A few responses to comments posted after the RNN interview on public sector wages. Instead of responding individually, I wrote a few notes focused on themes raised in multiple comments:
1. PENSIONS and BENEFITS- The importance of retirement (pensions) and other benefits was raised several times. In the report we focus primarily on wages for two reasons: 1. Wages are the biggest part of total compensation (2/3), and; 2. Data issues. The individual level micro data that allow us to adjust earnings to separate out returns to experience and skills as well as sector of employment (we use the Current Population Survey) simply doesn?t have much information on benefits. Having said that, those who read the study will see that we spend the final third of the paper adjusting the wage results to account for differences in non-wage compensation across sectors.
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And while it is true that benefits account for a larger share of total compensation in the public sector than in the private sector, the difference is not as large as some might imagine. The benefit share is couple of points higher in the state and local government sector than for the average of all private firms, but when you compare state and local with private firms with more than 100 workers the difference is very small, and compared to private firms with 500 or more workers, there is no difference at all. State and local governments are sizeable operations and it makes most sense to compare them with the mid and large size firms in the private sector than the small companies and mom and pop outfits that typically provide very low benefits.
I think in part the perception of ?large? public sector benefits is driven by anectdotes and a focus on specific benefits that are not always properly understood. Pensions are one example. People know that private companies typically don?t offer pensions any more, and they also hear about pensions in the public sector. But, most people don?t realize that public sector workers in many states (including Massachusetts, Connecticut and Rhode Island here in New England) are not eligible for Social Security. So, these public pensions take the place of Social Security that private sector workers will eventually receive. Another report (By Jeffrey Keefe for the Economic Policy Institute: http://www.epi.org/publications/entry/debunking_the_myth_of_the_overcompensated_public_employee/) addresses the compensation issue in greater detail than we did in our paper.
The bottom line is that even after including non-wage compensation workers in the public sector continue to face a small penalty in total compensation. (The non-wage compensation measure used, by the way, is quite broad and includes paid leave, vacation time, bonuses, health care, pensions, employer contribution to IRAs and 401(k)s, employer-provided day care, etc.)
2. UNIONS ? Several comments suggested that our treatment of unionization in the analysis was somehow missing something, or worse ?stacking the deck?. Setting aside the issue of ?pro? or ?anti? union, I think our approach to identifying the public sector wage differential is sensible in not including unionization. The goal of the analysis is to come up with as close to an ?apples to apples? comparison of workers are possible. So, we are comparing workers with similar educational attainment, years of experience, gender, region, etc. We want to know if there is any difference between what the worker would make if they went into the public sector as opposed to the private sector. If we also include unions, then we are comparing public sector unionized workers with private sector unionized workers, and public sector non-union workers with private sector non-union workers. I don?t think this is really the comparison of interest. Part of the concern over public sector wages is a concern that unions are driving wages higher. So, we don?t really care too much about a public sector differential that is distinct from a union wage difference, but accept the fact that some of the wage difference across the sectors is a result of greater unionization of the public sector. The fact that so few private sector workers are in unions, and so many public sector workers are in them could also result in unreliable estimates.
3. POLICE and FIRE ? Some comments reflect concern over pay, work rules, and benefits of police (and fire fighters?). This category of workers is problematic analytically since there are basically no realistic equivalents of these services in the private sector. Although not included in the paper, we conducted some sensitivity analysis to explore whether pay for police and fire is driving our results in any way (although they are included in a separate paper by my co-author John Schmitt). Whether we include or exclude police and fire has no real impact on our findings.
Some comments express frustration that police get paid too much and can retire too early. One thing to note is that police officers and fire fighters make up about 11 percent of state and local government employment in New England, and to a great degree their compensation and work rules are independent of and have little relationship to the wages of most of the rest of the public sector workforce.
The second thing to note is that because of the risk, danger, and odd work schedules associated with these jobs, there is not only considerable public sympathy for police and fire fighters, but there is also good reason to expect substantial compensation premiums. These fields are specialized enough, and the compensation structures complex enough, that I don?t claim to be an expert in police and fire compensation. These safety occupations, though, are not likely to be the ?poster-children? for excessive compensation in the public sector, and are instead featured prominently in campaigns to fund public services.
4. THE PROPER ROLE OF THE PUBLIC SECTOR – One comment urged keeping the public sector as small as possible and argued that the ?public sector does not make anything and ?. steals from the ever shrinking private sector.? I think this comment reflect the sentiments of more than a few Americans, but is quite off base. If by ?things? the comment is referring to actual goods for sale, then that is true, but then neither does the bulk of the private sector, as most of our economy is in services. The reality is that state and local governments provide a wide range of value public services: education, health care, and infrastructure are all examples. Public schools educate most students in this country and provide employers with a highly skilled workforce. The idea that public education ?makes nothing? is belied by the location choices of parent who choose communities with good schools, the property values in districts with good schools, countless economic studies, and the repeatedly stated sentiments of private sector employers who rely on schools to produce the future workforce. The bulk of the public infrastructure ? roads, bridges, ports, sewers, etc. ? is built, maintained, and operated by the public sector. And, someone will have to remind me how a barbershop plays a role in community economic development and growth, while the police department and local courts, which uphold public safety and protect private property do not.
The truth is that the American economic system is a mixed system in which the public sector plays an important role. Policing streets, educating kids and the future workforce, and maintaining infrastructure have nothing to do with creeping socialism, and everything to do with the public sector?s role in correcting market failures and providing services valued by communities ? including the businesses in those communities.