State and Local Government Compensation Lower Than Private Sector Pay, Report Says

State and local government employees are compensated by an average of 3.75 percent less than private sector workers when education and other factors are taken into account, with a public employee compensation “penalty” of 7.55 percent for state government employees and 1.84 percent for local government employees, according to a study released Sept. 15 by the Economic Policy Institute.

“Comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity and disability, reveal no significant overpayment but a slight undercompensation of public employees when compared to private employee compensation costs on a per hour basis,” according to the report titled “Debunking the Myth of the Overcompensated Public Employee: the Evidence.” EPI, a Washington-based nonprofit, describes its mission as seeking to “broaden the discussion about economic policy to include the interests of low- and middle-income workers.”

Creating an accurate comparison is important, EPI said, because 37 states are struggling with substantial budget deficits and governors in several of those states—including Indiana, Minnesota, and New Jersey—have identified excessive public employee compensation as a major cause of their state’s fiscal woes.

Differing Education Levels a Factor

Part of the perceived pay gap in favor of state and local employees is due to differing education levels, the report said.
On average, it said, state and local public sector employees are more highly educated than private sector employees, with 54 percent of full-time public employees holding at least a four-year degree, compared to 35 percent of full-time private sector employees. However, state and local governments pay college-educated employees on average 25 percent less than private employers, with the greatest differential for professional employees, lawyers, and doctors, the report said.

At the same time, it said, the public sector also “appears to set a floor on compensation,” compensating state and local government employees with high school educations better on average than their peers in the private sector. “This result is due in part because the earnings floor has collapsed in the private sector,” the report said.

The report focused on education levels rather than job categories in comparing compensation, explaining that it is too difficult to compare job categories due to differences in private and public sector jobs.

“Even private and public teaching is significantly different. Public schools accept all students, while private schools are sometimes highly selective and may exclude or remove any poor performers, special needs, or disruptive students. Consequently, comparing workers of similar ‘human capital’ or personal productive characteristics and labor market skills is considered the best alternative, and well accepted by labor economists,” the report said.

Better Benefits, Less Pay in Public Sector

Compared to private sector employees, 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 than in the private sector, the report found.

Among other benefits, state and local employees’ health insurance and retirement benefits are more generous on average than what is found in the private sector. However, public employees on average receive less supplemental pay and vacation time, the report said.

“Some benefits are more generous in the public sector, but it is a serious error to imagine that comparability requires that each and every element of compensation is the same. What is important when considering both the employer-provided benefits and direct pay is whether state and local government workers have a total compensation package that costs what they would receive if employed in the private sector,” the report said.

The report, written for EPI by Jeffrey Keefe, an associate professor of labor and employment relations at Rutgers University’s School of Management and Labor Relations, relied on data from the U.S. Census Bureau and the Labor Department’s Bureau of Labor Statistics. The sample size for earnings estimates was 44,280 total observations and 8,737 public employee observations, according to the report.