one is bad, the other not.

    The points you raise are far too complicated for a blog post unless you’re trying to rant political rhetoric but this isn’t the place. You cram a lot about “natural inheritors through God-given rights” and “moral obligations to prove ourselves humble servants” into a post purported to be about a supposed compensation gap.

    The underlying assumption seems to be that there is waste – an assumption very much in the eye of the beholder. Salaries just don’t appear, “POOF!” Obviously, there’s a political give-and-take between unions and elected representatives. Special interests bear the brunt of people who say their taxes are too high and government gives away fortunes to the indolent.

    However, we, the public, are the “special interests”. We are not just the Wall Street banker; we are the poor, the disabled, the homeless, the abandoned, and the sick. You can’t expect to find an educated, qualified and accountable public workforce serving 310,000,000 people at the McDonald’s fryer.

    One report (there are many) by the National Institute for Retirement Security (NIRS) and Council on State and Local Government Excellence (CSGE) recently noted, among other things, that public and private workforces differ in important ways. For instance, jobs in the public sector require much more education on average than those in the private sector. Anyone who has sat for a civil service test, passed, scored high enough to be interviewed, and then ranked among the top three to be posted to an available opening appreciates that fact.

    The report also noted that, “Employees in state and local sectors are twice as likely as their private sector counterparts to have a college or advanced degree.”

    While their study acknowledges that benefits (e.g., pensions) comprise a greater share of employee compensation in the public sector (that’s not a bad thing), it concludes that State and local employees have lower total compensation than their private sector counterparts, and “on average, total compensation is 6.8 percent lower for state employees and 7.4 percent lower for local workers, compared with comparable private sector employees” based on data they find at the U.S. Bureau of Labor Statistics.

    If we don’t pay attention and participate there will always be someone who is all-too-ready, willing, and able to take what is ours… and use the pretense of “tough economic times” to do so.

    Those looking for a ‘coddled class’ should look to the Wall Street bonus pool, not the Parks Department.

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