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The Federal Pay Scale: Inflated Yet Compressed

05/07/2013 04:24 pm ET | Updated Jul 07, 2013
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Back in 2010, USA Today and other popular media loudly declared that federal employees were grossly overpaid. Famed economist Peter Orszag swiftly denied this allegation on behalf of the Obama administration. I found his response extremely suspicious, but was too lazy to confirm my doubts. Recently, though, I discovered that the Congressional Budget Office did all the necessary legwork for me in early 2012.

Here's what the CBO found:

1. After adjusting for education, occupation, work experience, and other observable characteristics, federal salaries are only 2 percent higher than in the private sector.

2. HOWEVER, federal workers' fringe benefits are 46 percent higher than in the private sector. As a result, total compensation (salary + benefits) is 16 percent higher for federal workers than comparable private sector workers.

3. Overcompensation is highest for the least-educated federal workers -- +36 percent if you've got a high school diploma or less. As education rises, the federal worker premium falls. Federal workers with professional or doctoral degrees actually earn 18 percent less than private sector counterparts. Full results:

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Two observations:

1. People occasionally claim that useless credentials only pay because the government hires on the basis of useless credentials. If you take a careful look at the table, however, both the education premium and the marginal dollar payoff of education are higher in the private sector! Yes, the federal government pays more for B.A.s than the private sector does. The reason, though, is not that the federal government overpays for credentials. The reason, rather, is that the federal government overpays for breathing. If someone who never set foot on a college campus manages to land a federal job, his marginal reward for acquiring further credentials is exceptionally low.

2. Despite many virtues, the CBO report still ignores unmonetized fringe benefits, including the Big Kahuna: job security. During the last five years, how much would the typical private sector worker have paid to enjoy the same level of job security that federal workers take for granted? We won't have an apples-to-apple comparison until we estimate that dollar figure and add it to the final tally.

As far as I can tell, the White House never responded to the CBO's report. Am I wrong?

P.S. Also check out Bewerunge and Rosen's working paper on this topic.

This post first appeared on Liberty Fund, Inc., on April 25, 2013. Liberty Fund is a private educational foundation dedicated to increased knowledge of a society of free and
responsible individuals.