Are Federal Workers Overpaid?

2012 March 13
by SJ Leeds

There have been several papers written recently about whether federal employees are overpaid.  Recently, the CBO published a paper on the issue, “Comparing the Compensation of Federal and Private-Sector Employees.”  (Here’s the link.)  Before I tell you the results, let me give you a little background.


It’s obviously difficult to compare public and private workers.  The job requirements are different, the actual work is different, the motivation of employees may be different, the actual number of hours worked may be dissimilar, etc.  As a result, we have to try to compare “apples-to-apples.”  The biggest characteristic to use is education.  So, this is what the CBO did.  Here are some background facts and then the findings.


Background Facts

1. There are 2.3 million full-time employees.  This does not include the military (which also employs approximately 2.3 million people).


2. The number of federal employees has been relatively stagnant for 30 years.  At the same time, the private sector has grown.  As a result, the percentage of the labor force working for the federal government has shrunk from 2.3% (1980) to 1.7% in 2010.


3. The study does not include the 800,000 workers who are employed by government enterprises that pay compensation through sale of their services (rather than tax revenue).  The largest such employer is the Postal Service.  (Of course, the Post Office runs deficits and is eventually paid by our tax revenue.)  The study also excludes the military.


4. Approximately 57% of the federal civilian workforce is employed by the Department of Defense, Department of Veterans Affairs or the Department of Homeland Security.


5. The federal government workforce is much more educated than the private sector – 51% have a bachelor’s degree (vs. 31% of the private sector).


6. More of the federal employees work in professional occupations (33% vs. 18% in the private sector).


7. Approximately 21% of federal employees are members of unions (vs. 8% of private employees).


8. Nearly all federal employees work in entities (mostly departments) with at least 1,000 employees.  Only 40% of private employees work for large entities.


9. The study tried to account for differences (required education, type of work, size of employer).  The goal was to figure out how federal compensation would change if the average cost were the same as private employees.  Obviously, the study did not factor in the natural ability or motivation of employees.


The Results

1. Just Wages.  Federal workers with a high school diploma (or less) make 21% more than their private sector counterpart.  Federal workers with a bachelor’s degree make approximately the same (as the private sector).  Those with a doctorate or professional degree make 23% less.  On average, federal employees receive wages that are 2% higher.  There is more dispersion in the private sector (the top people make more and the bottom people make less).


2. Just Benefits.  The benefits for federal workers with a high school diploma (or less) are 72% higher than the private sector.  For those with a bachelor’s degree, they are 46% higher.  For employees with a doctorate or professional degree, the benefits are approximately the same as those in the private sector.  These differences are the result of defined benefits retirement plans (as opposed to the defined contribution plans that most private sector employees have) and subsidized health insurance to qualified retirees.


3. Total Compensation (Wages Plus Benefits).  Total compensation for federal employees is 36% higher for those with a high school diploma (or less) when compared to the private sector.  It is 15% higher for those with a bachelor’s degree.  It is 18% less for those with a professional degree or doctorate.  For all workers, the federal employees averaged total benefits that were 16% greater than private employees.


Some Final Thoughts

1. Differences would have been much larger if they were not factored on education.  Educated workers make more and federal employees have much more education.  Also, federal workers are in higher-paying occupations.


2. The assumption that almost all federal employees work for large entities was also crucial.  Without this adjustment, the average difference in wages would have been 9%, rather than 2%.  Working for large private entities has advantages and disadvantages.  As an example, large companies frequently restructure and this results in job uncertainty.  As a general rule, federal employees have much less job uncertainty.


3. The real advantage of being a federal employee (from a financial perspective) results from staying with the government for a long time.  This is where you see the real difference in benefits.


Below, you can see the chart that summarizes the findings.



Have a great week.

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