The Heritage Foundation has posted a new working paper that considers whether public workers in California are overpaid compared to their private sector counterparts. The paper’s findings are summarized today in a Wall Street Journal op-ed, coauthored by myself and AEI’s Andrew Biggs. We argue that previous public-private comparisons at the state level have undercounted important fringe benefits. While existing studies claim that pay is roughly comparable between the sectors, we find that California workers could be overpaid by as much as 30 percent. The working paper has all the gory details, including how we quantified the value of job security. Comments are welcome.
The paper comes at an important time, when even the political bloggers have been debating the statistical nuances of pay comparisons. Over at NRO’s The Corner, Jim Manzi critiqued a pay comparison published by the Economic Policy Institute:
…Consider Bob and Joe, two hypothetical non-disabled white males, each of whom went to work at Kohl’s Wisconsin headquarters in the summer of 2000, immediately after graduating from the University of Wisconsin. They have both remained there ever since, and each works about 50 hours per week. Bob makes $65,000 per year, and Joe makes $62,000 per year. Could you conclude that Joe is undercompensated versus Bob?
Manzi is referring to “the human capital model,” which holds that workers are paid according to their skills and personal characteristics, like education and experience. Most scholars—including Andrew, myself, and Heritage’s James Sherk—use it to compare the wages of the public and private sectors. If the public sector still earns more than the private after controlling for a variety of factors, then it is said to be “overpaid” in wages. But because we cannot control for everything, Manzi is saying, the technique is not very useful.
His critique is reasonable enough, but overwrought. The human capital model has been around for three decades, and it is unlikely that economists have failed to uncover important variables that would drastically change its results. Nevertheless, there are other techniques that address most of Manzi’s concerns. An upcoming Heritage Foundation report uses a “fixed effects” approach, which follows the same people over time as they switch between the private and federal sectors. By looking at how the same person’s wage changes when he moves between sectors, a lot of unobservable traits—intelligence, extroversion, etc.—are accounted for.
In order to capture fringe benefits as well as wages, economists have also used quit rates and job queues. If public workers quit less often than private workers, we can infer (with some qualifications, of course) that there are not better options available to them. Similarly, if many more applicants apply for government jobs than there are positions—creating a “queue”—then we know that government jobs are highly desirable. Of course no methodology is perfect, but the scholarly literature can tell us a lot about pay comparisons. Andrew and I discussed this work in detail in a recent Weekly Standard article.