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Economy Lab

Are all public sector workers really overpaid? Add to ...

Tammy Schirle is an Associate Professor of Economics at Wilfrid Laurier University

In a recent meeting with some private sector colleagues, I boldly suggested that many public sector employees could earn much higher wages in the private sector, but chose public sector careers for the benefits, pensions, and job security. Looking around most Universities’ Economics Departments, this seemed obvious to me. I was immediately tackled with evidence of higher average salaries in the public sector, and several anecdotes, and quickly lost that battle.

But I don’t concede defeat that easily. The difficulty in analyzing this problem is that we never see the parallel world we’re interested in. What would I have earned in a private sector career path? We will never know.

I found a few studies that have tried to capture that parallel world with our limited data resources. The main message is that there is a great deal of diversity in our public sector – while some public sector workers appear to enjoy a public sector “premium” by earning more than they possibly could in the private sector, some do not.

For example, women appear to enjoy the largest public sector premiums, particularly in service occupations. A study by Gunderson, Hyatt, and Riddell (2002) suggests this might reflect the impact of pay equity policies on ‘low-status’ jobs.

Their study also shows managerial and professional occupations are quite diverse. The premium might actually be negative for some public sector managers – suggesting they would have a higher wage in a private sector job. Evidence from Mueller (1998) suggests that public sector workers with the highest wages (at the 90th percentile, which would include many university professors) face a fairly steep public sector penalty. This (in addition to pension considerations) may help explain why we see many senior managers move to the private sector.

Tiagi (2010) attempts to explicitly account for the decision to enter public sector careers in his analysis. A key point from his study is that if a typical individual in the public sector was forced to move into the private sector, that individual would still earn more than the typical private sector worker. In his words, the “public sector workers consist of the ‘cream of the crop’.”

Certainly, the average public sector worker is earning more than the average private sector worker. Moreover, we all have anecdotes - such as MPs sleeping on the job and getting great salaries for it. But the averages and anecdotes do not provide a complete picture of public sector workers. Perhaps boldly, I will continue to claim that not all public sector workers are overpaid.

Economy Lab, winner of the 2011 Eppy Award for best business blog. Follow Economy Lab on twitter

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