More on Federal vs. Private Pay

August 17, 2010

The release of updated industry data from the Bureau of Economic Analysis, which show that the average federal employee continues to earn significantly more in compensation than the average private sector employee, has Office of Personnel Management Director John Berry on the defensive.

In light of Berry’s assertion that Cato and other critics of federal pay are not “advancing a factually-oriented debate,” I’d like to make a few comments:  
First, the Washington Post reports that top OPM officials point to Bureau of Labor Statistics data that “[f]ederal employees made on average 22 percent less than workers in similar private-sector jobs.” To Berry’s credit, he dismissed that figure (along with comparisons made using BEA data) as being “faulty.”
Even if the BLS data comparison were true, it would only reflect wages. Federal benefits are generally more generous than those found in the private sector. We use the BEA data because it provides the most comprehensive accounting for the value of employee benefits.
Second, defenders like Berry point to higher education levels in the federal workforce relative to the private sector as a reason for the higher average compensation in the former. Because the aggregate private data includes industries with lower-skilled employees, like restaurants, defenders say comparing averages isn’t “fair.” 
However, breaking the BEA data out across 72 industries shows that the federal civilian workforce as an industry ranks sixth in terms of average compensation. As one would expect, average compensation in the restaurant and bar industry is dead last, and financial services are at the very top. (See this blog for the breakdown.)  
Third, in addition to ignoring benefits, defenders also ignore other perks of federal employment including extreme job security. According to BLS data, in 2009, a private sector employee was more than three times more likely to be laid off or fired than a federal employee. As my colleague Chris Edwards points out in an essay on federal pay, federal workers also “receive generous holiday and vacation schedules, flexible work hours, training options, incentive awards, generous disability benefits, and union protections.”
Fourth, BLS data shows that a federal employee is more than 8 times less likely to quit than a private sector employee. We’ve argued that this indicates that federal employees recognize that the generous combination of wages, benefits and job security is hard to match in the private sector, so they stay put.
Defenders of federal pay haven’t adequately addressed this point. Attributing this discrepancy to a selfless motivation on the part of federal employees to serve the nation would be nonsense. A question that defenders need to answer is: if comparable private sector pay is so much better, why don’t more federal employees leave for the private sector? If they’re as high-skilled and educated as defenders claim, why settle for less than they’re worth?
The question of worth leads to the fifth, and in my opinion, the most important point.
I think the most valid criticism defenders of federal pay offer up is that we’re comparing “apples and oranges.” However, although they have a point, it’s not for the reasons they suggest.
In the private sector, an employee’s compensation is a reflection of his or her value in the market. For instance, one may not like that LeBron James makes millions of dollars playing basketball, but that’s what the market for professional basketball players says his production is worth. It’s no different for a considerably lower-paid employee in the restaurant industry.
What’s a federal employee worth? How does one measure a government employee’s production? Government isn’t subject to market disciplines. It can’t go out of business. It has no competitor. It doesn’t need to earn a profit let alone break even. It doesn’t receive its revenue from voluntary transactions – its revenues are obtained via taxation, which are paid by individuals under compulsion and force.
Therefore, federal employee compensation is a function of the political process. Government employees are plugged into a pay scale, and can move up the scale by simply sticking around. President Obama proposed in his fiscal year 2011 budget that federal civilian employees receive an arbitrary across-the-board 1.4 percent pay increase. What does that figure have to do with a federal employee’s worth?
Federal and private employees are apples and oranges because the former is dependent on the latter for its existence. In the natural world, this relationship is call parasitism. This is not a pejorative statement. Every dollar earned by a federal employee is one less dollar that a private sector employee earns. One can argue over a federal employee’s value to society, but one cannot argue that the perceived value doesn’t come at the expense of the private sector.
According to the BEA, total federal wages and benefits amounted to $240 billion in 2009. That’s $240 billion in economic resources extracted from the private sector. Given that the private sector has lost millions of jobs while federal employment continues to expand, defenders of federal pay can’t just dismiss the critics as being “unfair.”  


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