Recently, there has been a great deal of debate and consternation over the compensation of public-sector employees across the U.S. It has been asserted that state and local government employees are overpaid compared to workers in the private sector. In California government workers have been vilified as scandals and anecdotes pass as confirming evidence of exorbitant pay. This research is especially important given the outrage over the pay of municipal officials in Bell, California. The outrage over what happened in Bell is reasonable and just. Many of the players immediately resigned and on September 21, 2010 eight city officials were arrested.1 Those arrested include the former city manager of Bell, Robert Rizzo, who was making nearly $800,000 a year. Rizzo was charged with 53 counts. It is alleged that Rizzo, without approval from the City Council, actually wrote the conditions of his own contract—the case keeps growing in terms of scope and involved officials. It is clear by the arrests and scores of allegations that the situation in Bell was not in line with usual procedures.
While anecdotes that stem from public-sector corruption capture much attention, it is a data-driven analysis of public-sector pay and compensation that is needed to answer the question: How do the pay and benefits of public sector workers compare to those in the private sector? This is a legitimate question that should not be answered anecdotally. The research in this paper investigates empirically whether California public employees are overpaid at the expense of California taxpayers.
The results from this analysis indicate that California public employees, both state and local, are not overpaid. The wages received by California public employees are about 7% lower, on average, than wages received by comparable private sector workers; however, public employees do receive more generous benefits. An apples-to-apples comparison, or one that controls for education, experience, and other factors that may influence pay, reveals no significant difference in the level of employee compensation costs on an annual or per hour basis between private and public sector workers.
Nonetheless, there are substantially different approaches to staffing and compensation between the private and public sector. Specifically, there are important workforce differences between the two sectors in terms of educational attainment. On average, California’s public sector workers are more highly educated. Of full-time workers, 55% hold a four-year college degree in the public sector compared to 35% in the private sector. Educational attainment is the single most important predictor of earnings—thus it plays a vital role in this analysis. On average, California state and local governments pay college-educated labor less than private employers. The earnings differential is greatest for professional employees, lawyers and doctors. On the other hand, the public sector appears to set a floor on compensation. The earnings of those with a high school degree or less is higher in state and local government than it is for similar workers in the private sector.
There are other significant personnel differences between the public and private sector workforces. The age (median) of a typical worker in state and local government is 44 compared to 40 in the private sector. Furthermore, the state and local government workforce has more women (55%) compared to the private sector (40%).
In general, better educated and older, more experienced workers earn more than less educated and younger workers while women earn less than men. Thus, comparisons between the two sectors must take into account these and other differences such as race and experience when making pay comparisons. Simply comparing average pay between the two sectors, without taking into account workforce differences, would be highly misleading.
Benefits are also allocated differently between private and public sector full-time workers in California. State and Local government employees receive a higher portion of their compensation in the form of employer-provided benefits and the mix of benefits is different from the private sector. While some benefits may be more generous in the public sector, it is a serious error to imagine that comparability requires that each and every element of compensation be the same. When total compensation—both the cost of employer-provided benefits and direct pay—is taken into account state and local public sector workers in California are similarly compensated to workers in the private sector.
Public employers contribute on average 35.7% of employee compensation expenses to benefits, whereas private employers devote 30% of compensation to benefits. Public employers provide better health insurance and pension benefits. Public employers contribute 11.8% to insurance, mainly health insurance, compared to a 7.7% contribution by private employers. Retirement benefits also account for a substantially greater share of public employee compensation, 8.2% compared to 3.6% in the private sector. Most public employees also continue to participate in defined benefit plans managed by the state, while most private sector employers have switched to defined contribution plans, particularly 401(k) plans. On the other hand, public employees receive considerably less supplemental pay and vacation time, and public employers contribute significantly less to legally-mandated benefits.
Thus, the difference in workforce characteristics and benefit allocations between the public and private sectors is why a regression-adjusted analysis is employed in this research. The regression framework allows a comparison of similar workers controlling for factors which influence compensation levels. A standard wage equation produced a surprising result: full-time state and local employees are under-paid by about 7% compared to their private sector counterparts. However, a re-estimated regression equation of total compensation (which includes wages and benefits) demonstrates that there is no significant difference in total compensation between full-time state and local employees and private-sector employees.