Higher Public Compensation for the Same Work

Public employee compensation is often considerably above that of identical employment in the private sector. For example:

According to the AFL-CIO, It is not uncommon that work done by public employees can be done for as much as 50 percent less in the private sector. ⁽¹⁾

Transit bus drivers who are public employees are often paid double and more that of private bus drivers employed providing transit service under contract to public agencies. ⁽²⁾

Average US Postal Service compensation per employee was nearly $45,000 in 1991 ⁽³⁾ --- 40 percent more than the average private employee. Yet, it would be expected that Postal employees would be paid less private employees, since the Postal Service has a lower percentage of supervisory, technical or professional employees than the private sector. ⁽⁴⁾

Often excessive public employee compensation is obtained through collective bargaining. In the public sector collective bargaining works particularly to the advantage of employees, because unlike the private sector, competitive forces do not operate. Moreover, the public sector collective bargaining often relies on data from the flawed comparability studies.

The Advantages of Public Employment

Public employment involves a number of advantages not considered in determining compensation. These include:

(1) More generous paid fringe benefits. Public employees have more generous non-wage employer paid benefits than private sector employees (Table #1).

(2) More Paid Vacation Days and Holidays: Public employees generally have more generous vacation and holiday benefits (Table #2)

The average state and local government employee has 9.9 more paid vacation and holidays annually than the average private employee. This is nearly one extra paid day off for each two days of paid leave for private employees.

The average federal civilian employee has 13 more paid vacation and holidays annually than the average private employee. This is more than three extra paid days off for each five days of paid leave for private employees.

Over the course of a career, state and local government employees and federal civilian employees receive nearly 1.5 years more in paid vacation and holidays than the average private employee. ⁽⁵⁾

(3) Federal Income Tax Free Value of Excess Paid Benefits: The more generous public employee fringe benefits are provided free from federal (and state) income taxes, expanding the gap between public and private fringe benefit values. ⁽⁶⁾

(4) Higher Compensation Increases. Protected from the cost controlling pressures of the competitive market, public employees have received larger annual compensation increases for decades. ⁽⁷⁾ From 1951 to 1991, the average state and local government employees received $1.37 in compensation increases for every $1.00 received by the average private employee. ⁽⁸⁾ Federal civilian employees received $1.91. Since 1980 the pace has increased with average state and local employees receiving $4.78 for each $1.00 received by private employees. ⁽⁹⁾ Federal civilian employees received $4.98. ⁽¹⁰⁾

(5) Greater Job Security: Public employees have superior job security. Private employees have a far greater chance of being involuntarily terminated (laid off or discharged). On average, private employees are nearly three times as likely to lose their jobs than public employees. ⁽¹¹⁾ While superior job security is good for employees, it can only be achieved for some employees, not all. Public employee job security is paid for by private employees, who pay the overwhelming percentage of taxes.

(6) Lower Productivity: Productivity (both management and labor) is often lower in the public sector. Lower productivity means lower output per dollar of compensation -- higher unit labor costs. Higher unit labor costs represent a cost greater than necessary to obtain a public service.

America's Protected Class III estimated that state and local government employee counts could be reduced by 19.2 percent without reducing public services (this process is called "rightsizing"). This would require states and local governments to achieve the staffing levels of the state with the lowest number of state and local government employees per capita --- Pennsylvania (adjusted for population and geographical size). And even Pennsylvania has substantial potential to improve. ⁽¹²⁾

The rightsizing element of Clinton Administration's "Reinventing Government" program is intended to reduce the federal civilian work force by 12 percent without negatively impacting performance. ⁽¹³⁾

Many governments are using the competitive market to produce quality public services (competitive contracting) at substantial savings. Cost savings are typically in the 20 percent to 40 percent range with some instances of more 60 percent ⁽¹⁴⁾ and more. ⁽¹⁵⁾

(7) More Paid Personal Days: Some public employers (including at least 20 states ⁽¹⁶⁾) provide additional paid "personal days" off for employees. On average, state and local government employees are eligible for paid personal days at a rate more than double that of private sector employees. ⁽¹⁷⁾

(8) More Other Paid Time Off: State and local government employees miss more days of work (such as sick days). ⁽¹⁸⁾ While the percentage is small, state and local government employees are more than 30 percent more likely to be eligible for paid lunch breaks. ⁽¹⁹⁾

(9) Work Weeks with Fewer Hours: Some public employees (at least 10 states ⁽²⁰⁾) have shorter work weeks than in the private sector.

