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Public Servants Versus Private Contractors ... Again

Has the battle over public sector compensation turned a decisive corner? Have much-maligned government workers won an evidence-based victory?

Reasonable people might think so, thanks in part to a study by the Project on Government Oversight (POGO), a nonpartisan group that keeps close tabs on government operations. According to the findings of the POGO report – findings that they call "shocking" – the "federal government approves service contract billing rates … that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services."

More specifically, federal government employees cost less than private contractors in 33 of the 35 occupational classifications reviewed – and non-federal private sector worker compensation was lower than contractor billing rates in all of the reviewed classifications. In one case, contractor bill rates were nearly "5 times more" than the full compensation rates paid to comparable federal workers.

The High Cost Of Caring

The field of early childhood education (ECE) is riddled with contradictions. Bluntly, when those we love the most—our children—are at the most consequential stage of their cognitive, social, and emotional development, we leave them in the hands of the people we pay the least. According to the latest data from the U.S. Bureau of Labor Statistics, for example, childcare workers earn about 4 percent less than animal caretakers—$20,940 and $21,830 per year, respectively.

I am far from the first to make this embarrassing comparison; more than a decade ago, Marci Whitebook provided an extensive overview. Unfortunately, the comparisons still hold.

Over the intervening years, there have been many determined efforts to regulate and improve the working conditions of early childhood educators, including raising the qualifications and wages for the profession. Indeed, the demand for worthy salaries is often discussed in combination with workforce development efforts. In other words, we want early childhood workers to be both better trained and better paid. While this may seem to be a perfectly reasonable approach, it suggests that the low wages are a result of inadequate qualifications. Perhaps. But I believe that this obscures another important explanation for these workers’ persistently meager pay.

Unions And Pensions: Unfunded Culpability

The Pew Center on the States just released an updated report on unfunded liabilities of state pension (and retiree health) systems. The figures are sobering. In FY 2009, state pension plans were funded at an average of 79 percent, meaning that they were short about one dollar for every five that projections suggest they’ll need to meet their obligations.

While there’s no doubt about the troublesome implications of these findings, there’s a lot of disagreement as to causes. Lately, governors and state legislators (of both parties, but mostly Republicans), as well as dozens of commentators, have tried to lay the blame on the public sector workers, to whom the pensions are owed – seeking to restrict these workers’ collective bargaining rights, with the claim that this will help control the cost of benefits.

The unfairness of blaming public sector workers – and their unions – should be pretty clear. By all accounts (also here), the primary reason that pension plans are in trouble is that the 2008 collapse of financial markets decimated the value of pension fund investments (the early 2000’s recession also seems to have played a role). Add to that an aging population (there is an increasing percentage of retirees as a share of the population, and they are living longer), as well as the failure of many states to make their required contributions during good times, and you have a fairly comprehensive explanation for the pension "crisis."

Nevertheless, some have argued that public employee collective bargaining has exacerbated states’ pension problems – after all, more than their non-union counterparts, union members have tended to trade current salaries in favor of increases in deferred benefits. In that case, we might expect that states with higher densities in public sector union membership will have larger unfunded pension obligations. These differences need not be huge, but it’s reasonable to anticipate that they would be discernible. Let’s take a look.

Are Teachers Driving The Public/Private Sector Earnings Gap?

A great deal of the debate surrounding public sector unions focus on how much public employees earn versus private workers. Every credible analysis – those that account for huge differences between public and private workers in terms of characteristics like profession, education, and experience – find that public compensation is competitive or lower than that of private-sector workers (for recent examples, see here, here, and here, or a review here).

I have, however, heard a few thoughtful observers make the point that virtually all these analyses include education workers, and that this might be a little misleading. It’s a fair point. Roughly one in five state/local government employees are in fact K-12 teachers, while another five percent are professors at public colleges and universities. This is important because analyses of public/private sector compensation essentially compare public employees with workers with similar characteristics (education being the most important one) in the private sector. The research above indicates that workers with more education pay a larger “price” for working in the public sector, whereas many lesser credentialed, lower-skilled government jobs actually pay more. Since many teachers have master’s degrees (and professors Ph.D.’s), and they are such a huge group, it’s reasonable to wonder if they might be skewing the overall estimates.

So, I decided to see if a comparison of public/private compensation that does not include teachers and professors would yield very different results. Let’s take a look.

How To Make A Misleading Public/Private Earnings Gap Disappear

USA Today last week published yet another story claiming that public sector workers make more that their private sector counterparts - this one saying that Wisconsin is one of many states where this is the case. Their “analysis” used data from the Bureau of Economic Analysis, and compared total compensation (salary+benefits) between workers in the private sector and state/local government.

