Cost of Employee Compensation in Public and Private Sectors

By Braden, Bradley R.; Hyland, Stephanie L. | Monthly Labor Review, May 1993 | Go to article overview

Cost of Employee Compensation in Public and Private Sectors


Braden, Bradley R., Hyland, Stephanie L., Monthly Labor Review


At first glance, compensation costs between State and local governments and private industry appear vastly different. In March 1992, employer costs for employee compensation (wages paid plus employer-provided benefits) averaged $23.49 per hour worked in State and local governments and $16.14 in private industry--a difference of almost 50 percent. (See table 1.) Such a comparison can be quite misleading, however, as was noted when these data were first released in June 1992.(1) In fact, the differences in the cost of compensation in the public and private sectors stem from a number of factors, particularly the large variation in the work activities and occupational structures of the two sectors.

For example, certain activities that are required in government, such as public education and safety, call for a large proportion of white-collar professionals and highly skilled service occupations. In contrast, certain industries such as manufacturing, wholesale trade, and retail trade, are unique to the private sector, and require occupations with comparatively lower compensation costs, such as sales. When certain industries common to both sectors are examined, such as health services, total compensation costs are similar.

About two-thirds of the overall gap in total compensation between public and private sectors was in the wage component; one-third was in benefits. Straight-time wages and salaries were $16.39 per hour worked in government, and $11.58 in private industry; benefit costs averaged $7.09 per hour worked in government and $4.55 in private industry.

The difference in the costs of employer-paid benefits between government and private industry primarily reflects differences in the nature of compensation packages provided to employees in each sector. The availability and characteristics of benefits such as paid leave, retirement, and certain insurances vary considerably in the two sectors. For example, virtually all government employees were covered by a retirement plan, while fewer than two-thirds of the employees in the private sector had such coverage.

This article highlights differences in the industry and occupational mix that influence average compensation costs in private industry and State and local governments, and provides data on the hourly cost of compensation for specific groups of workers in each sector.(2) In addition, differences in the cost of benefits are examined, using data on the incidence and provisions of major benefits in the two sectors.

Compensation costs are based on data from the Bureau of Labor Statistics Employment Cost Index (ECI), which measures quarterly changes in employer costs for employee compensation.(3) Data from the ECI are also used to produce measures of employer cost per hour worked for each component of compensation.(4) Compensation costs, representing data for March of each year, were first published for State and local governments in 1991, while private industry data have been available since 1987.(5)

Data on the incidence and provisions of employee benefits are based on the BLS Employee Bendits Survey.(6) The Employee Benefits Survey includes detailed information on the characteristics of employee benefits including paid leave, medical care plans, life and disability insurance, and retirement plans. With few exceptions, the Employee Bendits Survey is limited to benefits financed at least in part by employers.

Costs by industry activity

Much of the difference in average compensation costs between State and local governments and private industry can be explained by differences in the mix of industry activities in the two sectors. The activities that occur solely in one sector generally result in a higher average cost of compensation for government and a lower average cost for private industry.

For example, more than one-fourth of the government work force was engaged in public administration, which averaged $20.

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