(10) State Income Tax Free Value of Excess Paid Benefits: See #3, above. The more generous public employee fringe benefits are provided free from state (and federal) income taxes, expanding the gap between public and private fringe benefit values. ⁽²¹⁾

(11) Generous Severance Pay: Some government agencies provide particularly generous severance pay packages. Federal severance pay can equal two years of base salary. ⁽²²⁾ A particularly egregious example is an unfunded federal mandate that requires payment to public transit workers for up to six years after layoff. ⁽²³⁾

(12) Earlier Retirement: Public employees are often able to retire with full benefits earlier than private employees. For example, more than 50 percent of state and local government employees are eligible to retire with full benefits when they have either reached 55 years of age or 30 years of service. Fewer than 10 percent of private employees are eligible to retire at age 55 or after 30 years of service. ⁽²⁴⁾

(13) Unused Sick Leave Credit at Retirement: Some public employers permit employees to be paid for unused sick leave or to advance their retirement dates based upon unused sick leave. This is relatively in the private sector.

(14) Predominance of Defined Benefit Retirement Plans: Public employees are typically covered by expensive defined benefit retirement programs, while private employees are typically covered by less expensive defined contribution plans. Approximately 90 percent of state and local government employees are covered by "defined benefit" pension plans. ⁽²⁵⁾

Defined contribution plans guarantee the retirement benefit amount, regardless of contributions and subsequent earnings. Defined benefit plans tend to be more expensive than defined contribution plans and can require "bail-outs" due to under-funding. ⁽²⁶⁾ Defined benefit financial commitments are "open-ended:"

Over the years many federal and postal employees have mistakenly believed that retirement benefits are directly linked to the contributions that were withdrawn from their checks and matched by their agency's contributions...Federal retirement benefits are secured by the political commitment of the federal government to honor its agreements with its retired employees. ⁽²⁷⁾

Only 39 percent of private employees are covered by "defined benefit" plans. ⁽²⁸⁾ "Defined contribution" plans are used more frequently in the private sector. Under "defined contribution" plans the retirement benefit is based upon the contributions and subsequent earnings. The overwhelming majority of public employees are covered by the more expensive benefit plans. Defined benefit plans are beyond the resources of most private employers. Unlike public employers, private employers are unable to compel customers cover such expenses.

(15) More Pension Benefit Increases. More than 60 percent of state and local government retirees receive either automatic or "ad hoc" pension benefit increases. Approximately five percent of private sector retirees receive pension increases.

(16) Paid Retiree Health Care: Some public employers provide health insurance for retirees. The overwhelming majority of private employees do not receive this benefit.

(17) Exemption of Pension Benefits from State Income Taxes: In some states, federal and state government employees are exempt from paying state income taxes on their retirement income.

The Excess Value of Public Employment: Each of the factors above adds financial value to public employment relative to private employment. The impact of these advantages constitutes the excess value of public employment.

Excess Value of Public Employment

The excess value of public employment is the extent to which total public employee compensation exceeds the market rate for comparable employees who produce the same quantity and quality of work. The excess value of public employment is, for the economy and taxpayers, economic waste --- it is a cost that is higher than necessary to obtain public services (see Box #4: Excess Cost of Public Employment).

Accounting for the Excess Value of Public Employment

A valid comparison of public and private employee compensation must include the value of all compensation, including both wages and employer paid benefits. Adjustments can be made to account for some of the differences between private and public employee compensation. A model was developed to estimate the excess value. It is assumed that a private employee, state or local employee, and federal civilian employee begin a 40 year career at the same wage rate (the average private wage rate in 1991). ⁽²⁹⁾

Accounting for Wages and Benefits per Hour Worked: Public employees tend to work fewer hours in exchange for more lucrative wages and benefits (Table #3). In the first year of employment, the effect of more lucrative employee benefits ⁽³⁰⁾ and greater paid time off converts into an advantage for the public employees.

The state or local government employee would receive 10.3 percent greater compensation than a private employee paid the same wage rate.

The federal civilian employee would receive 18.9 percent greater compensation than a private employee paid the same wage rate.

Over a 40 year career, the higher rate of public employee compensation increases ⁽³¹⁾ would increase the gap.

The state or local government employee would receive 21.7 percent greater compensation than the private employee starting at the same wage rate. The public employee's compensation would exceed that of the private employee by $280,000.

The federal civilian employee would receive 35.0 percent greater compensation than the private employee starting at the same wage rate. The public employee's compensation would exceed that of the private employee by more than $450,000.

1. Elliot Sclar, "Privatization: A Giant Step Backwards," Privatization Update, Fall 1991, Public Employee Department, AFL-CIO, (Washington: 1991).

2. Jean Love, "Mass Transit: A Barren Promise," Across the Board. The Conference Board, July-August 1992.

3. Statistical Abstract of the United States: 1993, Table #896.

4. Approximately 10 percent of postal employees are supervisory, technical or professional.

5. Calculated from US Department of Labor Bureau of Labor Statistics data.

6. It is estimated that this benefit amounts to 0.6 percent for state and local government employees and 1.7 percent for federal employees.

7. Wendell Cox and Samuel A. Brunelli, "America's Protected Class: Why Excess Public Employee Compensation is Bankrupting the States," The State Factor, Volume 18, Number 3 (February 1992); "America's Protected Class II: The Widening Public-Private Pay Gap," The State Factor, Volume 19, Number 1 (January 1993); and "America's Protected Class III: The Unfair Pay Advantage of Public Employees," The State Factor, Volume 20, Number 4 (April 1994), American Legislative Exchange Council (Washington, DC).

