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The public-private pay debate: what do the data show? - sector wages

Monthly Labor Review - May 1, 1996

From the 50 State capitols to the 80,000 local government entities, the level of public employees' pay is a much-discussed issue. Payroll costs are a big-ticket item in State and local governments, amounting to more than 60 percent of all expenditures. Citing average pay rates and quit rates, critics such as Wendell Cox and Samuel A. Brunelli argue that public employees are overpaid compared with private sector employees and that public agencies are over-staffed.(1) Others, such as Dale Belman and John Heywood, argue that State and local governments provide services requiring a better educated and higher skilled work force than exists, on the whole, in the private sector.(2) In addition, citizens expect government to lead by example, and studies indicate that State and local governments have outpaced the private sector in remedying wage discrimination against women and minorities.(3)

This article examines the current literature and then uses occupational pay data from the BES Occupational Compensation Survey Program (OCSP) to compare wages and salaries in State and local governments with pay in nonfarm private industry. For the occupations studied, the major findings include the following:

* At the low end of the pay scale, State and local governments generally paid better than private industry did.

* Among white-collar jobs, private industry usually paid better than State and local governments did.

* Among white-collar jobs, within occupations, as pay rose with the level of duties and responsibilities, the private sector paid increasingly better wages.

* State and local government pay lagged far behind that of private industry for professional and administrative occupations.

* Patterns were mixed for technical, clerical, and blue-collar workers.

* Comparisons across occupations revealed that workers in lower paying jobs were more likely to be paid better in the public sector. Workers in higher paying jobs were more likely to be paid better in private industry.

Recent studies of pay

A survey of the recent literature on public and private sector pay (wages and salaries) reveals that conclusions may be more closely linked to methodology and ideology than is desirable. Generally, researchers employ one of two methodologies: human capital studies or comparability analyses. Human capital studies typically calculate an overall average wage rate for all workers and then examine the rate in terms of demographic characteristics such as age, education, race, and sex. Comparability analyses weigh differences in the average pay of workers in the same occupation performing essentially the same level of work in the different sectors. Some studies report that State and local governments pay better than private industry does, others report that private industry pays better, and still others report that the results are mixed. This disparity arises for two reasons:

* The data that were used came from sources (pay surveys) designed to collect data in different ways, often for different purposes.

* Average wage rates used in the studies were calculated in different ways; that is, the researchers did not average the same factors.

The differences in the results of the various studies have fostered a serious debate over the appropriateness of pay levels in Stale and local governments. This article summarizes the debate and then examines whether data collected by the OCSP help to clarify the issue.

Human capital studies, which typically compare all-employee average wage rates, often provide valuable insight into differences in data that stem from demographic characteristics. Data used in these studies frequently come from readily available wage and salary surveys collected on a nationwide basis by various Federal agencies. Two examples of data banks used in human capital studies are the Current Population Survey (CPS)(4) and the National Income and Product Accounts.(5) Typical human capital studies were written by Sharmila Choudhury, as well as the aforementioned Cox and Brunelli, and Belman and Heywood.

The Choudhury study. Choudhury's scholarly examination of the relation between wage differentials and various demographic characteristics used data from the March 1991 CPS and found that "on an average, both male and female public sector employees earn a significant wage premium."(6) Building on the work of other academicians, such as Sharon Smith, R. M. Blank, Steven Venti, William Moore, and John Raissian, Choudhury made the following conclusions with regard to race, union membership, work schedule, marital status, and education and experience:

* White men earned higher wages than nonwhites in both the private and the public sector.

* White women earned significantly higher wages in the public sector than nonwhite women, and the gap was considerably greater than in the private sector.

* Men who belonged to unions earned more than nonunion men, but the premium was greater in the private sector.

* Women who belonged to unions earned more than their nonunion counterparts in the private sector, but in the public sector, union women earned less than nonunion women.

* Part-time workers received higher pay in the private sector.

* Marital status was an important influence in pay rates in the private sector, but not the public sector, and was more important for men than for women.

* Pay rose with the workers' levels of education and experience, but it reached higher levels for men than for women.

Choudhury's data refer to all government workers; State and local workers were not broken out separately from Federal workers. Choudhury relied upon an overall average wage for all workers, regardless of occupation, in the categories observed.(7) That the workers in the overall categories were not all performing the same type of work at the same level of difficulty was not considered.

The Cox-Brunelli study. Prior to Choudhury's scholarly analysis, Cox and Brunelli, writing for the American Legislative Exchange Council in 1991, published the first in a series of reports asserting that State and local government workers were overpaid and urging State legislators to slash public payrolls and employment, and contract work out to private industry.(8) The most recent report in the series used data from the 1991 National Income and Product Accounts and provided separate figures for State and local government workers. Cox and Brunelli found that State and local government workers were paid an average of $28,160 per year in wages and salaries. This figure was 5.4 percent higher than the average annual earnings for all private sector workers ($26,716). When benefits were included, the gap widened to 10.3 percent. When the shorter workweek for State and local government workers was taken into account, the public sector pay premium rose to 25 percent.

Cox and Brunelli contended that much of the public sector pay advantage observed in 1991 was the result of substantial wage gains in that sector in the 1980's. The authors estimated that, during that decade, State and local government pay rose almost 5 times faster than private sector pay. They estimated further that the 1991 public sector pay premium amounted to $51.4 billion in "excess" State and local government expenditures. Citing these numbers, they contended that State and local government employment was too high and could be cut. Reducing per capita public sector employment to the rate of Pennsylvania, the State with the lowest such employment, would save an estimated $78 billion and could be accomplished in 34 other States in just 4 years, relying on attrition alone. In addition, Cox and Brunelli used their findings to promote the competitive contracting (privatization) of selected government services as a cost-saving measure.

The Belman-Heywood study Cox and Brunelli's findings, however, were immediately challenged in academic circles and by public employee unions. Typical of these responses was Belman and Heywood's paper, in which the authors asserted that reliance upon an overall average wage rate is inappropriate:

Although the body of research on public sector wages

provides little evidence of universal overpayment at

the State and local levels, the belief that state and local

governments overpay their employees does get support

from studies that ignore the issue of [occupational]

comparability. One must compare like with like: accountants

with accountants and not store clerks, college

graduates with college graduates and not high-school

dropouts.(10)

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