Ezra Klein and a variety of other thoughtful liberal bloggers have been pointing to an Economic Policy Institute analysis that they claim demonstrates that Wisconsin’s public employees, even after adjusting for benefits and hours worked, face a “compensation penalty of 5% for choosing to work in the public sector.” Unfortunately, when you get under the hood, the study shows no such thing.
Klein links to an executive summary to support his claim, but reading the actual paper by Jeffrey H. Keefe is instructive. Keefe took a representative sample of Wisconsin workers, built a regression model that relates “fundamental personal characteristics and labor market skills” to compensation, and then compared public- to private-sector employees after “controlling” for these factors. As far as I can see, the factors adjusted for were: years of education, years of experience, gender, race, ethnicity, disability, size of organization where the employee works, and hours worked per year. Stripped of jargon, what Keefe asserts is that, on average, any two individuals with identical scores on each of these listed characteristics “should” be paid the same amount.
But consider Bob and Joe, two hypothetical non-disabled white males, each of whom went to work at Kohl’s Wisconsin headquarters in the summer of 2000, immediately after graduating from the University of Wisconsin. They have both remained there ever since, and each works about 50 hours per week. Bob makes $65,000 per year, and Joe makes $62,000 per year. Could you conclude that Joe is undercompensated versus Bob? Do you have enough information to know the “fundamental personal characteristics and labor market skills” of each to that degree of precision? Suppose I told you that Bob is an accountant, and Joe is a merchandise buyer.
Even if Bob and Joe are illustrative stand-ins for large groups of employees for whom idiosyncratic differences should average out, if there are systematic differences in the market realities of the skills, talents, work orientation, and the like demanded by accountants as compared to buyers, then I can’t assert that either group is underpaid or overpaid because the average salary is 5 percent different between these two groups.
And this hypothetical example considers people with a degree from the same school working in the same industry at the same company in the same town, just in different job classifications. Keefe is considering almost any full-time employee in Wisconsin with the identical years of education, race, gender, etc., as providing labor of equivalent market value, whether they are theoretical physicists, police officers, retail-store managers, accountants, salespeople, or anything else. Whether they work in Milwaukee, Madison, or a small town with a much lower cost of living. Whether their job is high-stress or low-stress. Whether they face a constant, realistic risk of being laid off any given year, or close to lifetime employment. Whether their years of education for the job are in molecular biology or the sociology of dance. Whether they do unpredictable shift work in a factory, or 9–5 desk work in an office with the option to telecommute one day per week.
Keefe claims — without adjusting for an all-but-infinite number of such relevant potential differences between the weight-average public-sector worker and the weight-average private-sector worker — that his analysis is precise enough to ascribe a 5 percent difference in compensation to a public-sector-compensation “penalty.”
And his use of the statistical tests that he claims show that the total public–private compensation gap is “statistically significant” are worse than useless; they are misleading. The whole question — as is obvious even to untrained observers — is whether or not there are material systematic differences between the public and private employee that are not captured by the list of coefficients in his regression model. His statistical tests simply assume that there are not.
I don’t know if Wisconsin’s public employees are underpaid, overpaid, or paid just right. But this study sure doesn’t answer the question.
And I doubt Ezra considers that teachers have a 1600 hour work year - a 40 hour work week is 2080. CPA's put in around 2300 hours a year, some physicians even more.
Reply to this commentLinkReport AbuseHow does one qualify as a "thoughtful" blogger in your book? Merely demonstrate that they are sentient? Outside of that, I'm not sure how that really characterizes the likes of Ezra "the Constitution is, like, really old" Klein. Your analysis here doesn't really put him in that kind light, either.
Reply to this commentLinkReport AbuseWithout delving too far into econ-nerdery, the best way to measure public vs. private sector is to employ "quantile regression" analysis. The negative differential in salary is concentrated at the top. That's not surprising, b/c the ceiling is typically lower in the public sector. At lower quantiles, public sector is ahead these days. So, an average gov't lawyer, for example, probably makes more than an "average" private practice lawyer. Partners at white shoe firms will make so much more, however, that it may affect the whole average, and lead to the result arrived at by Keefe.
