New AEI Paper: Almost Every State Pays Its Employees More than the Private Sector Does

by Jason Richwine

Are state workers overpaid or underpaid? Andrew Biggs and I have been asked that question a lot in the years since we started analyzing public-sector compensation. But the truth is that there is no single answer to the question. States vary enormously in how they pay their workers, so giving aggregate estimates hides more information than it reveals. That’s why Andrew and I just released a new American Enterprise Institute working paper that measures the generosity of public-sector compensation in each of the 50 states.

The chart below compares the combined wages and benefits of state (not local) employees with comparable private-sector workers. The most generous state is Connecticut, which pays its public employees 42 percent more than private-sector workers who have similar skills. The stingiest state is Virginia, where public employees are paid 6 percent less.

An obvious take-away from the chart is that most states do pay a compensation premium to their workers, although only a minority have what we classify as a “large” (11 percent to 20 percent premium) or “very large” (20+ percent) premium. The premiums tend to be highest in northeastern states such as Connecticut, New York, and Pennsylvania, as well as in public-sector-union strongholds such as California and Illinois. States paying a tiny premium or penalty tend to be clustered in the South and Midwest, though there are several individual exceptions. Perhaps not surprisingly, the states where public-sector compensation became a major political issue — Ohio, Wisconsin, California, Rhode Island, etc. — pay some of the highest premiums.

There’s much, much more in the working paper for those who are interested in the details. The paper is 87 pages long, and the appendix is probably the most comprehensive discussion of technical and corollary issues ever put together on this topic.

One of these related issues is the need for “compensating differentials” in jobs that are especially stressful or demanding. A coal miner, for example, commands a higher salary than a similarly educated worker with a desk job. But the compensation differences in the chart above are based strictly on wages and benefits for workers with comparable skills. Could there be systematic differences in work conditions between the public and private sectors that affect the comparison? More specifically, could state government jobs be more unpleasant in some way that justifies the generally greater compensation they offer?

The short answer is no. The single most important difference in public and private job characteristics is job security. We found that, after controlling for skills, government employees had greater job security than their private-sector counterparts in every state. There is no state in the union where employment with the government does not confer extra protection from being fired or laid off. That protection has a value, and we attempted to quantify it in one section of the paper.

What about other work conditions? We could not detect any major differences. The chart below displays results from a survey conducted by the International Social Survey Program (ISSP). Reponses are expressed on a one-to-five scale, with five designating strong agreement with the statement:

U.S. public employees are more likely to state that their jobs are secure, interesting, helpful to other people and to society, not physically arduous, and skill-building. However, public employees also say that their jobs offer fewer opportunities to work independently and involve greater stress. There is no statistical difference between sectors in the reported danger of jobs.

Together with other evidence we discuss in the paper, the ISSP data indicate that we should not expect work conditions other than job security to play a major role, positive or negative, in setting pay for government employees. We hope this is the kind of evidence that will be useful to state policymakers as they consider how to set compensation for public employees.