Comparing Compensation: State-Local versus Private Sector Workers

The comparability of state-local versus private sector pay has become a major issue in the wake of the financial crisis. Funded levels of public pension plans declined sharply, and governments' ability to make the required contributions has been severely constrained by the collapse of state-local budgets. Politicians everywhere are looking for ways to reduce pension costs and increase revenues. Often such efforts are couched in terms of excessively generous existing compensation - especially, current pensions. Dueling studies have appeared arguing that state-local workers are paid less or more than their private sector counterparts. Virtually all agree that wages of state-local employees are lower than for private sector workers with similar education and experience, but researchers differ on the extent to which pensions and other benefits compensate for the shortfall. This brief builds on the recent wave of studies by refining the estimates of the value of benefits. The discussion proceeds as follows. The first section presents some basic data on wages and benefits. The second section, following the methodology of earlier researchers, estimates the relative wages in the state-local versus private sector, controlling for education, demographics, and other factors. The results suggest that state and local workers in the aggregate have a wage penalty of 9.5 percent. The third section explores the extent to which benefits for state anad local workers offset the wage penalty. With appropriate modifications for pension contributions and the addition of retiree health insurance, annual public sector compensation - including both wages and benefits - is about 4 percent less than that in the private sector. The final section concludes that, given the modest size of any differential between public and private compensation, policymakers whould look carefully at the specifics of their own state or locality before making significant changes.