Reply to this commentLinkReport AbuseMr. Marzi,
You are right. It is awful hard to determine whether the pay of public sector employees is too high, too low, or perfect. I look forward to your pointing out this difficulty everytime there is mention of a study detailing how overpaid public sector employees are.
I've said it before, the real problem is not with public sector compensation (although there does need to be some serious restructuring of retirement rules, especially for police/FD/teachers) which is by most research close to private sector compensation the real problem is the breadth and scope of government. Keeping government as large as it is and cutting total compensation 20% is much worse than cutting workforces by 20% which would achieve the same results. Every rule, regulation, and bureaucrat is a hidden tax paid by everyone. The economic drag of the insidious spread of the government into every nook and cranny of economic activity is the real fundamental problem that is not being addressed.
Reply to this commentLinkReport AbuseHis choice of controlling factors strongly overvalues the public employee.
Government workers will have more years of experience because several factors lead to low turnover: the stability of the government itself, unions, civil service laws, the missing incentive to occasionally clean out deadwood and the generous compensation and benefits.
Government workers will have more education because career paths in government are based highly on credentials rather than performance, so an ambitious government employee will spend his extra hours gaining education credentials rather than gaining recognition via performance on the job.
And as for size of employer, well, what's bigger than the government?
But these studies are all worthless, regardless of what they show. Here are the two tests: how easy is it for the government to hire and how many government employees voluntarily leave for greener pastures?
Reply to this commentLinkReport AbuseIf there are people eager to get their foot in the government employee door and if once there they are reluctant to leave, then government employees are overpaid.
Paying more than is necessary is simply stealing from the taxpayer.
DougTN makes a good point.
In addition, the dependent variable in the regression is just salary. It does not include benefits, which, of course is what's way out of control in the public sector.
Benefits as a share of salary in Milwaukee Public Schools are just over 70 percent.
Reply to this commentLinkReport AbuseI only skimmed the paper... did I miss something? When I see tables presenting and comparing numbers like these (ratio/interval variables) I expect to see some measure of variation. These numbers, e.g. annual income of college grads, are after all, *averages*. If I want to know if there is a statistically significant difference between public and private sector incomes, I don't think I'd go about it the way Keefe does.
Reply to this commentLinkReport AbuseNot to get too much into econ-nerdery, but Keefe should have employed "quantile regression," i.e. comparing public vs. private at different levels in the income distribution. What these often find is that the public sector pay is higher than private at most quantiles, but much lower at the top. If the difference is high enough at the top, the average for the aggregated sample could be what Keefe says.
An example of this might be lawyers. What you'd likely see is that most gov't lawyers are paid better than their "average" private sector counterpart, but that the top gov't lawyer makes substantially less than the partner at a white shoe firm (e.g. a career federal prosecutor who was on the Harvard Law Review 20 years ago is going to cap out at about $175K, whereas a partner on Wall Street will pull down >$1M). The difference at the top may cause a misleading result w/r/t analysis of the aggregated sample.
Keefe also doesn't account for risk profile. Risk lovers would prefer the private sector's high risk, high reward culture. Risk averse folk may view any reduction in compensation, or artificial ceiling, as the price they're paying for a de facto "insurance policy" against unemployment risk.
Reply to this commentLinkReport AbuseI refuse to accept the entire premise. There should be a gap between the public and private sectors. And I dare say it should be wider than 5%.
Reply to this commentLinkReport AbuseSo here's my question - assuming arguendo that Wisconsin's public employees are underpaid, then what exactly are they getting in return for their union dues? It seems to me that if you except Klein's argument, then you're also implicitly acknowledging that the unions haven't really been their job in representing their members.
Reply to this commentLinkReport AbuseIs it too simplistic to suggest that if public employee positions were indeed underpaid that the state wouldn't be attracting so many people with "equal" skill and education sets as those found in the private sector?
