Does the federal pay system fairly compensate employees compared to their private-sector counterparts? Why do studies using a jobs-to-jobs comparison versus the human capital approach reach different results?

The Coalition for Effective Change (CEC) provides a forum to share information and take action on issues that further the goal of an effective and efficient federal government. Formed in 1993 to bring together associations representing current and retired federal managers, executives, professionals, and related groups to work on reforming the government and good government initiatives, CEC members represent close to 600,000 public employees. CEC also sponsors forums on challenges and opportunities facing the government and prepares reports with findings and recommendations on how to tackle current issues.

On June 13, 2012, CEC convened a panel of three experts to explore federal pay issues. CEC's three experts were at the forefront of the debate on federal pay, which has become hotly contested on Capitol Hill and elsewhere. John Palguta, CEC's vice chairman and vice president for policy at the Partnership for Public Service, moderated the panel. Videos of this panel discussion are posted on the CEC website.

The panelists discussed several aspects of the federal pay system, including what's working, what's broken, and whether and how it should be changed. A key issue was whether the system fairly compensates federal employees or does it overpay or underpay those employees compared to their private-sector counterparts. Another key issue is what data to use and how to use them.

The panel also discussed ideas on how to reform the federal pay system, including thoughts on what type of pay system should be put into place if the government were to design a new system. The audience was invited to ask questions and offer suggestions.

The three panelists were

  • Rex Facer, member of the president's Federal Salary Council (FSC) and associate professor of public finance and management at the Marriott School of Management at Brigham Young University
  • Joe Kile, assistant director for the Microeconomic Studies Division of the Congressional Budget Office (CBO) which prepared the recent CBO study, "Comparing the Compensation of Federal and Private-Sector Employees"
  • Andrew Biggs, resident scholar at the American Enterprise Institute (AEI) and author of the paper, "Comparing Federal and Private Sector Compensation."

Comparing Jobs to Jobs

The FSC determines federal pay comparability by annually comparing federal jobs to similar jobs in the private sector using Bureau of Labor Statistics (BLS) data, according to Facer. FSC also looks at locality differences in federal pay. The FSC pay analysis is "not market driven" and it does not place a value on job security, which is a significant aspect of federal pay. "The FSC's work shows federal employees are 30 to 40 percent undercompensated. … However, the FSC does not consider the cost of [government] benefits."

He also said the FSC is required by law to use the jobs-to-jobs approach using job analysis in comparable organizations with large numbers of jobs. "This is the traditional human resources approach to comparing federal pay to private-sector pay. The federal government decided to be a model employer and unlike the private sector, gives the same level of benefits to all employees." He added that "the federal government recognizes the value of higher job security it offers by paying lower pay and higher benefits. However, while it is more difficult to fire federal employees, they can still be fired."

CBO Used Modified Human Capital Approach

The recent CBO study on whether federal employees earn more or less than employees in the private sector used a human capital approach, according to Kile. He added that this approach to pay comparison uses a modified statistical model that recognizes that distribution of pay and composition of the workforce matter a lot. This approach is commonly used by labor economists. In contrast, AEI used a standard statistical comparison that did not recognize distribution of pay or composition of the workforce. Both CBO and AEI used data from the BLS.

Although the human capital approach can be used to explain pay differences, Kile said that it does not work for setting pay. He noted that the government spends more than $200 billion on federal pay annually. He agreed that federal benefits are richer than those in the private sector and federal employees get more paid time off. Kile adds that "like employees in the private sector, federal employees work in a wide range of jobs."

Comparisons show some differences: half of federal employees hold a bachelor's degree or better, compared to only one third of private-sector employees. However, federal employees with less education tend to be paid more in the federal government. Federal employees have more experience in professional and technical occupations. Federal employees also have more job security, which is a cost to the federal government. "There is no short answer to pay comparison, but education is the largest explanatory variable," Kile noted.

The CBO study concluded that, "overall, the federal government paid 2 percent more in total wages than it would have if average wages had been comparable with those in the private sector." CBO also concluded that "on average, the benefits earned by federal civilian employees cost the employer 48 percent more than the benefits earned by private sector." CBO concluded that "the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector." CBO added that its conclusions were based on accounting for "certain observable characteristics of workers," particularly education level.

AEI: Human Capital Approach

Like CBO, AEI used the human capital approach, "which looks at multiple personal characteristics like education, age, race, and sex, and recognizes that there is more to pay comparison that just pay, or even just pay and benefits," Biggs told the audience. "There are also other comparison methods like job security, quit rates, applications for jobs, job switching between federal and private sector. … Data show that people entering federal jobs receive an increase in pay, while people leaving federal jobs lose pay."

In addition to looking at BLS data, AEI also looked at Census Bureau data and official government reports. "The FSC jobs-to-jobs comparison does not look at benefits, but the human capital approach does." He described the BLS/FSC jobs-to-jobs approach and the CBO human capital approach as "consistent, but argued that the human capital approach is better. The human capital approach looks at large numbers of jobs using statistical analysis. … Education and experience tend to drive federal pay, while productivity tends to drive private-sector pay." He noted that "the job-to-jobs approach used by the FSC does not consider these kinds of differences."

Compared to similar private-
sector workers, AEI estimates that "federal workers receive a salary premium of 14 percent, a benefits premium of 63 percent, and extra job security worth 17 percent of pay. Together, these generate an overall federal compensation premium of approximately 61 percent."

Heritage Foundation Study: Federal Pay Is Inflated

The Heritage Foundation also used the human capital approach in its July 2010 pay comparison study. However, Biggs noted, the Heritage Foundation used somewhat different statistical analyses than CBO did. The Heritage study found that "salaries and benefits—for identical jobs—are 30 percent to 40 percent higher in the federal government than in the private sector.

"Claims that this dramatic discrepancy in compensation is warranted because of government workers' high skills are unjustified, as this study shows. Equally unjustified is the fact that federal workers can rarely be fired, no matter how poor their job performance."

Panelists' Ideas for a New Federal Pay System

Palguta asked the three panel members to comment on what the characteristics of a new federal pay system might look like. They replied that the current federal pay system is good, but periodic reclassification is needed to keep it current—a big job with more than 2 million federal employees. Still, they agreed that is what good compensation systems do. They added that pay for performance is important, too; the federal pay system offers some higher pay for superior performance, although with limited funding. Panelists agreed that the key to a good pay system is to have good data with which to make accurate projections. They also agreed that we need to keep improving our methodology.

State of Federal Pay System and How to Improve It

Why do the jobs-to-jobs comparison and the human capital approach reach different results? The panelists suggested that the reasons for this are not clear, but over-grading of some federal jobs and requiring less experience for others account for some of the difference. Panel members also stated that prior CBO studies and some academic papers have made the case that federal employees, overall, have more education and experience than private-sector employees in similar jobs.

Audience members noted benefit comparisons need to recognize that many private-sector employers don't charge employees for benefits, while the federal government does. Further, audience members noted that the current federal pay system is more than 100 years old and includes definitions by pay level that are out of date and hamper pay comparisons with the private sector. Therefore updated pay level definitions that reflect the composition of today's workforce are needed for a new General Schedule pay system that will cover the bulk of federal employees.

Comments Invited

The CEC hopes that this panel discussion will generate interest in ideas for meaningful reform of the federal government's complex, multiple pay systems.

Future CEC panels on the federal pay issue will examine whether to fix or replace the federal pay system. CEC chair Roz Kleeman is confident that the coalition will support initiatives to reform the federal pay system. She invites The Public Manager readers to share their ideas for pay reform by sending an email to contact@coalition4effectivechange.org.