Money Matters: Sector Differences, Competition, and the Public Personnel System

• Author: Laura Langbein,Fei Wang Roberts
• Published date: 01 January 2022
• Date: 01 January 2022
• DOI: http://doi.org/10.1177/02750740211032574
• Subject Matter: Articles

https://doi.org/10.1177/02750740211032574

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Introduction

Government is a significant employer in the United States.

According to the Department of Labor, government employ-

ment accounted for 14% of total employment in 2018, with

22 million people employed in federal, state, and local gov-

ernments. Government pays for and also directly or indi-

rectly provides essential social services. However, even

though many people benefit from government programs,

and while government is not a dominant employer, public

perception is often negative toward government in general,

and especially toward compensation for government

employees as well as the public personnel system (Marvel,

2015; Niskanen Center, 2019). For instance, in 2013, con-

troversies regarding government employees’ compensation

led to several states passing legislation to cut wages and

reduce the impact of labor unions for public employees

(Lafer, 2013; Rainey, 2014).

Compensation in the public sector, and more broadly, the

entire public personnel system, remains an area of contro-

versy among both policymakers and the public. Many peo-

ple perceive public personnel systems as rigid, inflexible,

and wasteful while operating in a non-competitive environ-

ment (Marvel, 2015). Therefore, numerous reforms target-

ing public personnel systems have been implemented during

the past several decades for the purpose of recruiting tal-

ented employees, reducing the rigidity associated with the

traditional personnel system, and augmenting the efficiency

and effectiveness of public service (Brewer & Kellough,

2016; Kellough & Selden, 2003).

The main focus of this study is to explore whether public

personnel systems, particularly the compensation system, is

indeed as rigid and non-competitive as people perceive it to

be. To the best of our knowledge, little scholarly work in

public administration has explored whether and how com-

pensation in the public personnel system responds to wages,

and to wage competition, with the private sector. Many stud-

ies of compensation systems focus on intrinsic incentives

(e.g., public service motivation; autonomy), along with atti-

tudes (e.g., satisfaction) about pay and other extrinsic

rewards. But, especially for middle (and lower) class work,

real money must matter. Moreover, when examining deter-

minants of wage differentials in the public sector, most of the

existing research does not account for the impact of other

sectors. In practice, human resource managers are aware of

the interdependency of wages in the public and private sec-

tors, implying that offering substandard wages can lead to

1032574ARPXXX10.1177/02750740211032574The American Review of Public AdministrationLangbein and Roberts

research-article2021

1American University, Washington, DC, USA

Corresponding Author:

Laura Langbein, Department of Public Administration and Policy,

American University, Washington, DC, USA.

Email: langbei@american.edu

Money Matters: Sector Differences,

Competition, and the Public

Personnel System

Laura Langbein1 and Fei Wang Roberts1

Abstract

This study explores whether public personnel systems, particularly their compensation systems, are flexible and responsive

to market wages in a competitive labor market. Focusing on registered nurses, we explore whether and how the public,

private nonprofit, and for-profit labor markets influence each other in determining wages. We also examine if sector plays a

role in determining wages. We use American Community Survey data from 2016 and 2017 to test these expectations. Fixed

effects regressions and seemingly unrelated regressions with Chow tests reveal that higher wages in the dominant for-profit

sector appear to drive up wages in the other two sectors, and vice versa. The results imply that public personnel systems

are not so rigid and inflexible as perceived. Rather, they are sensitive to supply and demand and offer wages responding

to competition from other sectors. Moreover, public employees do not ignore competitive opportunities in alternative

employment markets in the private sectors. Students of public employment should not overlook the private sectors either.

The markets are distinctive but not independent.

Keywords

registered nurses, wages, labor markets, competitive wages, public personnel system

2022, Vol. 52(1) 61–86

negative outcomes such as high turnover rates, poorer qual-

ity, and difficulties in filling vacancies. Nonetheless, few

studies in public administration have examined how wages

in one sector respond to wages in the other sectors in what

potentially is a competitive market.1

This study seeks to address gaps in current literature by

(a) examining the impact of sector on wages and (b) explor-

ing each sector’s responses in setting wages to wages in the

other two sectors, with a focus on comparison to the domi-

nant private for-profit sector. We use the registered nurse

(RN) labor market as an example to answer these questions.

The data were obtained from the two most recent waves of

the American Community Survey at the time when we con-

ducted this research.

