Federal Employees News Digest

Fed compensation well below private sector: An economist discusses factors in play

The Federal Salary Council reported this month that federal employee pay lags behind that of comparable employee pay in the private sector—at more than 30 percent less, on average according to the government body. However, another federal benchmark comparison of government-versus-private-sector pay, the Congressional Budget Office study, issued last year, showed feds were relatively significantly overcompensated (by 17 percent in that body’s most recent calculation.) This week, Nathan Abse discusses this issue with University of Utah economic historian Peter Philips. Philips lays out some of the inputs that go into calculating pay—particularly in determining differing compensation for similar jobs across varied areas of the country, whether public- or private-sector, and some of the problems economists and officials face in the process.

Q & A with Peter W. Philips

There is a perennial argument about federal pay versus private sector pay, with different sides arguing feds are over- or under-compensated compared to the private sector, by wide margins. How can there be so much debate?

Philips: In my knowledge on pay issues, there are some common factors in figuring locality pay, having to do with prices of things people need no matter where they live. Some commodities and services, for example, enter into interstate trade, and their prices will tend to equilibrate across the country. If you want to buy an iPhone, for instance, you will probably pay the same amount anywhere in the USA—well, except for variations in sales tax. But other things you need will vary in price based on where you live. A good and old-fashioned example of this would be, say, the cost of a haircut. The point is, if you want a haircut, you are not going to travel to Salt Lake City just because that would be several dollars cheaper in Utah compared to getting it done in Los Angeles. That is, the barbers in Salt Lake City really only compete with other barbers in that area. So, these kinds of prices are determined locally. Now, something expensive like heart surgery, on the other hand, might offer a much lower price in one area compared with another, enough so that it could justify the savings of traveling to Salt Lake City. But there are many, many costs determined by local markets. Hence, local costs can lead to a need for locality pay.

And so what you note here are the kinds of cost differentials—across a wide range of items—that underpin the idea of “locality pay”—the varying costs of living in different areas, right?

Philips: Exactly, and so the question is what drives the cost of living—specifically what drives the cost of living up in some areas, and not others? Now, given that some things don’t compete directly except locally, this is all about what we call the “cost of living” across different places. So, what drives the cost of living, what makes it vary? It gets driven primarily by the vibrancy of the local economy. Vibrant economies that are growing—say, in the Seattle or San Francisco Bay areas, attract population growth both by in-migration and the fact that people born there, stay there—compared to other places. And of course many urban areas are just more expensive.

Bottom line then is that vibrant local economies drive up costs?

Philips: Yes, vibrant local economies end up having higher housing costs, especially. And that’s in part because people are constantly moving in. And yet there are some absolute barriers to expanding the housing stock, and you just literally can’t quickly fit any more people in a certain area. And often also people don’t want to go from a single-family dwelling where they are currently living into some sort of multi-family dwelling. Again, for instance, the San Francisco Bay Area, is a good example of a very popular vibrantly growing area, and you see this situation. A biotech engineer that you need to work in that area, let’s say, whether they work for the private sector or the government, that engineer has to be paid enough to afford a house or some kind of acceptable dwelling—and has to be able to also buy services, including haircuts. And pay, for that locality, has to include enough money for haircuts so the barber can live somewhere near enough to make it worth it to do the job, too.

Can you expand on that, and offer other examples?

Philips: If you are a government employee, let’s say at a particular, specialized job. Let’s say you’re a scientist in a small community in Indiana versus the same job slot in Seattle. The employee in Seattle must make more than someone in the same job in the countryside of Indiana. But the system won’t adjust perfectly just based on where you live and the local cost of living. That’s because, for instance, if you are a retiring scientist in Seattle that your employer is seeking to replace, you may have worked as a scientist there for many, many years. You might have bought your house when it was cheap to live there, and someone coming in now would face much higher costs because the place—and its real estate and other costs—has boomed over the years, compared to other areas. The employer must offer higher compensation under those circumstances. Another factor in increasing compensation costs is that an employer must compensate the employees in a certain area in such a way that they can get along, that one employee in a certain position is not grossly over- or under-compensated, so compensation appears relatively fair. This kind of issue can force you to alter the pay in certain geographical locations too.

Are there any other factors in play?

Philips: There are other problems that come in when you are comparing jobs, across different geographical areas, that you might think are similar, but aren’t really. Say, for instance, we are looking at a secretary or administrative assistant job, but across different areas and different positions they may have the same title, but not really be all that similar, depending on what is involved in the work. That is, it’s not just the job title and the wage in question when determining what we are comparing, but the job and the wage plus the working conditions, the job security offered, the job stress, the sense of autonomy in a particular job, and many other factors—some of which may well be geographical, and may have to do with the regional and particular job culture.

Specifically, is government work different than private sector work, in considering the differences in compensation not just across localities, but between the two types?  

Philips: You can talk about basic differences here between government work from private sector work. First, government work tends to offer lower labor turnover—and this creates greater job security. Second, government work tends to insist on rules, more rules than the private sector, and sometimes there is, in some ways, less creativity in play, depending on the exact job. And third, government work tends to have a longer time horizon for the work that needs doing. In other words, you can see that a job in a government courthouse might be needed for the next 100 years, or more, but a job that a biotech firm is trying to fill doesn’t have a certain time frame—it could be a year, five years, no one knows, because we just don’t know how the company is going to do over time.

How does that affect things, then, with regard to compensation?

Philips: The employers have a big incentive to pay people very differently in each of these very different situations. The employer who has a long time horizon has a stronger incentive to retain workers—and the way you retain workers is to pay generously especially in the area of benefits, particularly pension and health insurance. Both of these added compensation items tend to anchor someone to the job. So, you might find two people in Seattle doing exactly the same kind of work or task, but where the public sector employee is making $30 per hour, and the private sector employee making $40 per hour. That’s on initial comparison of compensation. But, if you look just beneath the surface, though, the overall compensation might be the same, at $45 per hour—with government employee receiving $15 in benefits, and the private-sector employee receiving $5 in benefits. This is a simple example—and the reason for disagreement is there are a lot more factors that are considered.

Can you elaborate?

Philips: When you start comparing wages without very carefully comparing benefits, or you start comparing dollar remuneration only, instead of looking at remuneration-plus-working conditions as a real factor, the two sides to the ensuing compensation debate have a lot of wiggle room to argue that one side or the other is getting less, and therefore the employee is or isn’t getting paid fairly by X percent. They can do this by paying attention to and emphasizing certain factors, and more or less ignoring or at least undervaluing others. Actually, again, each compensation analysis is likely to be a lot more complicated than this hypothetical, of course.

Have you had any direct experience, and played a role, in this kind of compensation argument?

Philips: Well, I have in the past dealt with something related to this. I did some work at Los Alamos, the government labs, in wage conflicts. And the way these are dealt with there, in a disputed situation (not an academic study as we are discussing) is that you get two economists walking in the room. I was one of those economists, and in the event there would be someone from the other side. You would have an arbitrator there, trying to come to a fair decision on compensation, and the whole thing worked like a court hearing. That is, in effect, the same kind of thing going on our discussion here. The economists who argue that federal employees are undercompensated are making one kind of argument, likely taking into account and emphasizing one set of factors, while the other side of the argument is saying something else emphasizing other factors.

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