Public vs Private Sector Pay: Comparisons and Differences

The raging debate over if the public is paid more than the private sector has heated up since the beginning of the recession.  Although think tanks, compensation professionals, and other leaders in both sectors have been discussing the evidence for more than a decade, the question has come to the forefront in the last three years.    The major reasons for the renewed momentum since 2008 relate to the difference in the impact of the downturn on employment in the public compared to the private sector coupled with a desire to reduce public spending, the size of government to better align with current tax revenues, and the magnitude of future public pension liabilities. Recent events in Wisconsin are a good representation of the debate that is going on more nationally:  (http://www.washingtonpost.com/wp-dyn/content/article/2011/02/22/AR2011022205319.html).  A key element of the Wisconsin debate relates to equity and fairness of total compensation.  A sample of a few of the recent news stories comparing total compensation between the sectors include:

http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm

http://www.bismarcktribune.com/news/local/govt-and-politics/2011_session/article_1e6b6300-4f50-11e0-b924-001cc4c03286.html

http://economix.blogs.nytimes.com/2009/12/21/private-vs-public-sector-pay/

http://articles.chicagotribune.com/2010-07-22/news/ct-edit-teacherpay-20100722_1_average-teaching-salary-teachers-private-sector

http://www.kansascity.com/2011/03/09/2712930/statistics-intensify-feud-over.html

The last article from the Kansas City Star summarizes the public verses private pay question in the following terms: “There’s no hotter debate in America today than whether government employees are overpaid.”  I was working with an organization in Kansas City the day the article came out and was asked about the public verses private pay issue in general and the Bureau of Labor Statistics study that underlines the article, specifically (http://www.bls.gov/news.release/ecec.nr0.htm).

In reviewing the analysis behind many of the reports, there are common weaknesses across each.  Most of the studies comparing public and private compensation focus on aggregate averages for both sectors.  The creation of this “large soup” gives a good indication of the central tendency of each market segment, but does little to truly compare both sectors to each other in a meaningful way. As with any salary analysis exercise, there are three similar key elements that need to be kept in mind:

  • Similar markets
  • Similar jobs
  • Similar situations

Similar Markets

Most comparisons include businesses of all sizes as well as government entities at all levels and size.  Instead of looking at components of the markets that are similar, all industries are included. The private sector includes approximately 1.2 percent agriculture, 22.2 percent industry, and 76.7 percent services (2010 estimates) while the public sector looks more like a combination of a small portion of industry and the middle and upper end of services.  Obviously, if we limit the private market to only those segments similar to government the results would be different.

Similar Jobs

Just as the markets are not the same, the jobs as well as the concentration of jobs are not the same across the sectors.  Each sector has jobs of different types and levels, but they do not overlap perfectly.  In other words, the concentration of a type of job is not the same when comparing both.  Moreover, there are differences in compensation that are job specific based on the level of job and the unique market position relevant to the job.  An example of this finding appears in: (http://www.bloomberg.com/news/2011-03-09/nyc-less-educated-workers-out-earn-private-sector-study-shows.html)

Similar Situations

The similarity we should consider relates to differences in the work requirements, level of unionization, methods of reward, and organization size.  The Bureau of Labor Statistics (BLS) recognizes these differences are present and includes a warning in most press or report releases.  These differentials are important and should be controlled for as part of any comparison of the public and private sectors.

Whenever we discuss compensation, it is always tempting to invoke the “apples to apples” requirement.  Basically, we want to make sure that our comparison is good between the divergent items we are examining.  As more work is done to examine differences between public and private compensation these factors need to be kept in mind for salary as well as total compensation comparisons.

 

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