Thursday, May 24, 2012

Public Sector Workers: Overpaid Bureaucrats?

This year, Mitt Romney declared that, "Average government workers are now making $30,000 a year more than the average private-sector worker." This is a popular talking-point among many current Republican governors, who have attempted to argue that state and local public-sector employees are preposterously overpaid, in large part because they are unionized.   This was a big reason for the infamous union-busting debacles in Wisconsin and Ohio (Senate Bill 5, anyone?). The governors argued that the exhorbitant pay of state and local workers was the main reason for such large state budget deficits. On the face of it, it may appear that some studies or news reports have shown that this is true, but the reality is that many of them fail to account for several factors.

Over at EPI, they have a great explanation of why many public sector employees are perceived to be overpaid:
"For starters, public sector workers are, as a group, more highly educated, work in more highly paid occupations and they tend to work moderately fewer hours than those in the private sector. In addition, it is frequently noted that public employees earn more in benefits such as health care and pensions: therefore, a simple wage comparison will not accurately capture difference in total compensation."
So unless we control for these differences in hours worked, total compensation (including health and retirement benefits), and different levels of education, any comparison presented would be highly misleading at best and utterly meaningless at worst. Fortunately for us all, there have been several different academic studies done to try to control for these factors. So what were the results?

Well, this table sums it up nicely:
After controlling for different levels of education, hours worked, and including total compensation instead of wages alone, the results are that anyone with a bachelor's degree or above have drastically lower total compensations than comparable workers in the private sector. It is true, however, that the less-educated workers on public payrolls have slightly higher total compensation, but this is nowhere even close to the numbers that Mitt Romney threw out. Their higher compensation is, as you can see, all from slightly higher health/retirement benefits, not from wages. And many state retirement plans are in the form of something called "deferred contributions," where workers choose to have their pay put into a retirement or health plan for collection later on in life. So the fact that they recieve higher total compensation due to increased benefits is in many cases because workers themselves chose to direct their pay there, not because the government is putting more money into benefit plans.  David Cay Johnston has a good piece that explains this better than I probably can.

The fact that public sector workers are more highly-educated than private-sector workers (54% of public sector workers hold a four year degree versus 35% in the private sector) also makes the slightly higher compensation for less educated workers much less prevalent than it would be in the private sector. So sure, if you want to say that in some cases, public sector workers make a little bit more (5-9% more), then I guess you could say that. But you could also say that private sector workers who are more educated make anywhere from 21 to 37% more than their public counterparts.

The high levels of unionization among public-sector employees has, in fact, created a wage floor of sorts, whereas declining unionization in the private sector has caused this floor to collapse. However, research has been done that shows that trying to eliminate this by busting public unions will lead wage growth to further lag behind worker productivity, which has been cited as a factor in deterioration of middle class earnings. And, I know this gets a bit convoluted, but some jobs, like police and firefighters, have no real alternative non-government employment, so their unionization is a critical counterbalance to legislative efforts to hold their total compensation levels below market pricing. For more reading on that, check out the conclusion of this study.

In any case, Romney's statement mentioned that on average, public sector workers are making $30,000 more a year than public sector workers. I've just shown you the breakdown of total compensation for comparable workers with various levels of education. Let's take Romney's statement and see how the average public vs. private sector workers do:

Sure doesn't look like they're rollin' in it. They're making $2,001 less a year on average. Overpaid indeed. So, like I said, maybe unionized workers with lower levels of education make slightly more in total compensation, but most public sector workers don't seem to be grossly overpaid. They sure as hell aren't pulling in an extra $30,000 a year over private sector workers. In fact, most of the more educated ones are horribly underpaid compared to their private sector counterparts. Are unions bloated? Maybe they are, but it sure doesn't seem like they're extorting huge sums of money from taxpayers in the form of generous benefits and salaries. You could argue about the costs vs benefits of allowing collective bargaining and unionization. That would be a conversation worth having. But the conversation we're having now with governors like Scott Walker and John Kasich is whether or not unions are bankrupting states. 

State budget problems don't appear to be primarily a result of unionization. State budget problems are an issue because of the recession and all that accompanies it, as well as rising health care costs. Recessions reduce tax revenues and increase safety net outlays. Of course state budgets are going to be in shambles, they're paying out more and taking in less! It also doesn't make sense for unionization to be the cause of state budget woes, given that levels of unionization and public-sector compensation haven't grown. Anyways, you can argue about unionization all you want, but there's really not a lot of evidence that public sector unions are the primary culprit when discussing current state budget problems.

Update: I've clarified and expanded upon this topic in a newer blog post here.