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September 1, 2010

Federal Employees Are Not Underpaid 22 Percent


For the 9.5 percent of Americans who are unemployed, this Labor Day will not be a vacation, I t will just be another day looking for work in a time of stubbornly high unemployment.

One class of workers not suffering, however, are those employed by the federal government, where there is no recession.  Salaries and employment in the public sector are up, and benefits remain generous.

Especially in a time of ballooning budget deficits, no one thinks federal workers deserve a big raise, except, that is, federal officials and the workers they employ. Faced with calls to rein in federal pay, the Office of Personnel Management and the National Treasury Employees' Union cite government statistics claiming that federal workers actually earn 22 percent less than comparable private sector workers.

In contrast, academic studies typically show that federal workers receive a significant pay premium. With deficits in the trillions and the private sector suffering, lawmakers need to get federal pay right.

Federal workers are right to protest simplistic public/private pay comparisons. USA Today recently reported that average federal pay is double that of the private sector. But federal workers have greater education and work experience, for which they deserve higher pay.

But not that much higher. Even after controlling for a large set of variables related to individual productivity, federal workers still appear overpaid. Our analysis finds that federal employees received salaries 12 percent higher than private sector workers with the same age, education, experience, race, gender, and other personal characteristics.

This conclusion is consistent with academic evidence spanning three decades. Combined with higher benefits, average federal compensation may be $14,000 above what a similar private sector worker would receive.

Yet claims continue that federal employees are underpaid. Colleen Kelley, NTEU’s president,  recently cited the 22 percent pay gap figure and called for increased federal pay. An OPM official referenced the same alleged pay gap in a press conference, and director John Berry released a statement claiming federal workers “are making a significant sacrifice in pay.”

How does the 22 percent underpayment figure coexist with the academic evidence that federal workers are overpaid? Because the government asks a different question than do economists. The government compares jobs, while economists compare employees.

Each year a bureaucratic entity called the President’s Pay Agent compares public and private sector wages in various occupations and at different levels of responsibility. The answer is that, on average, federal positions pay 22 percent less.

But this does not mean federal employees earn less than they could in the private sector. The reason is that the federal government promotes employees to higher positions than they would hold in the private sector.

For instance, a senior accountant in government might qualify only as a junior accountant in the private sector. This senior accountant would be “underpaid” compared to private sector employees only because he is under-qualified by private sector standards.

A Congressional Budget Office study concluded that the average federal worker resides two-thirds of one pay grade above a similar private sector employee. A more recent academic study found a larger gap of three-quarters of a grade.

Official pay statistics are badly skewed as a result. If federal employees are over-promoted, federal positions can be underpaid, while federal workers remain overpaid.

The 2008 Pay Agent’s report acknowledged its own shortcomings, stating: “We continue to have major methodological concerns about the underlying model for estimating pay gaps.” The Obama administration’s first pay report omits this warning, though it is hard to believe that administration economists – at least one of whom did groundbreaking work on the federal pay premium – accept the official figures.

We estimate that federal employees are overpaid by roughly $40 billion annually, on top of job security and other perks that make beleaguered private sector workers envious. Not every federal worker is overpaid and the most talented people often receive less working for government, but average federal pay is substantially higher than in the private sector.

It should not be surprising that federal employees quit their jobs at only one-third the rate of private sector workers. The only surprise would be if federal employees remained so loyal while simultaneously being paid just 78 cents on the dollar, as OPM and union officials implausibly claim.

Despite clinging to this figure, OPM has announced that it will look into revising the way federal salaries are determined. We welcome this development, and we strongly recommend that public employees be paid based on their skills, not their job descriptions.

Jason Richwine is a senior policy analyst at the Heritage Foundation.

First appeared in The Washington Examiner







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