Public Pay Study Seems Bogus

OCT. 21, 2010


The media have been providing serious reporting about a “UC Berkeley” study showing that public employees earn a total salary and benefit package that’s about the same as those in the private sector. This counter-intuitive study is being championed by government advocates as a rebuttal to the public upset over public pay and pension scandals in cities such as Bell and San Diego.

As the San Francisco Chronicle reported, “While public employees make about 7 percent less than their counterparts in private industry, the study found there is virtually no difference between the two sectors once you consider that state and local governments contribute nearly 6 percent more to benefits such as health insurance and retirement funds. But public employees also receive ‘considerably’ less supplemental pay and vacation time, the study found.”

Yet this “study” is far more about politics than research. For starters, this is not a Berkeley study, as has been widely reported. That gives it far too much credibility. It is a study by the Institute for Research on Labor and Employment at the University of California, Berkeley. This is a left-wing, taxpayer funded group that specializes in pro-union advocacy and has been the source of much recent commentary.

“This is an institute created by the Legislature for the purposes of labor advocacy and training programs,” a University of California vice president argued, according to an August CalWatchdog report. “The unions benefit from by these programs and use them against the UC in their collective bargaining negotiations and advocacy efforts with the legislature. I’d find it ‘cruel and unusual punishment’ if we get stuck funding these Institutes in the future out of the UC budget at a time when the state is cutting our funding, but pressuring us to give more at the collective bargaining table.”

The Schwarzenegger administration vetoed state funding of these think tanks – one is at UC Berkeley, the other at UCLA – but the UC system came up with the cash to keep them going after intense pressure from labor unions and legislative Democrats. Typical studies:  Miguel Contreras: Legacy of a Labor Leader; Women’s Work: Los Angeles Homecare Workers Revitalize the Labor Movement; Sweatshop Slaves: Asian Americans in the Garment Industry; Voices for Justice: Asian Pacific American Organizers and the New Labor Movement; Voices from the Front Lines: Organizing Immigrant Workers in Los Angeles.

Beyond the group’s advocacy role, the study itself falls apart under close examination. The main problem is the overall technique that the researchers used. They did not compare job categories but instead aggregated private and public sector workers into separate groups, averaged it out and then adjusted based on education and other factors.

This is from the study: “An apples-to-apples comparison, or one that controls for education, experience and other factors that may influence pay, reveals no significant difference in the level of employee compensation costs on an annual or per hour basis between private and public sector workers.”

My colleague at the Pacific Research Institute, Jason Clemens, who is an economist who directs PRI’s studies, scoffs at this approach. The economists take a statist approach that measures inputs rather than outputs. In other words, the researchers assume that factors such as seniority and education levels are more important than job performance. In the free market, a car salesman will be valued based on his prowess selling cars, not on his age or number of degrees. I know someone with several degrees but with few marketable skills. In the researchers’ worldview – typical of the worldview found among unions and government officials – that over-credentialed person deserves a high salary.

The only serious way of evaluating salaries between the public and private sector is to compare job categories, Clemens explains. That’s just the beginning of the study’s problems. Marcia Fritz, a CPA and president of the California Foundation for Fiscal Responsibility, details some substantial oversights in the study’s methodologies:

Here is the letter she sent to the researchers:

I read with interest your research regarding how wages in California’s public sector compare with wages in California’s private sector.  Comparing wages based on education is an excellent approach to get an “apples to apples” comparison and it handles the problems in comparing teachers’, safety workers’, and other public sector jobs that do not have counterparts in the private sector.

However I have several observations listed below that, if addressed carefully and thoroughly, may result in a conclusion that differs from your report:

1. The pension contribution cost for state and local public sector workers is much lower in your report than what is currently being paid.  The state, which provides the lowest formulas, generally, compared to local agencies paid an overall pension contribution last year of over 20% of gross wages.  This includes payment on unfunded liabilities, but payments for the 2008 market drop was not included.  Most of the unfunded liabilities being paid were caused by workers receiving higher-than-anticipated wage increases and earlier-than-anticipated retirements.  The higher employees’ wages and the earlier they can retire, the more valuable (and costly) their retirement benefits are.

