As a resident scholar at the conservative American Enterprise Institute, Andrew Biggs studies one of the most contentious issues: the pay differential between public-sector and private-sector employees.
In an interview with Roll Call, he argues that an across-the-board pay freeze simply isn’t enough to close the gap between the two groups and says demand is much greater on the public side than the private.
Q: Why do public-sector employees have greater job security than private-sector employees?
A: There’s a variety of different reasons for it. One is that … because the government is not as cyclical as other businesses, there may be less need to hire or lay off. I tend to think the bigger factor is the power of public employees.
Q: Is there anything the private sector can do in both the short term and long term to compete with the public sector in the areas of wages, benefits and job security?
A: Well, it’s very, very hard. The private sector competes best on wages because wages are the place where compensation in the public sector is most comparable to the private sector. It’s in the area of benefits and job security where things are really very, very different. Pensions are much more generous in the public sector, in part because they have accounting standards that are a lot looser than private-sector firms have to work with. The solution to that is … to make public-sector plans use accounting standards that make sense. In terms of job security, I don’t think that’s something where the private sector should try to compete with the public sector.
Q: In your study last year, “Comparing Federal and Private Sector Compensation,” you noted that the federal premium shrinks considerably for higher-level employees in the public sector. Why?
A: Most studies find … that pay is most generous at the lower levels of skill and less generous at the high levels. Politically speaking, there’s a limit on how low the wages can be in the public sector because it just sort of looks bad. And likewise, there’s a limit on how high the wages can be because that also looks bad. This comes down to what the typical voter is going to approve of.
Q: Could you explain the Pay Agent Approach? And why, if at all, you’re critical of using it as a metric to compare the pay between the two sectors?
A: The standard approach for these types of pay comparisons is that you focus on the employee. … You use the attributes of the individual to try and predict what the wages are and that’s how most economists see this. … The Pay Agent Approach doesn’t think about employees, it thinks about jobs. … The Pay Agent also doesn’t include benefits. … For both federal [and] state and local workers, it’s in the benefits where the action is.
Q: Do you think an across-the-board pay freeze for public-sector employees is enough to level the playing field? If not, what steps would you recommend?
A: An across-the-board pay freeze like we’ve seen and [people] have proposed, I don’t think as a short-term measure is terrible. But it’s really not the way you want to go about this. … The level of pay for federal employees isn’t uniform across the distribution. It tends to be the low and middle end where the pay is overly generous. … An across-the-board pay cut is a blunt instrument that doesn’t get things right. We need reforms to how we go about doing these things and to get away from a one-size-fits-all solution.
Q: In which sector is it more significant to have a college degree?
A: It is more common in the federal government to have a college degree than in the private sector. There’s a second more technical question: Where are you more rewarded for being educated? I think [payment] tend[s] to be a bit larger in the federal government.
Q: From your perspective, what industry in the private sector is the most promising in terms of salary and benefits at the moment?
A: It’s not something I study very much. Obviously health care is a growth industry in the private sector. Private-sector education is working well. I don’t have a very good answer to that question.
Q: Are there a large number of private-sector employees who are going to the public sector? Or is it the other way around?
A: Research has shown that you have what’s called a job queue for federal employment and also for state and local government as well, which means that more people want those jobs than can get them. The government doesn’t have a lot of trouble attracting people in most cases.
Q: What do you think the biggest misperception is about the debate surrounding the pay differential between the two sectors?
A: You get a little from both sides. Folks on the right who will just compare pay for the average federal employee to that of the average private-sector worker, and ignore the fact that federal employees are more educated and more experienced. On the other hand, a lot of government employees have spent most of their lives in the government being told that they’re underpaid by 26 percent or whatever. And I think a lot of them don’t really understand how generous their pay and benefits are relative to the private sector.
Q: Is there a model on the state level that you would implement on the federal level in terms of dealing with discrepancy in pay?
A: Indiana is actually a pretty good state in terms of public-sector pay. [They] have defined benefit pensions but they’re not super generous. They have a fairly modest retiree health plan. It’s not wildly different from other governments in terms of the benefits they offer, but the benefits are much more modest and much more in line with private-sector levels.