Academic journal article Contemporary Economic Policy

Comparing Federal and Private-Sector Wages without Logs

Academic journal article Contemporary Economic Policy

Comparing Federal and Private-Sector Wages without Logs

Article excerpt

I. INTRODUCTION

Numerous researchers have concluded that workers in the federal government are more highly compensated, on average, than those in the private sector with similar education, experience, and other characteristics. This study reexamines data from the Current Population Survey (CPS) to estimate differences in hourly wages and uses administrative data on federal pay to more accurately impute high earnings that are top-coded in the CPS. Comparing federal workers with workers in the private sector having similar observable characteristics, I estimate that hourly wages were higher in the federal government than in the private sector among less educated workers and lower among those with more education.

What was the difference in average wages between federal and private-sector workers overall? Because of differences in wage dispersion within the sectors for people with similar characteristics, the answer depends critically on the definition of "average." Pooling results from all education levels, I find that the arithmetic mean of hourly wages was about 2% greater among federal workers than among similar workers in the private sector. Most of the previous literature comparing federal and private-sector wages examined differences between the mean log wages of those two sectors (and I also find larger differences in those geometric means), but this study focuses on differences in the arithmetic means of wages, for both practical and theoretical reasons.

As a practical matter, lawmakers have asked what the implications would be for the federal budget if federal workers were paid the same wages as similar workers in the private sector. With the number of federal hours worked held constant, the answer to that question depends on the difference in arithmetic means between the wages of such workers in the federal and private sectors. Differences in mean log wages do not answer that question.

The basic theoretical model of wage determination derived by Mincer (1974) and others leads to a form for wages (Y) as a function of the worker's years of schooling and work experience (X) such that Y = exp(X[gamma]), which Mincer shows fits the data well. But the empirical literature has almost exclusively focused on estimation of the log-linear regression model ln(Y) = X[beta]+ [member of], even though consistent estimates of [beta] are generally not consistent estimates of [gamma]--as discussed by Blackburn (2007). In particular, differences in wage dispersion between two groups of otherwise similar workers (i.e., heteroscedasticity in the log-linear regression models) cause [beta] to be an inconsistent estimate of [gamma], and I find that wages of federal employees were substantially less dispersed than those of similar workers in the private sector.

I measure differences between employees with similar observable characteristics; I do not attempt to address other potential questions of interest, such as what the wages of federal workers would have been if those particular workers had never been employed by the federal government, or what their wages would be if they were laid off from the federal government and moved to the private sector. Those types of questions involve various issues (such as unobserved abilities, selection into and out of the federal sector, and impacts of job loss) that I did not have sufficient data or a credible identification strategy to address.

The wages that this paper focuses on are only one component of compensation. Analyzing differences in overall compensation would involve quantifying the value of the fringe benefits--such as pensions or other employer contributions to retirement savings--provided in each sector. That issue is addressed for federal employees in Falk (2012) and for employees of state and local governments in Gittleman and Pierce (2011a. 201 lb).

II. BACKGROUND AND CONTEXT

The salaries or wages of most federal employees are set based on their rank in a pay schedule, which consists of a series of pay grades and pay steps within those grades. …

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