What About the Benefits?
May 13, 2010
My CEPR report released yesterday shows that state-and-local government workers earn less than private-sector workers at the same age and education level. But what happens when we also include benefits? A second CEPR report, also released yesterday, addresses the benefits question.
Perhaps surprisingly, factoring in benefits doesn't much alter the conclusions. First of all, state-and-local workers are older (by about four years) and much better educated (just over half have a four-year college degree or more, compared to just under 30 percent of private-sector workers). Since we expect older, better-educated workers to have better benefits than younger, less educated workers, higher average benefit costs are not, in and of themselves, evidence that state-and-local workers' benefits are "too high".
Second, in the limited cases where we have evidence on (1) occupations that are broadly similar between the state-and-local and private sectors and (2) total wages and benefits, the sum of wages and benefits are actually pretty similar across the two sectors. Managers in state and local government, for example, have slightly lower wages and slightly higher benefits than their private-sector counterparts, leaving average compensation for managers almost identical across the two sectors.
Third, the private sector benefit numbers include a lot of small and medium-sized establishments, which frequently have poor benefits and are not a sensible point of comparison for state and local governments, which are often among the largest employers in their areas. National survey data on pay and benefits consistently show state-and-local government compensation packages (the sum of pay and benefits) are on a par with what large employers in the private sector offer.
Fourth, state-and-local pension expenditures are not directly comparable with private-sector numbers because 30 percent of state-and-local employees are excluded from Social Security. That exclusion means that an important portion of total state-and-local pension contributions goes only to make up for the missing Social Security.
Finally, solid state-and-local benefits packages may simply reflect market realities. Even the highest-skilled workers in the public sector will never get rich. They have no stock options, no big bonuses, no chance to become an equity partner or the CEO. Job security and good benefits are among the few ways to recruit and retain highly skilled public employees.
UPDATE 05/14/2010: In their recent study of state-and-local employee compensation, economists Keith Bender and John Heywood conclude that, even after factoring in benefits, state-and-local employees earn about seven percent less than similar workers in the private sector (and about 10 percent less than similar workers in large firms in the private sector).