Andrew Biggs of AEI has waded into a number of new studies of public sector compensation, and he’s find a serious oversight:

The CWED and the other three reports use nearly identical methods in calculating the “pay gap” between public and private sector employees. In the first step, the studies use detailed data from the Current Population Survey to compare salaries for public and private sector employees while controlling for differences in age, education, experience, and a number of other relevant factors. Then, the studies use Bureau of Labor Statistics (BLS) compensation data to estimate the generosity of fringe benefits, such as health coverage and pensions, since it is only by including benefits that we can know if public employees are truly overpaid. It is in this second stage that all these studies fall down.

So what’s the problem?

The basic problem with CWED’s treatment of benefits is that it assumes data showing what employers currently pay toward benefits is equal to what employees will actually receive. In the short-term, this assumption is fine, since many employee benefits are consumed today. But in the public sector, a large share of compensation is deferred to retirement in the form of pension benefits and retiree health benefits. The CWED study significantly underestimates the value of deferred benefits.

The underfunding of public pensions, Biggs argues, creates an illusion of undercompensation:

Although the CWED study argues that California’s public sector employees receive pension benefits equal to 8.2 percent of their total compensation, that’s not exactly true. Their data actually shows that California public employers are paying 8.2 percent of employee compensation toward pensions, but that is only around half what employers should be paying. And since public pension benefits are guaranteed, that extra amount will be paid sooner or later. A good guess of true public pension compensation is to divide the reported pension contribution of 8.2 percent by the 50 percent funding level of California pensions, producing a value for promised pension benefits of 16 percent of compensation. This increases the 2 percent pay advantage that the CWED study already acknowledges to a public sector pay premium of around 10 percent.

Moreover, retiree health benefits aren’t counted as worker compensation, which is … curious. I hope and expect that the CWED team will respond to Biggs’s analysis. They might have a good reason for making this assumptions, e.g., perhaps they consider it obvious and normatively sound that promised public pensions should be slashed so that they align with worker contributions.