Private Sector Versus Government Workers

By Mike Koetting April 19, 2019

You don’t have to work very hard to find someone willing to criticize government workers, for instance this investors’ newsletter dismissing the hardship of government workers during the shutdown:

Let’s remember who we are talking about here. While there are certainly plenty of hardworking, dedicated federal workers, they are, for the most part, incredibly pampered. They get better pay and more generous benefits than private sector workers doing the same things.

Complaints about government worker pensions are ubiquitous, particularly here in Illinois where the pension system has been horribly mismanaged.

But I think there is a shortage of clear thinking on the topic. I would make two fundamental points:

• Maybe the problem is not in the government sector, but in the private sector.
• The net impact of moving good jobs to the contracting sector contributes to other problematic trends.

Whose Problem Anyway?

The issue of how government salaries relate to private sector jobs has been hotly debated. But I suspect the below chart, prepared by the Congressional Budget Office (CBO) a few years ago, is as good an indicator as anything.

It shows that with less than a college degree, government salaries are higher, that with a college degree it’s basically a wash, and with an advanced degree, government salaries are lower. Government workers are typically better educated, with 60% of federal employees having a bachelors or more advanced degree, compared to 35% in the private sector. For federal workers, 29% have advanced degrees compared to 11% in the private sector, which is in itself an important consideration for thinking about the work done by government workers.

This is interesting in that traditionally government salaries, across the board, were lower than private sector salaries. But private sector salaries at the lower end of the salary range have stopped growing while government salaries kept growing at a reasonable, but continuous rate, yielding the above graph.

Consistent with historic trends, government benefits are materially greater at all but the highest levels, where they are roughly equal. The CBO notes that most of the differences in benefits have to do with differences in retirement benefits. As the private sector has replaced pensions with 401(K)s—if lucky—the difference between the two have increased. The retreat of private sector from providing robust healthcare benefits has also contributed.

Focusing on the differences between government and private sector compensation misses the more important question: What kind of employers make the country stronger? Providing wages that track inflation, good health insurance, holidays and sick days and provisions for retirement with dignity are things we should expect from all employers. To be sure, there are tweaks needed to some of the wage-benefit structures in government. In Illinois, for instance, there are numerous anomalies that desperately need fixing. But marginal issues notwithstanding, we should not be seduced by the private sector’s race to the bottom. Other workers should not resent government workers for getting paid fairly, but should be demanding the same thing for themselves. And government should do more to insure they get them.

I have a friend who mentioned to me how relieved she was that her nephew got a job with the Postal Service. She said he definitely wasn’t suited for college, but this would provide a stable job with a reasonable salary and benefits that didn’t keep disappearing. Letting these jobs slip away is not really in the national interest.

I note that in the short term, a political problem has been created because many workers, whose salaries have not kept track with inflation and whose benefits have shrunk, feel doubly aggrieved by also having to pay for government workers getting better benefits. But we still need to be clear that reducing everyone is a losing strategy in the long run.

One of the reasons government salaries and benefits have stayed healthy is, of course, that public employees have unions. Unions protect workers. It is as simple as that. Note, for instance, that when the shutdown was finally over, civil service workers received back pay. Contracted employees did not. Many of the lowest paid “government” jobs are the cooks, guards, and janitors and others whose jobs have been contracted out. Their salaries are between $450 and $650 a week, which makes it very hard to absorb the loss of a full month’s pay. Losses were greater for contracted employees who had higher salaries, but they also had more resources to fall back upon.  (On the other hand, that may undermine their long-run enthusiasm for governmental contract work.) The loss of union jobs in the private sector is part of the race to the bottom that has been allowed, even encouraged, over the last 40 years.

Another observation here: government benefits increase with salary but the benefits discrepancy between the highest and lowest paid government employees is enormously lower than in the private sector. The same is true of wages, but the difference is not quite as great. Government employment is fundamentally more equitable.

Net Impact

The net impact of moving more workers from civil service positions to contracting is another, substantial, contribution to the growing inequality of American society. As noted in my previous post, salaries of contracted workers are substantially lower than of regular federal employees. But the overall cost of contracted workers is, typically, greater. The difference goes to corporate overhead and profit returned to investors. In short, it moves taxpayer money from the people actually doing the work to corporate overhead and profits. This is a specific policy that widens the gap among workers and investors. Is this the best use of tax dollars?

This is particularly problematic for minority groups. As the New York Times reports:

For millions of black families, working for the government has long provided a dependable pathway to the middle class and a measure of security harder to find in the private sector, particularly for those without college degrees.

Blacks are about 30 percent more likely to have a public sector job (including state and local government) than non-Hispanic whites, and twice as likely as Hispanics. The 2007 recession was particularly hard on public sector jobs and they have not rebounded as quickly as the private sector—in part because formerly public sector jobs are being moved into the private sector at lower wages. So this trend not only adds to overall inequality, it disproportionately impacts minorities.

In short, we need to pay more attention to what happens when public sector jobs get reduced, especially when they result in contracting jobs out to private agencies.

Errata

My brother called to my attention that in my last post I referred to Post Office employees. He noted that the Post Office has not existed since 1971, at which time it became the Postal Service. When I suggested he was being bureaucratic, he retorted that you couldn’t always go by the old adage: “Good enough for private sector work—like Boeing, Wells Fargo, Experian or Deepwater Horizon.”