No matter how many times they are told that you can’t just make a straight comparison of dissimilar groups of workers, apparently they still don’t get it. Incredibly, this particular article admits as much, and even quotes economist Jeffrey Keefe, who tells them that the gross comparisons don’t account for important sectoral differences in education and other factors. In other words, their numbers don’t tell us much of anything about public versus private sector compensation. Still, there is the headline: "Wisconsin one of 41 states where public workers earn more." How many people saw that headline, and now believe that public workers are “overpaid?"

USA Today, of course, is not alone. These assertions have lately become insidious, coming from governors, commentators, and others. But when a major national newspaper decides to run this story at this politically-charged time, based on their very own “analysis," a separate response seems in order.

I’ve discussed this issue before, but maybe it would be more helpful to show how the data are more properly analyzed in a step-by-step fashion, using 2009 U.S. Census microdata (the American Community Survey, available from the wonderful organization IPUMS.org). Here’s how you make a false earnings gap disappear in five minutes.

Ready, Disclaim, Fire

Earlier today, newly-elected Michigan Governor Rick Snyder released his "Citizens’ Guide to Michigan’s Economic Health." The general purpose was to provide an easy-to-understand presentation of the state’s finances, and to encourage local governments to do the same. These are of course laudable goals, but one of the report’s major findings, also mentioned in the governor’s press release, was a familiar one:

Average annual compensation of state employees (including salary, wages, and benefits) was over twice the average annual compensation of private sector workers in 2009.

As might be expected, many reporters and editors dutifully ran this outrage-inspiring finding as a headline (also here and here), even before the report was officially released: State workers make twice as much as private sector workers. Governor Snyder rolled out the report as part of his presentation to the Business Leaders for Michigan Summit, in which he spoke about the state’s fiscal situation.

I’ve already discussed how these gross comparisons of public and private sector workers – whether nationally or in a single state – are invalid. That is, they compare two completely different groups of workers: Public employees, who are mostly professionals, and private sector workers, many of whom work in lower-wage, lower-skill jobs. But this time, you don’t need to take my word for it. After featuring the “twice as much” finding in a header and pull-out quote, the governor’s report says it directly:

However, this analysis does not compare private and public sector employees with similar jobs, years of experience, or education.

Let me translate that for you. It means: This comparison is meaningless.

Attention To Pay

The debate over how best to restructure teacher salary systems is older than I am—with good reason: Instructional salaries represent roughly 40 percent of current K-12 public school expenditures.  And some of the arguments for changing current salary structures make sense, at least in theory. 

For instance, there is a case for tying step increases (typically awarded according to years of service) to additional measures, such as strengthened evaluation systems and curriculum-linked professional development (as is the case in the recently-ratified Baltimore contract). These types of changes, if they are bargained and approved by teachers, could be of real benefit to all stakeholders.

At the same time, it’s unfortunate that some of the talking points used commonly by those who wish to overhaul teacher salary systems are rather misleading and oversimplified. Not only do they sometimes seem designed to inspire outrage against teachers, they also tend to obscure or ignore important facts about the relationship between teacher pay and teacher quality.  Three such arguments seem particularly pervasive.

Public Apples, Private Oranges: A More Ripened Look

In a previous post, I criticized articles in the USA Today and elsewhere (all citing data from the conservative Cato Institute), which claimed that federal government workers earn almost twice as much as private sector employees (including salary and benefits). I argued that en masse comparisons of public and private sector workers don’t tell us much, since the jobs that comprise the two sectors are very different.

For a more useful comparison, we need to understand not only that most public sector workers are professionals, but also that they tend to be more experienced, and more quickly promoted, than the typical private sector employee. For example, a lead research scientist will earn more than his or her staff scientists, whether they are working in the public or the private sector. So, if public sector employees in a given occupation tend to be more experienced or have more authority or responsibilities, they will appear “overpaid” even though they are not.

So, how does the public/private wage gap look when we compare professionals in the two sectors by both occupation and experience/responsibilities?

Public Apples, Private Oranges

Hardly a week goes by during which an editorial or column in a major newspaper doesn’t comment on how public sector workers are making a killing compared with their private sector counterparts. Recently, as a result of the "edujobs bill," there has been even more of this chatter than usual about “overpaid” government workers with “bloated benefits” and “fireproof” positions. Some of these commentaries even purport to present “evidence."

Earlier this week, for instance, a piece in the Washington Examiner cited data showing that average compensation (salary plus benefits) for federal government workers was roughly twice that of private sector workers. Sound remarkable? Not so much.

This “argument” is akin to comparing the compensation of employees at IBM versus WalMart. You are talking about two very different groups of jobs.