Do we overpay public employees?

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Andrew G. Biggs & Jason Richwine
Tuesday, March 15, 2011

Amid the rage over Wisconsin Gov. Scott Walker’s proposals to shrink government worker compensation, one question predominates: Are these workers overpaid? If so, it makes sense for them to accept less, rather than force taxpayers to give up more.

We’re told, of course, that they’re not. In recent weeks, left-leaning think tanks have tried to portray public employees, including government workers, as underpaid. A recent report from the Economic Policy Institute concluded that Wisconsin public employees are undercompensated by about 5 percent compared to private workers with similar skills and personal characteristics.

When counting the full value of benefits and job security, however, public employment in Wisconsin is a very good deal indeed.

As in most states, Wisconsin state and local workers make less in wages but more in benefits than comparable private workers. According to our analysis of the Current Population Survey, Wisconsin public workers have earned about 5 percent less in wages over the past five years than private workers in large firms—after controlling for age, education and many other earnings-related characteristics. (The penalty would disappear almost entirely if we compared public workers to employees of all private firms, not just the largest ones.)

Do generous benefits outweigh this wage penalty? The EPI report acknowledges that public-sector benefits are more generous than in private firms—equal to around 27 percent of total compensation for Wisconsin public workers, versus 19 percent to 23 percent for private employees. This already makes total pay nearly even for public- and private-sector employees.

But the EPI study underestimates public-sector pension benefits, omits retiree health benefits and doesn’t count the value of public-sector job security.

Wisconsin public employers fund their defined-benefit plans by calculating the contributions today which, compounded at an assumed 7.8 percent interest rate, will be sufficient to pay promised benefits at retirement. Because public-pension benefits are guaranteed by Wisconsin law even if investment returns fall short, this means public employees receive a riskless 7.8 percent return on their employer’s pension contributions.

Private-sector employees with 401(k) plans, by contrast, can earn only around a 4 percent guaranteed return by holding U.S. Treasury securities. Adjusting for this difference adds around 4 percent to total Wisconsin public-employee compensation.

Another overlooked benefit that most state and local employees receive is retiree health coverage. Even the simple right to buy into the employees’ plan, which is what most Wisconsin public retirees receive, is a good deal compared to the cost of a 60-year-old purchasing coverage in the individual market.

Other public employees receive an even better deal: Retired Milwaukee teachers receive full health coverage at almost no cost to themselves, a benefit that actuarial reports conclude is worth around an extra 17 percent of pay. While the value of retiree health benefits varies among Wisconsin public employees, almost all receive a better deal than the private sector, where retiree health coverage is rare and stingy by comparison.

Finally, public-sector workers enjoy significantly greater job security than private-sector workers. The Bureau of Labor Statistics reports that nationwide, state and local employees are fired or laid off at less than one-third the rate in the private sector. How much is this job security worth? A lot. A worker who loses a job spends an average of almost 20 weeks unemployed, during which time the worker must subsist on unemployment benefits.

We can put a number on this. Assuming that Wisconsin workers would have the same probability of being discharged, and the same duration of unemployment as private workers, their extra job security is equivalent to about a 9 percent increase in pay.

In short, the total job package for Wisconsin public employees—salaries, benefits and job security—is roughly 10 percent higher than what is paid to similar private workers, and in certain cases far more. Government workers should bear that in mind as they press their demands.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Jason Richwine is a senior policy analyst at The Heritage Foundation. Write to them in care of The Heritage Foundation, 214 Massachusetts Ave. NE, Washington, D.C. 20002; Web site: www.heritage.org.

Last updated: 9:52 am Monday, December 17, 2012

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