Thursday, July 28, 2011

Estimating the Value of Public Sector Job Security

AEI economist Andrew Biggs and Heritage Foundation Policy Analyst Jason Richwine have co-authored a series of articles on private vs. public compensation, for example see their WSJ articles "The Public Worker Gravy Train" and "The Government Pay Bonus," and a longer more technical working paper "Comparing Federal and Private Sector Compensation."   

From the abstract of the working paper (emphasis added):

"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."

In a post today on The Enterprise Blog, Andrew Biggs writes:

"In our work on public sector pay, Jason Richwine and I have attempted to put a dollar value on the greater job security enjoyed by government employees, which acts as a free insurance policy against losing your job. Estimating the value of job security from the data is tough, however, for technical reasons outlined in our working paper on federal pay. Instead, we use an economic model, calibrated with a variety of data, to arrive at an estimate. Our baseline result was that job security for federal government employees was equivalent to a 1.5% to 3% increase in pay."

Andrew then points to a recent CD post on the market for private job loss insurance, which allows him to estimate the "implicit value of public sector job security" based on differences in market-based insurance premiums by occupation:

"I compared salaries between public and private sector workers’ net of supplemental unemployment insurance premiums sufficient to protect against all loss of income during unemployment. The difference in salaries indicates the job security premium paid in the public sector. The answer I found was around 2.4 percent, which was right in line with our baseline results. Given that total compensation for a typical federal employee is well over $100,000, even this baseline 2.4 percent job security premium is worth several thousand dollars. When you add that it protects a job paying a wage and benefits premium, the value of public sector job security is far higher."

MP: It's interesting that the empirical evidence from market-based insurance premiums for unemployment supports the estimates from a more theoretic, economic model developed by Andrew Biggs and Jason Richwine.  

15 Comments:

At 7/28/2011 11:42 PM, OpenID American Delight said...

Meanwhile, the top public administration faculties at universities across America teach that public sector salaries should be increased to attract the best candidates into public service. They probably look at the same data & applaud.

 
At 7/28/2011 11:43 PM, Blogger deb said...

As a worker in the public sector, I have to ask if you factored in the negative job security if not politically connected and the results on job security of elections that remove their patrons?

 
At 7/28/2011 11:57 PM, Blogger Hydra said...

If you set out to measure generosity, what othier result oils you expect?

I do not know any govt workers I would swap jobs with. Not one. Not even the ones that supervise my work.

Maybe you have to pay that way because the jobs are horrible.

 
At 7/29/2011 5:55 AM, Blogger cluemeister said...

How many Wisconsin state employees quit after Scott Walker's plan was implemented? We were told the pension and benefit cuts would be devastating to state employees. So where are the massive resignations? Could it be Wisconsin state employees know that they still have a great deal? Could it be that if 1,000 of them quit, there would be a line of 10,000 people applying for their jobs?

You betcha!

 
At 7/29/2011 7:03 AM, Blogger John Thacker said...

@Hydra:

Your logic in general makes sense, which is why I like looking at how people switch jobs. However, that data suggests that people quit federal jobs very rarely.

At the very top end, federal jobs pay worse. However, federal jobs are cushier at the bottom and in the middle. That's one reason why a lot of people take federal jobs, earn experience (and pension), and then only jump ship once they've built up skills and contacts.

 
At 7/29/2011 7:19 AM, Blogger Ettubloge said...

One benefit of job security is how the individual looks at risk in investments. Since the public employee is permanently employed, the long-term risk is lessened and such investments as real estate (for resale or pleasure) are made. Conversely, with the precarious state of private inductry employment, those people cannot fairly enter risky investments. That provides public employees as massive advantage it the marketplace.

As my spouse recently asked me about the numerous public employee frienda and acquaintances, how do they all retire in their late 50's and own vacation homes South of the Border?

The public employees are also not scrimping their after-immediate-expensess dollars into 401K plans hoping they can retire at the age of 70.

 
At 7/29/2011 9:45 AM, Blogger morganovich said...

deb-

why would the sort of "lose if your patron loses" figure not already bee included in firings and departures?

i think the issue you raise is already in the data.

in fact, i see no way you could take it out.

 
At 7/29/2011 10:41 AM, Blogger Benjamin said...

A few years back, Arthur Andersen estimated the average value of the typical federal pension for a military employee who retires after 20 years of service at well more than $1 million. That didn't even count the lifetime medical benefits.

 
At 7/29/2011 11:31 AM, Blogger morganovich said...

bunny-

the NPV of a million dollar payout over 40 years is pretty low.

a promise to pay to $2000 in 40 years is only worth $250 bucks now.

to pay it, you'd only need $90 bucks saved from the day you started.

that million is worth maybe 125k in present value when they start work (assuming 5% discount rate) that's about $6k per year in needed contributions, hardly egregious.

if you want to see an egregious plan, take a look at the one congress gets.

 
At 7/29/2011 12:38 PM, Blogger juandos said...

"I do not know any govt workers I would swap jobs with"...

Yeah, sure! LMAO!

The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.

Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted...

From USAToday dated 12/11/2009

 
At 7/29/2011 12:43 PM, Blogger Seth said...

It seems like a good proxy of this would be the difference in pay between what tenured profs earn compared to what their private market counterparts earn.

 
At 7/29/2011 12:47 PM, Blogger juandos said...

"A few years back, Arthur Andersen estimated the average value of the typical federal pension for a military employee who retires after 20 years of service at well more than $1 million"...

Yeah pseudo benny, sure he did.... Prove it...

 
At 7/29/2011 1:14 PM, Blogger Dave said...

What about the STRESS factor of private sector workers as compared to public ? Does any study take that into consideration ? I don;t know a civil servant who would leave his/her job if salary & BENEFITS were cut 25%. Let's have a dutch auction and find out.
First objective would be to reduce the number of civil servants by 10-20-30 % by reducing compensation until a set number have left. Then a year later do it again.

 
At 7/29/2011 4:23 PM, Blogger Mike said...

"Could it be that if 1,000 of them quit, there would be a line of 10,000 people applying for their jobs?" - Cluemeister


Amen.


Except I think you take remove two zeros from the first number and it would still be accurate.

 
At 7/29/2011 7:55 PM, Blogger secondson said...

‘American Delight’ is quite right. Faculty and administrators at public universities in their demands for higher salaries never fail to pull out the argument about needing to pay salaries comparable to private universities in order to attract ‘the best and the brightest’. The security and benefits of public employment never seem to enter into their calculations. Case in point: Uniformed Services University (USU), a Federal medical school. Until 2008, USU top salaries were limited to $192,000, about the top limit for most professional Federal salaries. In that year an administration and faculty concerned about how ‘low’ their salaries were compared with private universities, requested that Congress raise the pay limit at USUHS to $400,000. Hiding it in the middle of a Defense appropriations bill, Congress obliged. Many USUHS salaries are now in the >$200,000 range. Perhaps Congress can rethink its generosity in light of the current debt crisis and an awareness of the hidden benefits of Federal employment.

 

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