Public-sector compensation often comes up in budget battles when governments are making difficult cuts. Regardless of what side officials are arguing for, they'll draw on different studies that show the public sector pays more, less or is about equal to their private-sector counterparts.
Setting collective bargaining issues aside, one has to wonder how and why these reports ended up with different conclusions. Looking at recent studies and issue briefs released by the conservative American Enterprise Institute (AEI), the liberal Economic Policy Institute (EPI) and the nonpartisan Center for Retirement Research (CRR), they all agree that salary-wise, public-sector employees make less than their private-sector counterparts. It's the benefits received by public-sector employees that make total compensation fluctuate in each study. There are three clear factors contributing to how each study calculates total compensation: pensions, retiree health care and job security.
In terms of pensions, the conflict among researchers is how to compare a defined-benefit plan for public-sector employees, which effectively guarantees an approximately 8 percent return, to defined-contribution, 401(k)-style plans in the private sector that do not include such a guarantee. On retiree health care, the disagreement exists over how this benefit should be valued because comprehensive data on the subject is lacking. What researchers can say is that the benefit is far more prevalent in the public sector, even as governments continue to shift more of their costs to employees.
That leaves job security. These days it seems like no job is really "safe": CRR reported in a September issue brief that state and local employment is down 3.1 percent since its peak, while private-sector employment is down 5.6 percent because of the economic downturn. However, the study finds that employment in the public sector is falling faster than it is in the private sector. The loss of public-sector jobs was backed up by data released recently by the Bureau of Labor Statistics which showed a loss of 280,000 public-sector jobs from December 2010 to December 2011, with most of these losses being experienced at the state and local level.
So the question is, can job security even be quantified as a benefit? And what impact does it have on overall public-sector compensation?
In its report for The Heritage Foundation, AEI finds that the job security enjoyed by the public sector can be quantified and gives job security a value of an addition 6 percent nationally, and up to15 percent in California. In an earlier February 2011 article published in the Wall Street Journal, AEI resident scholar Andrew Biggs argues that quantifying job security in the public sector is reasonable because data from the Bureau of Labor Statistics and other studies show "that public employees are more risk-averse than other workers."
Jeffrey Keefe of Rutgers University, who has written a number of state-based policy briefs for EPI, rejects AEI's job security calculation in a March issue brief. It is his belief that, if job security were a valid compensation indicator, those private-sector industries with high involuntary turnover would offer a salary premium to compensate for instability. In his analysis, Keefe has found no proof of this premium.
Considering the back-and-forth AEI and EPI have undertaken on the job security issue, I turned to CRR for some guidance. "The studies bring value," says Laura Quinby, a CRR research associate. "Even if they have competing viewpoints, they're all well done and thoughtful. It's almost good in a lot of ways to have different viewpoints out there, so you can read through what everyone is thinking and make a judgment based on the situation [which] varies a lot on the state or locality," Quinby says.
That said, CRR does not quantify job security because it is too difficult to measure. "How much state and local employees value that job security is going to differ depending on the individual because it's not something monetary that you can measure. You have to ask, 'How much value do I place on not being on a job search?'" Quinby says.
With varying opinions on the quantification of job security, retiree health care and pensions, AEI, EPI and CRR all reach different conclusions on overall compensation. When AEI takes these factors into account, they find a compensation benefit for public employees over similar private-sector employees in large organizations that can reach 30 percent in California or 43 percent in Ohio. Leaving job security out of the equation, EPI reports that private-sector workers make approximately 3.7 percent more on average. CRR finds compensation in the public- and private-sector relatively equal, with the private sector making, on average, 4 percent more.
As Quinby notes, there is benefit to having studies of various viewpoints on the difference between public- and private-sector compensation. But the decision to account for job security in public-sector compensation needs to be left up to each public official who can "take a look at their own situation and make a judgment based on that," she says.
Public officials would be remiss however, if, when debating compensation, they fail to consider the other costs of changing the compensation of the public workforce. For example, if a government brings its overall compensation in line with the private sector, can it remain competitive and continue to recruit the best and brightest? And if compensation is reduced for current employees, what is the total cost of an employee strike or of losing employees who might seek employment elsewhere, especially those with a deep institutional knowledge? There's little question that job security is important to public- and private-sector employees alike, but it is just one small piece of the compensation puzzle.
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