The Earnings Penalty for Public Workers

Apples to Apples: Private-Sector and Public-Sector
Compensation in Iowa

Executive Summary
By Andrew Cannon, Research Associate

Posted February 22, 2011
Full report including this 1-page executive summary
News release

In recent months, public employees have become a political target. Lawmakers, candidates and pundits alike have claimed that the wages and benefits public employees earn exceed the norms of the private sector. These assertions neglect the significant differences between the two workforces — and neglect the differences in education, work experience and occupation between a public-school teacher and a teen-ager working for the minimum wage at a fast-food restaurant. They also avoid a significant public policy issue: Do we want to drive all employees’ wages and benefits down? Is that best for economic opportunity in either the public or private sector, or the state economy?

An assessment of wages and compensation in the public sector requires that we differentiate between levels of education, experience and occupation. More than half of the public-sector workers in Iowa have at least a four-year college degree or more; just a quarter of Iowa’s private-sector workforce has the same. When average earnings are compared by education level, private-sector workers generally fare better than their public-sector peers.

When education, work experience, annual hours worked, race, sex, disability status, and firm size are accounted for, male public-sector workers earn nearly 12 percent less and female public-sector workers earn over 16 percent less than private-sector workers. Male state government workers earn 9 percent less than comparable workers in private industry, while for local government the public-sector wage penalty was 14 percent. Among women, the earnings penalty was over 13 percent for state workers and 19 percent for local government workers.

Many critics have argued that it is not public-sector pay that is so out-of-line, but rather public-sector benefits, such as health insurance and pension contributions. It is true that such benefits comprise a larger share of public employees’ overall compensation than for most private-sector workers. However, even after adding these benefits into the mix, total compensation for Iowa’s male and female public employees are 7.9 percent and 10.8 percent less, respectively, than for their private-sector counterparts. The gap between private and public compensation narrows to 6 percent and 8 percent among male and female state government workers, and 9 percent and nearly 13 percent for male and female local government employees.

Iowa faces a number of fiscal challenges in the months and years ahead. But none of these challenges result from excessive public employee compensation.

Iowa’s state and local government employees work to ensure that Iowans receive quality schooling, have safe water to drink and air to breathe, have adequately maintained roads and highways and enjoy safe neighborhoods. Iowa has well-qualified individuals performing important tasks and their compensation is less than that for similarly qualified employees in the private sector.