Comparing Federal and Private Sector Compensation

Read the full text of this working paper as a PDF.

Public sector compensation has come under increased scrutiny from politicians and the media, but comprehensive technical comparisons of federal and private compensation have been largely absent from the discussion. Drawing from the academic literature and using the most recent government data, this report measures the generosity of federal salaries, benefits, and job security. Compared to similar private sector workers, we estimate that federal workers receive a salary premium of 14 percent, a benefits premium of 63 percent, and extra job security worth 17 percent of pay. Together, these generate an overall federal compensation premium of approximately 61 percent. Reducing federal employee compensation to market levels could save taxpayers roughly $77 billion per year.

Introduction

Compensation of public sector employees was a major political issue during the 2010 election campaign, and the new Congress is considering reform of the federal pay system. It is essential that lawmakers, political commentators, and voters know whether and to what extent federal workers are paid more than what they could earn in the private sector.

Partisans on both sides of this issue have been given to extreme and unsupported claims. Politicians and journalists have exaggerated the federal-private pay disparity by comparing raw salary figures without considering the above-average skills of federal workers. Defenders of federal pay, particularly public sector unions, have claimed in turn that federal workers are underpaid and described evidence to the contrary as “lies” and “scapegoating.”

In response to both sides, we offer this analysis of federal compensation. Drawing on three decades of academic research, the latest Census Bureau micro data, official government reports, and standard economic tools, we document the extent to which federal workers are "overpaid" by private sector standards. We conclude that the total federal compensation premium--combining cash wages, fringe benefits, and job security--is approximately 61 percent, or about $77 billion annually.

Andrew Biggs is a resident scholar at AEI. Jason Richwine is a senior policy analyst at the Heritage Foundation.

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