And should we ignore profitability? By definition state employee workers work for employers who do not make a profit. By definition, private sector workers work for employers who are trying to make a profit. When those profits come, liberals are at the forefront of demanding that those profits should be "shared" with employees. To the extent this is done, for example in a law firm's partnership structure or bonus policy it is done to a large degree, this will necessarily lead to substantial differences in compensation levels between public and private employees.
Reply to this commentLinkReport AbuseI wonder how the statistics would work out if controlled for SAT or GMAT scores.
Reply to this commentLinkReport AbuseNo comparision of how much government employees make when compared to the private sector can tell the full story without making allowances for their retirement benefits. I would be surprised, if once these benefits are made part of the equation, if public sector compensation still falls short of that in the private sector.
Reply to this commentLinkReport AbuseNo, we have a perfectly empiracle way of determining whether pay is too high, too low, or just right: employee turnover. Factoring in all economic considerations, people will stay with a job up and until the inherent and monetary marginal return of working there = the perceived and real marginal costs of taking a position elsewhere. I'll point out that career government employees will take new positions and relocate if they feel they can advance and increase their pay...without causing turmoil at home or taking a $200K loss on their house.
In the federal gov't, DoD has been converting contractors into low-level GS aggressively for about 2 years. They've struggled to meet their goals, in part, because the converted contractors often make 25-30% less because the positions are so junior.
The advantage of Gov Walker's plan is that it slightly INCREASES employee marginal costs (including now lost "sick days"), and brings benefits more in line with the private sector. I also don't know if the study accounted for it, but some government pay (at least at the federal level) is tax free...such as housing allowances. Until we changed to an HSA, our healthcare was an after-tax expense.
When you consider that 401K pre-tax contributions in the private sector can be upwards of 10% per year plus employer matching (which are wages foregone), the question is why private sector wages are only 5% greater. I would have expected the number to be 25%. That "delta" is more realistic to what I've experienced, and that is the primary reason people leave gov't as an employee to find their fortunes elsewhere.
Don't get sucked into the equal pay for equal work argument. The risk profiles are utterly different.
On the flip side, look at the high profile businessmen who join the gov't. Do you suppose those guys at Goldman-Sachs have made a decision about the long term benefits of federal "service" in their market?
Reply to this commentLinkReport AbuseYou start off with the premise that Ezra Klein as a thoughtful blogger and we are supposed to take anything else you have to say seriously? Seriously?
Reply to this commentLinkReport AbuseDoes the study account for the value, in terms of job security, provided by being under civil service protection and getting (in the case of teachers at least) an annual contract making it virtually certain you will never become unemployed between the months of September and June?
More generally, isn't it just the height of liberal arrogance to think that a study like this can peg the relative "value" of various workers' service more accurately than the free market?
If public employees in Wisconsin truly believe they're underpaid relative to their private sector counterparts, then clearly the only reasonable thing to do is to privatize all of these governmental functions so that these workers can realize their true earnings potentials as members of the private sector.
Reply to this commentLinkReport AbuseI guess Ezra Klein is "thoughtful" alright, but, then again, I know "thoughtful" Ph.D.'s who think deep thoughts about 9/11 and then triumphantly proclaim it was a "set-up."
Being "thoughtful" is no guarantee that one is wise, intelligent, or, most importantly, correct.
Reply to this commentLinkReport AbuseDoug,
Reply to this commentLinkReport AbuseIf you read the paper you will see they controlled for hours worked. From the paper: "A standard earnings equation produces what some may consider a surprising result: full-time state and local employees are undercompensated by 8.2%. We observed,
however, that public employees work fewer hours, particularly employees with bachelor’s, master’s, and professional
degrees. An earnings equation controlling for work hours of full-time employees demonstrates that Wisconsin public employees earn 4.8% less than comparable private
sector workers working comparable annual hours."
Oh, something else: what was government employee turnover during the recession? Exactly. And, how many private sector employees don't have a 401K with matching?
Reply to this commentLinkReport AbuseIf they're cashing their pay checks, they are not.
Reply to this commentLinkReport Abuse