California State Pay Too High

Americans need ... a referendum on government, rather than
a referendum on rhetoric about government
- The Economist (96.01.27)

February 1996

Background: Comparing Government and Market Compensation

Over the past four years, the American Legislative Exchange Council has published research on government employee compensation under the general title of America's Protected Class. On March 22, 1995, Wendell Cox provided testimony to the California Assembly PER&SS Committee with respect to the costs of government employment in California. This testimony was based upon California research, America's Protected Class III: The Unfair Pay Advantage of Public Employees and America's Protected Class: The Excess Value of Public Employment. The point of the testimony was that California government employees --- both at the state and local level --- are compensated at well above rates paid to comparable employees in the private sector.

California Government Employees are Paid More than Comparable Private Employees

America's Protected Class: The Excess Value of Public Employment shows that the value over a career of average US state and local government employee compensation is more than one-third higher than that of a comparable private employee who starts a career at the same salary rate as a government employee. The research indicated that the California government employee advantage is likely to be even larger. The calculations included elements of value that are routinely (and inappropriately) ignored in government-private sector compensation analyses, such as employer paid benefits, paid time off, larger annual increases, and superior security.

Government Employees Should be Compensated at the Market Rate

It has been suggested that government-private employee compensation comparisons should be limited to large private companies (such as the Fortune 500). This is not an appropriate standard. Government-private employee comparisons should be based upon the market. The question is not "what are Fortune 500 companies paying?" it is rather, "what is the market paying?" The widespread savings from competitive contracting and other forms of privatization has demonstrated that the same or higher quality public service can be purchased through the market for less than the costs of direct government service production. And most of the difference is in labor costs --- the payment of higher compensation rates for fewer hours worked. The March 22, 1995 testimony cited the following case study of transit in southern California:

>>> San Diego, with its systematic conversion of services to competitive contracting has achieved unit cost performance far superior to Los Angeles and the San Francisco Bay Area, where institutional barriers have precluded such a program. If Los Angeles and the San Francisco Bay Area had equalled San Diego's unit cost performance over the past 15 years, each of their annual operating expenditures would be $200 million less. As a result, less service is provided, fares are higher than necessary, there is less transit employment. And worse, the very public purpose is violated --- the poor receive inadequate levels of service, and air quality is retarded because transit is unable to use its resources efficiently to attract drivers out of their automobiles.

Any government spending that is more than necessary is waste --- including excessive compensation of government employees.

Unlike Government, the Private Sector Must Compensate at Market Rates

There is a significant difference between government and the private sector.

1. Private companies (even Fortune 500 companies) risk their very survival when they fail to control their costs. As a result, private companies, including Fortune 500 companies routinely pay their employees based upon competitive market rates. If their compensation structures are too high, they face financial setbacks or even closure. The last few decades have produced numerous examples of corporate decline for failure to remain competitive.

2. Governments do not risk their survival for failing to control costs. To use the ultimate example, even bankrupt Orange County faces no threat of closure. As a result, governments often pay more than necessary for the one component of cost not subjected to the competitive market --- labor (labor is also the largest cost component).

In the private market, employees are compensated based upon market rates. A company cannot long survive if it routinely pays its employees more than market. Government can and does survive when it pays its employees more than market.

Average Employee Tenure Confirms Above Market Compensation

Perhaps the ultimate test of whether government pays its employees too much or too little is "tenure." How long has the average employee worked for the employer?

1. If the average tenure of government employees is higher than that of comparable private sector employees, it is a reflection that the attractiveness (market value) of government employment is greater than that of similar employment in the market

2. If the average tenure of government employees is less than that of comparable private sector employees, it is a reflection that the attractiveness (market value) of government employment is less than that of similar employment in the market. This condition will also be reflected in a large number of government jobs that are vacant because potential employees find them of insufficient interest.

The average tenure of California state government employees is nearly 10 years --- approximately double that similar employees in the market. This higher average tenure indicates that California state government employee compensation is, on average, greater than market rates. This is not to suggest that all California state government employees are paid more than their private sector counterparts. The condition of under-payment, however, must be demonstrated by the necessary indicators --- less than market average tenure and recurring job vacancies.

It is Expensive and Wrong to Pay Government Employees More than Market

The fundamental public policy question is this --- should government pay its employees more than market (the rate paid to comparable private employees). Outside government, employee compensation is determined by the market. All things considered, the market value of a government job should be the same as that of a similar private job. But, on average, government employment is much valuable that employment in the market.

But by paying employees at above market rates, government injures society in two ways.

1. It reduces the net earnings of taxpayers --- not just the affluent --- but also the majority who earn middle incomes --- and the poor.

2. It stifles economic growth. It has been estimated that each additional $1.00 of taxation destroys up to $1.50 in economic growth. And, economic growth translates into jobs --- sustainable jobs created in the market. By over-compensating its employees, government denies jobs to others, unnecessarily entrenching poverty.

The March 22, 1995 testimony concluded that California may be paying its state employees $7 billion more than market. This is not only expensive, but it violates the most fundamental precepts of democratic civilization --- that of equality under the law. Where government employee compensation is higher than market, government bestows privileges on a particular class of people (government employees) at the expense of all others