Tuesday, January 17, 2012

Part 4: Let's lay this myth to rest once and for all!

As shown in the last blog post, once we correct for differences in education, experience, training, etc. we can then compare the basket of workers in the private sector with that in the public sector on an "apples-to-apples" basis. When this is done, we find that not only are wages of public sector workers 11-12% less than comparable private sector workers, this negative wage differential has been increasing for public sector workers since the mid-1990's. [see pg 9 of the Heywood/Bender study.]

But what about the benefits? Surely they must be much better for workers in the public sector? Let's go to the numbers.

Heywood and Bender looked at benefits "in nearly two dozen categories, including pensions, insurance, bonuses and supplemental pay, paid leaves, and legally required benefits (e.g., Social Security, Medicare)." They did find that "benefits comprise a larger portion of compensation in state and local government; thus earnings are a smaller share of compensation in state and local government."

The difference, however, is not large. They found that benefits as a share of total compensation across the entire private sector amounted to 29.15%. In large private firms (100+ employees), benefits were 31.42% of total compensation. The figure for local and state governments is 32.65%, hardly a dramatic difference! [Emphasis mine.] (Large firms were broken out of the private sector data because many state and local governments also have 100+ employees, allowing a more accurate comparison.)

When looking at benefits, we must recognize that some of these benefits are at least partially paid for by employees in both sectors. According to the study: "in March 2009, the share of family medical coverage plans paid by private sector employees averaged 30 percent, while that share paid by state and local employees averaged 27 percent. Interestingly, if one limits the size of the employer to 500 workers or more, the share by private sector employees is only 24 percent, while the state and local share remains 27 percent." [Emphasis mine.]

What about retirement plans? In doing a comparison here, we must recognize that there are two different types of retirement plans in use in our country. The "traditional pension" plan is often referred to as a "defined benefit" plan because the worker's retirement benefit is a defined amount based on years of service and final average salary. While most state and local governments provide such a "defined benefit" plan for their employees, less than 25% of employers in the private sector provide such a plan.

Over the past decade or two, most private sector employers have moved to a "defined contribution" type of plan. Most readers will recognize this type of plan by its more common name, "401(k)." In this plan, the employee makes a contribution of a percentage of pay, sometimes matched--up to a certain point--by the employer. These funds are invested in a small number of mutual funds and whatever accumulates during the worker's career is what the worker takes away to live on (plus Social Security and other savings) during retirement.

(For a more detailed comparison of defined benefit vs defined contribution plans, see the blog post titled "What's so bad about 401(k)-type plans?" 

Comparison is further complicated by the fact that "28% of state and local workers are not eligible for Social Security." But, "when limiting state and local pensions to those in which workers are eligible for Social Security, the employee contribution rate averages 5%. This can be compared to the private sector average contribution rate of 6% for defined-contribution plans and essentially zero for defined benefit plans." [Emphasis mine.]

When you put it all together (wages plus benefits), how do the numbers shake out? When comparing total compensation state workers are behind their private sector counterparts by 6.8%, while local government workers trail by 7.4%. If you compare them with just the large firms in the private sector sample, state workers trail their private counterparts by 10.4% with local workers trailing by 9.8%. [Emphasis mine]

Heywood and Bender conclude with this paragraph: "There are several implications of our exercise. First, the compensation of state and local workers is not excessive. Second, this remains true when including benefits. Third, the pattern of results over the last 20 years has generally been one of declining relative earnings of state and local workers compared to similar private sector workers. Fourth, this remains true in most of the states that we examined, although some heterogeneity exists. These implications lead to the policy prescription that now is not the time to advocate for large-scale rollbacks in the compensation of state and local workers. Although the current recession calls for equal sacrifice, the long-term pattern indicates that state and local workers are not, on average, overcompensated. If the goal is to compensate state and local sector employees in a manner comparable to those in the private sector, the data do not call for reductions in state and local wages. If anything, they call for increases." [Emphasis mine.]

There is still one more part of this myth to lay to rest: That public sector unions, through their political influence, are exacerbating state and local financial problems. That's coming up.

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