Wages, Pensions, and Public-Private Sector Compensation Differentials for Older Workers

Article excerpt


We use a sample of full-time workers over 50 years of age from the 2004 and 2006 waves of the Health and Retirement Study (HRS) to investigate whether workers in federal, state, and local government receive more generous wage and pension compensation than private sector workers, ceteris paribus. With respect to hourly remuneration (wages plus employer contributions to defined contribution plans), federal workers earn a premium of about 28 log points, taking differences in employee characteristics into account. However, there are no statistically discernible differences between state and local workers and their private sector counterparts, ceteris paribus. These findings are about the same whether or not indicators of occupation are included in the model. On the other hand, pension wealth accumulation is greater for employees in all three government sectors than for private sector workers, even after taking worker characteristics into account. As a proportion of the hourly private-sector wage, the hourly equivalent public-private differentials are about 17.2 percent, 13.4 percent, and 12.6 percent for federal, state, and local workers, respectively. We find no evidence that highly-educated individuals are penalized by taking jobs in the public sector, either with respect to wages or pension wealth.

Keywords: public-sector compensation, wages, pensions

1. Introduction

For many years, both academics and public policy makers have debated whether public sector workers are over- or under-paid relative to their private sector counterparts. This issue has recently received particular attention because of the severe budgetary constraints facing governments at all levels. For example, former Governor Mitch Daniels of Indiana argued, "We have a new privileged class in America...We used to think of government workers as underpaid public servants. Now they are better paid than the people who pay their salaries...Who serves whom here? Is the public sector-as some of us have always thought-there to serve the rest of society? Or is it the other way around?" (Garofalo, 2010). At the same time, some public employees maintain that they are underpaid. A seventh-grade English teacher demonstrating against Wisconsin Governor Scott Walker's plan to reduce public sector benefits told the Huffington Post, "I can't get a home loan. I set my thermostat at 62. No cable at my house, no internet...I'm also $36,000 in debt from becoming a teacher" (Delaney, 2011).

New Jersey Governor Chris Christie (2010) captured the essence of the issue nicely when he said, "at some point, there has to be parity between what is happening in the real world and what is happening in the public-sector world." But determining what "parity" means in this context is challenging for two reasons. First, the human capital of public and private sector workers may differ. If, for example, public sector workers have more education than private sector workers, then it is neither surprising nor objectionable that they earn higher wages. This is precisely the argument made by former White House budget director Peter Orszag regarding federal government compensation: "Basically the entire delta between private sector and public sector federal government average pay can be explained by education and experience...while there may be some remaining disparities, I think some of the more dramatic newspaper stories I've seen about that disparity are somewhat misleading" (Tuutti, 2010). The second reason why public-private sector comparisons are problematic is that compensation consists of more than just wages and salaries. Pension benefits comprise an important part of compensation, so that comparisons of just wages and salaries may be misleading. Indeed, sectoral differences in pension benefits have recently drawn considerable attention. According to Cook (2011), "union chiefs can downplay their pension benefits all they want. The fact is, most of their members have been guaranteed a millionaire's retirement. …