Our findings show that RN wages in the public sector

appear to respond positively to wages in the private for-profit

and nonprofit sectors. This suggests that, inconsistent with

the widespread perceptions that depict the civil service sys-

tem as rigid and inflexible, the public personnel system, at

least in the case of the labor market for RNs, appears to

exhibit flexibility and competition between the sectors with

respect to employee compensation in response to market

forces. This study seeks to deepen our understanding of the

public personnel system by providing empirical evidence

regarding whether and how wage determination in each sec-

tor of the market for RNs is dependent on wage determina-

tion for RNs in the other sectors. It also sheds light on within

sector differences in pay determinants.

Previous Research

Evolution of the Public Personnel System

Since the merit system was implemented during the period of

civil service reform in the 1880s, an important theme of the

public personnel system is neutral competence: selecting

public employees based on their occupational qualifications

while offering protection from the influences and interfer-

ences of political forces (Kellough et al., 2010; Kellough &

Selden, 2003). Equally important, politicians must ensure

that civil servants are accountable to voters, even though the

public personnel are not directly elected by citizens but have

the delegated authority and power to implement policy.

Policy is often an expression of intent without detail, so that

public personnel have considerable discretion. As a result,

the public personnel system has also been designed to

increase both professional flexibility (e.g., be a “good” nurse,

engineer, teacher, or policeman) as well as responsiveness to

the voting and paying public (Brewer & Kellough, 2016;

Brook & King, 2008; Kellough et al., 2010; Kellough &

Selden, 2003). This balance is not always easy to maintain

(Kellough & Selden, 2003).

Since the 1970s, policymakers have become increasingly

interested in public personnel reforms as a response to the

perceived inflexibility, rigidity, and poor performance

associated with the traditional public personnel system

(Brewer & Kellough, 2016; Marvel, 2016). In 1978, the

Carter administration enacted the Civil Service Reform Act,

which established the merit pay system and performance

appraisals in federal agencies (Ingraham, 1993; Knudsen

et al., 1979; Perry, 2008). It also replaced the Civil Service

Commission with the Office of Personnel Management and

the Merit Systems Protection Board, and designed the

Senior Executive Service for top managers in federal agen-

cies (Knudsen et al., 1979; Perry, 2008). Later, in the 1980s

and 1990s, advocates of the New Public Management, part

of the reinventing government movement, emphasized the

importance of empowering public managers through decen-

tralization to enhance managerial discretion in personnel

management practices, including hiring, firing, and com-

pensation (Kellough & Selden, 2003; Rainey, 1998). In

addition, many states have tried to reform civil service sys-

tems to increase flexibility and performance, and to take

advantage of alternative compensation systems (Condrey,

2002; Nigro & Kellough, 2008).

Many of these efforts focused on refining compensation

systems with the goal of increasing their flexibility (Kellough

& Selden, 2003). Today, it is not uncommon for state and

local governments to conduct pay-comparability studies to

keep pace with wages offered by the private sectors (both

nonprofit and for-profit) to remain competitive (Langbein &

Lewis, 1998; Rainey, 2014; Smith, 1976). Nonetheless, pub-

lic personnel systems, especially the compensation system,

are still perceived as rigid, inflexible, and not reflective of

market values of labor (Jacobs & Mettler, 2018; Niskanen

Center, 2019).

This study explores if wages in the public sector, at least

in the case of an active labor market in the public, private

for-profit, and nonprofit sectors, is responsive to market

competition. We use RN wages as an example. Specifically,

we examined the impact of sector on wages in each sector by

using separate equations as well as jointly estimated equa-

tions. Most importantly, we explored whether and how wages

in the public sector are influenced by wages in the private

nonprofit and for-profit sectors.

Determinants of Sector-Based Wage Differentials

It is well-established in the public–private comparison lit-

erature that public and private sectors have vast organiza-

tional, environmental, and individual differences, including

structure, oversight, sources of funding, productivity mea-

sures, citizen participation, employee motivation and com-

mitment, and many others (Allison, 1980; Bozeman, 1987;

Goodsell, 2007; Rainey & Bozeman, 2000; Scott & Falcone,

1998). Among those distinctions, wages also appear to vary

across sectors. A substantial body of work suggests sector

plays a role in determining wages (Delfgaauw & Dur, 2010;

Donahue, 2008; Langbein & Lewis, 1998; Melly, 2005;

Mueller, 1998; Rainey, 2014; Ramoni-Perazzi & Bellante,

62 American Review of Public Administration 52(1)