8. NIPA

9. "America's Protected Class III: The Unfair Pay Advantage of Public Employees," The State Factor, Volume 20, Number 4 (April 1994), American Legislative Exchange Council (Washington, DC).

10. Including federal government enterprise employees.

11. 11. Based upon analysis of unpublished 1989 and 1993 Bureau of Labor Statistics data. The probability of a private employees losing a job is nearly 4 times that of a public employee.

12. "America's Protected Class III: The Unfair Pay Advantage of Public Employees," The State Factor, Volume 20, Number 4 (April 1994), American Legislative Exchange Council (Washington, DC).

13. Vice-President Al Gore, Report of the National Performance Review: From Red Tape to Results, Creating a Government that Works Better & Costs Less (Washington, DC: U.S. Government Printing Office, September 1993).

14. For example, Los Angeles competitively contracted transit routes that were threatened with cancellation as a result of financial constraints. In an independent audit, Price Waterhouse reported (Price Waterhouse, Bus Service Continuation Project Fiscal Year 1988-89 Evaluation Report [1991]):

Unit cost savings of 60 percent savings (public costs were 150 percent higher than competitive costs). Savings on some routes were found to be 69 percent, which is unprecedented in transit contracting.

An improvement in service reliability of over 300 percent, a 75 percent reduction in passenger complaints, and virtually the same safety performance relative to the region's large public transit agency.

15. Cost savings from public-private competition are documented in a variety of sources. See for example, E. S. Savas, Privatization: The Key to Better Government, Chatham House Publishers (Chatham, NJ: 1987), David Osborne and Ted Gaebler, Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector (Reading, MA: Addison-Wesley Publishing Company, 1992), and Wendell Cox and Jean Love, "Controlling the Demand for Taxes through Competitive Incentives," The State Factor, Vol.17, No.12 (Washington, DC: American Legislative Exchange Council, December 1991).

16. Analysis of data in 1992 State Employee Benefits Survey, Workplace Economics, Inc. (Washington, DC: 1992).

17. Analysis of data in Employee Benefits in State and Local Governments, 1990; US Department of Labor, Bureau of Labor Statistics (Washington: February 1992); Employee Benefits in Medium and Large Private Establishments; US Department of Labor, Bureau of Labor Statistics (Washington: May 1993); Employee Benefits in Small Private Establishments US Department of Labor, Bureau of Labor Statistics (Washington: September 1991) (referred to in subsequent notes as USDOL Employee Benefits Series.

18. According to data in Employment and Earnings, United States Department of Labor, Bureau of Labor Statistics (Washington: January 1992), state and local government employees are absent at least 20 percent more than private employees.

19. Calculated from data in USDOL Employee Benefits Series.

20. 1992 State Employee Benefits Survey.

21. It is estimated that this benefit amounts to 0.6 percent for state and local government employees and 1.7 percent for federal employees.

22. Calculated from information in 1993 Federal Personnel Guide, Key Communications Group (Washington, DC: 1993).

23. Under Section 13(c) of the Urban Mass Transportation Act of 1964. Section 13(c)'s severance pay provisions are so onerous that public transit agencies have failed to implement productivity improvements that would have benefitted the public to avoid them. See Simon Rottenberg, "Protection of Employees in the Public Acquisition and Operation of Urban Mass Transit", Government Protection of Employees Involved in Mergers and Acquisitions, University of Pennsylvania, The Wharton School: Industrial Research Unit (Philadelphia: 1989). Vice President Gore's National Performance Review characterizes such extraordinary protection as "special interest privilege(s)" obtained by "holders of some occupations."

24. Calculated from data in USDOL Employee Benefits Series.

25. Bradley R. Braden and Stephanie L. Hyland, "Cost of Employee Compensation in Public and Private Sectors," Monthly Labor Review, U. S. Department of Labor, Bureau of Labor Statistics (Washington: May 1993).

26. At the end of fiscal year 1992, it was estimated that the total unfunded liability of the federal employee defined benefit retirement programs was approximately $1.5 trillion --- an amount that is equal is 40 percent as large as the federal (national) debt (data from Employee Benefits Research Institute).

27. Don Mace and Eric Yoder (editors), 27.. Federal Employees Almanac 1993, Federal Employees News Digest, Inc. (Reston, VA: 1003), p. 138.

28. Braden and Hyland.

29. All results are in 1991 constant dollars.

30. Includes an adjustment to account for the tax free benefit of the excess of public employee benefits over private.

31. Based upon the private sector average annual inflation adjusted increase from 1980 to 1991. Public increases were projected based upon their 40 year variance (1951 to 1991) from private increases. During this period, annual state & local government employee increases were 0.5 percent greater than private employees. Federal civilian employee increases were 0.6 percent greater. This method yields a conservative estimate of public sector increases --- the use of later data would have increased the gap.