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Obama's New Economic Chief Understands Federal Employee Pay

9:30 AM, Sep 13, 2011 • By ANDREW G. BIGGS and JASON RICHWINE
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Princeton University professor Alan Krueger, recently named by President Obama to be the new chair of the Council of Economic Advisors, is perhaps best known for his claim that raising minimum wage will not reduce employment. But Krueger has had a long, varied career as a labor economist—and a history that should be especially interesting to budget cutters.

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Early in his academic career, Krueger performed innovative work comparing the wages of federal employees to those of private sector workers. Contrary to the claims of public employees’ unions and the administration's own Office of Personnel Management, Krueger’s approach confirms that federal employees receive a significant pay premium over private sector workers. Reducing that pay premium could generate large savings for taxpayers.

To grasp Krueger’s findings, one must first understand the “standard” approach in public-private pay studies. Analysts usually compare the wages of government and private sector workers, while controlling for differences in education, experience, and a range of other factors that affect earnings. Such comparisons typically show a federal salary premium of 10 to 20 percent.

In a recent paper, we calculate that federal workers receive salaries roughly 14 percent above those paid to similar private sector employees working in large firms. (Adding massively higher fringe benefits and job security that even state and local government employees would envy, the total federal compensation premium rises even higher.)

But some question this methodology: Perhaps federal workers have higher quality degrees than private sector employees, or are more motivated, or are simply more productive in ways that we cannot measure with simple controls like “years of education.” Krueger’s inventiveness helps defuse these objections.

In a 1988 paper, he uses an alternative approach: Instead of controlling for differences between workers at one point in time, he follows the same workers over time as they shift in and out of different jobs. If the same person earns more in a federal job than in a private sector job, we can be reasonably sure that the job is making the difference, since the person himself barely changes over time. And Krueger controls for the limited instances when a worker’s characteristics do change—by getting an additional degree or by gaining an extra year of experience, for example.

Krueger finds that private workers who find new jobs in the federal government receive significantly higher pay than those who find new private jobs, essentially confirming that the “standard” approach has given the right results all along.
 
Recently, we updated Krueger’s paper using a much larger and more detailed dataset. We discover that, over the last decade, private sector employees who switch to a federal job receive an average pay raise of 9 percent, while those who find new private jobs receive only a 1 percent raise. In effect, the federal government pays an 8 percent salary premium for the very same employees. Since the federal salary premium rises with a worker’s tenure, these results regarding pay in the first year of federal employment fully support the conclusions of the standard approach.

Moreover, our new analysis shows—contrary to claims of many federal employees—that federal workers are not likely to earn higher salaries in the private sector. In fact, the average federal worker who shifts to private sector employment takes a salary cut of almost 5 percent. Together, these results show that the federal government pays higher salaries for the same employees.

Krueger’s paper also demonstrates that open federal positions tend to receive more applicants than private sector positions, which suggests that federal jobs are generally more attractive. He finds that federal positions receive 25 to 38 percent more applications than private sector job openings.

While current data on job applications is difficult to obtain, we suspect federal jobs are still highly desirable. Why else would people buy books like Ten Steps to a Federal Job or pay to attend classes entitled, “The Secrets of Acquiring Federal Employment”? Probably not so that they can become underpaid workers.

Overcompensation of federal employees isn’t a small matter for the budget. The total premium—including wages, benefits, and job security—implies that reducing federal employee compensation to market levels could save taxpayers hundreds of billions of dollars over 10 years. Given the size of the premium, even large cuts should not harm recruitment and retention.

In other words, federal pay reform could generate savings to the budget without significantly reducing services to the public.

Just ask President Obama’s top economic advisor.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute. Jason Richwine is a senior policy analyst at the Heritage Foundation. 

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