Thursday, February 24, 2011

State and local compensation

All the recent fervor about state and local unions, budgets, and wage contracts seems not to have included much on the subject of whether state and local government workers are paid more, the same, or less than equivalent private sector workers. If the answer is the same or less, then legislated reductions in their compensation are likely to reduce the quality of government services. But if government workers are paid "more than they are worth," that implies that reductions would only reduce the pool of applicants and probably not the amount of employees nor their quality.

A book chapter by Alan Krueger in an NBER volume from 1988 discusses trends in earnings. A big part of his analysis concerns the federal worker bonus. The last paragraph summarizes his findings on state and local government workers' earnings:
At the state and local government level, both the longitudinal and cross-sectional analyses suggest that the differential in earnings between public and private sector workers was small and positive in the 1970s, but became negative by the mid-1980s. Furthermore, the empirical analysis finds no evidence of a difference in pay between union and nonunion members in the public sector.

One of the big changes since the 1980s has been the movement away from defined-benefit pensions in the private sector and toward defined-contribution plans. I think the primary difference between them is the amount of risk, and not the average level, but a larger issue today may be differences in post-retirement compensation for public versus private workers. Health insurance copays may be a big part, but pensions might be as well.