Public employees are better paid for a reason

You have heard the complaint before: public sector employees enjoy job security, large benefits and on top of that they are better paid than private sector employees. And this is particularly upsetting right now where the latter are asked to accept pay cuts and face the prospect of higher tax rates. Now does the complaint hold water?

Jeffrey Thompson and John Schmitt show that is does not. While it is true that public sector employees enjoy higher pay, looking at such big average is misleading. Indeed, civil servants are on average also better educated and older. If you take this into account and determine the wage premium for different levels of education across public and private sector workers in New England, Thompson and Schmitt find that civil servants are in fact paid 5% less than comparable other workers at the bottom of the wage distribution, 3% less in the middle and 13% less for high wage workers. If you just concentrate on education, those with at least an undergraduate degree face a 7% penalty in the public sector, while those who have just a high school degree get a 1.6% premium. In other words, there is a substantial compression of wages in the public sector compared to the private sector, and averages are lower, at least in part reflecting the job security premium.