Finding Answers to the Public Compensation Question

• Author: Andrew G. Biggs,Jason Richwine
• Published date: 01 November 2012
• DOI: http://doi.org/10.1111/j.1540-6210.2012.02661.x
• Date: 01 November 2012

Perspective

Andrew G. Biggs is resident scholar at

the American Enterprise Institute. Previously,

he was principal deputy commissioner of

the Social Security Administration, SSA’s

deputy commissioner for policy, and associ-

ate director of the White House National

Economic Council. He holds a doctorate

from the London School of Economics.

E-mail: andrew.biggs@aei.org

Jason Richwine is senior policy analyst

at the Heritage Foundation, where he has

published widely on issues of public sector

compensation. He previously worked at the

American Enterprise Institute as a research

fellow. He earned his doctorate in public

policy in 2009 from the John F. Kennedy

School of Government at Harvard University.

E-mail: jason.richwine@heritage.org

780 Public Administration Review • November | December 2012

Public Administration Review,

Vol. 72, Iss. 6, pp. 780–781. © 2012 by

The American Society for Public Administration.

DOI: 10.111/j.1540-6210.2012.02661.x.

Andrew G. Biggs

American Enterprise Institute

Jason Richwine

Heritage Foundation

R

ecent empirical evidence strongly suggests

that, on average, combined wages and ben-

ef‌i ts for public sector workers now outstrip

compensation for comparable private sector work-

ers.  e most obvious implication of this imbalance

is that public money is being used inef‌f‌i ciently.  e

compensation disparity poses an even greater problem

for public administrators, however, who risk losing

legitimacy in the eyes of voters and taxpayers. People

want to know that government employment is truly

public service—not a gateway to special privileges.

Elected of‌f‌i cials and other policy makers need to

get compensation right, and the f‌i rst step is measur-

ing it accurately. Here we describe strategies that

economists have used to compare public and private

compensation.

We start with wages. Many economists favor a

“person-to-person” or “human capital” approach,

which compares wages for government employees

with that of private sector workers who share similar

education, experience, and demographic character-

istics that correlate with productivity and pay.  is

approach generally f‌i nds that state and local govern-

ment employees receive slightly lower salaries than

private sector workers, while federal employees receive

slightly higher salaries.

An alternative to the human capital model is a “job-

to-job” approach, which compares wages for jobs

demanding similar levels of ef‌f ort and skill. By and

large, this approach generates similar results. A recent

analysis published by two economists at the Bureau

of Labor Statistics (BLS) found that state government

employees earn about 4 percent less than private sec-

tor workers whose jobs demand similar skills, while

local government jobs pay about 7 percent more than

similar private positions.

With both approaches showing only small dif‌f erences

in wages, fringe benef‌i ts push average public sector

compensation well ahead of the private sector.  e

disparity is primarily the result of generous public

sector retirement benef‌i ts, including traditional

def‌i ned-benef‌i t pensions and retiree health benef‌i ts

that cover employees who retire before Medicare

eligibility.  e Congressional Budget Of‌f‌i ce (CBO)

found that federal pensions and retiree health cover-

age are 2.7 times as valuable as the retirement benef‌i ts

enjoyed by private workers in large f‌i rms. At the state

and local level, retirement packages are often even

more generous.

 e one comparison for which the person-to-person

and job-to-job approaches generate a major incon-

sistency is the federal versus nonfederal wage com-

parison. Two recent studies using the human capital

model conclude that federal employees receive wages

that are 2 percent to 14 percent higher than those of

similar private sector workers. At the same time, the

President’s Pay Agent, which conducts the govern-

ment’s of‌f‌i cial wage (but not benef‌i t) comparison each

year, concluded that federal jobs of‌f er wages fully 26

percent lower than nonfederal jobs with similar skill

requirements.

What might account for this dif‌f erence? For academ-

ics or practitioners looking to develop their own pay

comparisons, it is instructive to explore this question

in detail.

Federal jobs are given General Schedule (GS) grades,

ranging from GS-1 to GS-15, based on each job’s

specif‌i c duties and skill requirements.  e Pay Agent

takes a sample of nonfederal jobs and essentially maps

the federal government’s GS system onto that sample.

After collecting data on job requirements, the Pay

Agent has the BLS assign GS grades to the sample of

nonfederal jobs.

 en the Pay Agent compares the wages in each fed-

eral GS grade to the wages in nonfederal jobs with the

same corresponding GS grade. In other words, federal

GS-8s are matched with nonfederal GS-8s, federal

GS-9s are matched with nonfederal GS-9s, and so on.

Finding Answers to the Public Compensation Question