Public and Private Sector Compensation: What Is Affordable in This Recession and Beyond?-A Conference Summary

By Valentine, Lise; Mattoon, Richard H. | Chicago Fed Letter, May 2009 | Go to article overview

Public and Private Sector Compensation: What Is Affordable in This Recession and Beyond?-A Conference Summary


Valentine, Lise, Mattoon, Richard H., Chicago Fed Letter


On February 26, 2009, the Federal Reserve Bank of Chicago and The Civic Federation hosted a forum to examine the differences in wages and benefits between the public sector and private sector and to discuss best practices in work force sustainability.

For many years, conventional wisdom has held that public sector wages were lower than private sector wages, so generous ancillary benefits were needed in order to attract and retain skilled workers in the public sector. More recently, data from the U.S. Bureau of Labor Statistics (BLS) have suggested to some observers that total compensation averages of the public sector now significantly exceed those of the private sector. Economic pressures and global labor trends have led many private sector firms to eliminate expensive benefits, such as defined benefit pension plans (in favor of defined contribution plans),1 but most public sector agencies have not followed suit. Such changes have created a greater perceived gap between public sector and private sector employees in terms of both financial security and overall compensation.

The participants at this forum were invited to discuss these compensation differences and the assumptions behind them. The obvious question was the following: Who gets better pay and benefits - public sector or private sector workers? The participants illuminated various issues that make this question difficult to answer. While, at first blush, this might seem like an easy comparison to make, the aggregate wages and benefits data on both types of workers do not tell the whole story on compensation differences. There are also many factors to consider before one can draw any conclusions about how each sector can attract and retain the most effective work force.

Review of the data

Jay Mousa, regional commissioner, U.S. Bureau of Labor Statistics, Chicago Regional Office, along with Greg Philipaitis, assistant regional commissioner, described what kind of data the bureau collects and what that data tell us about differences in wages, health insurance, vacation time, and retirement benefits. Mousa noted that 16.4% of U.S. workers are employed in the public sector. More specifically, federal government employees make up 2.0% of the work force; state government employees, 3.7%; and local government employees (including teachers, police, and firefighters), 10.6%. This distribution has been fairly stable over recent years, with the largest additions to the public sector being teachers.

The BLS' s September 2008 Employer Costs for Employee Compensation (ECEC) survey shows that average total compensation in the private sector is $27.07 per hour, while the average total compensation in the public sector (state and local governments only2) is $39.18 per hour. However, Philipaitis explained that there are numerous caveats to be considered. Some of them are as follows.

* The employer surveys are voluntary, with 15% to 20% of private sector employers refusing to participate and only 4% to 5% of public sector employers refusing.

* More than 40% of public sector workers are represented by a union, while fewer than 10% of private sector workers are.3

* Average employee tenure is twice as long in the public sector.4

* The occupational mix of each sector is different: For instance, roughly twothirds of public sector jobs are professional and administrative, while 51% of private sec tor jobs are; and retail sales and food service jobs, relatively low-paid and often part-time positions, represent 20% of private sector jobs, but only 2% of public sector jobs.5

Philipaitis also compared selected occupations that do exist in both sectors, such as nurses, accountants, lawyers, and civil engineers. He noted that the hourly wages for these highly skilled professions tended to be better in the private sector, but added that when the value of benefits is also considered, the result may favor the public sector. …

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Public and Private Sector Compensation: What Is Affordable in This Recession and Beyond?-A Conference Summary
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