2. It does not appear you included the value of retiree health benefits in your analysis.  The state and many local agencies, including schools, provide retiree health benefits, but very few private sector employers do.  This cost should be included the comparison.

3. Many public sector employers pick-up the employees’ contribution toward their defined benefit plan.  Indeed, studies conducted last year in both Orange and San Diego counties found that over 70% of local agencies picked up all or most of the employees’ share.  This practice evolved when employers were contributing little or nothing to “over funded” pension plans in 1999, so they agreed to pick-up the employee’s pension contribution in lieu of granting them raises.  The employer “pick-up” is considered wages for pension purposes.  Your analysis should have taken this practice into consideration and grossed up wages accordingly.

4. Many agencies supplement the regular PERS pension benefits with defined contribution plans, and match the employee’s contribution.  It isn’t clear that these supplemental retirement benefits were considered.  The state pays 2% of prison guard’s gross wages into a deferred savings account, for example, and the City of San Diego matches employees’ 457 contributions up to 3% of gross wages.  This is a common benefit provided to management.

5. Few safety workers, no teachers, and about 30% of miscellaneous workers do not participate in social security.  Although it appears you addressed this in your analysis of employer costs, I don’t see that you adjusted private sector and public sector wages for differences employee contributions toward their retirement and other benefits, such as SDI.  Wages should have been reduced for SSI, SDI, 401(k), pension plan contributions, and health insurance contributions in order to get a true comparison.  By doing so, you may discover private sector employees pay more for their tax-deferred and tax-advantaged benefits than public sector workers, and, as you observed, the benefits they pay for are less generous than those provided at a lower cost to public sector workers.

6. Most of the public sector jobs that require masters degrees are teachers, who generally work less than a full year.  It appears you are treating teachers as full-year workers when comparing their compensation to those in the private sector who hold masters degrees.  I suggest for this category, you convert wages to hours of activity.  California has a 175 day school year.  Most teachers belong to a union, and their contracts strictly limit active teaching hours, extra duties outside the bell schedule, and mandate prep periods in order to minimize teachers’ after school and weekend activities.  I’m very confused how you determined that the average public employee with a masters degree works an average of 2,174 hours/year when so many included in this group are teachers in elementary, high school, and community colleges.

I would be happy to assist you in revisions to your analyses as I am a national expert in public sector pension and retirement benefits, and payroll issues in general.

Those are major problems.

James Sherk, a labor economist at the Heritage Foundation, notes that the study doesn’t include federal employees in the survey and federal workers are paid far more than others. He also noted that “This study only looks at part of the benefits paid to state and local employees. It ignores the retiree pension and health care benefits they get but which the government has not set aside enough money to cover. If the study included the more than $500 billion in unfunded government pension costs in California then state and local employees would not appear remotely under-compensated.”

Other experts I talked to and my own reading of the study revealed these flaws:

The study only looked at full-time workers and therefore conveniently left out small business owners and agricultural workers, private sector workers who work long hours and often receive low pay.

The study didn’t appear to consider the pension-spiking games and other gimmicks used by public sector employees to pump up their benefits.

The study compared an equal number of hours, thereby conveniently avoiding dealing with public employees who abuse the overtime system to turn modestly paid jobs into massively paid ones. Police and firefighters routinely earn average salaries in the 70s, but then have abused the overtime system in a way that allows them to earn double and even triple those amounts.

Finally, the study reads like a political argument rather than true research. Here’s a good example: “All the workers who have lost their jobs or took cuts in pay or benefits were made to do so not because of their work performance, or because their services were no longer needed, nor because they were overpaid. They were simply casualties among a list of millions of hard working innocent victims of a financial system run amuck. Public sector workers help our communities to thrive and provide services that make it worthwhile to live in them – it is wrong to blame them for the fallout from the greatest economic downturn since the Great Depression.”

I have no problem with unions funding such research and entering the debate about public-sector compensation. But this comes from a taxpayer-funded think tank. The unions should fund these things on their own dime, and the media should do a better job explaining where the information comes from and examining whether the researchers used traditional research methods or skewed the report to achieve a desired result.

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