The Government Pay Bonus

Andrew Biggs and Jason Richwine in today’s Wall Street Journal:

Even using all the standard controls–including race and gender, full- or part-time work, firm size, marital status, region, residence in a city or suburb, and more–the federal wage premium does not disappear. It stubbornly hovers around 12%, meaning private employees must work 13 months to earn what comparable federal workers make in 12.

Most academic studies dating back to the 1970s have found similar pay differences. In addition to the wage premium, federal workers enjoy more generous fringe benefits than do private workers. For instance, federal workers receive a defined benefit pension with benefit levels comparable to those from private 401(k) plans, except that federal workers contribute only 0.8% of pay and are not subject to any market risk. They also receive employer matches to the defined contribution Thrift Savings Plan that significantly exceed the typical private employer match.

If the overall generosity of federal benefits matches that of federal salaries (which seems quite likely), total compensation for federal workers may easily exceed $14,000 per year more than an otherwise similar private employee.

The pay premium is probably the main reason federal workers quit their jobs at a far lower rate than do private employees. At the beginning of 2010, federal workers were only about one-third as likely to leave their jobs (a ratio not much different than in 2006, before the recession), implying that no private employer could offer them better compensation.

Federal employment also carries significant nonfinancial benefits–in particular that layoffs and firings are much rarer. If you think these aspects of federal employment lack value, ask any private employee who is now looking for work. A federal pay premium is unfair both to private workers, who receive less than their government peers, and to taxpayers who must cover the difference. Given our 2.7 million-strong federal work force, the government effectively overbills Americans by almost $40 billion every year just on labor costs.

Worker compensation is hardly the largest driver of current and future federal deficits. The biggest threat comes from the rising entitlement benefits of Social Security, Medicare and Medicaid. Nevertheless, if Washington demands “painful sacrifices” to make these programs solvent, as the slogan goes, it must first re-establish its credibility. Giving federal workers salaries, benefits and terms of employment comparable to those received by private workers would be a good start.

Read the whole thing here.