Human Capital and the Public Sector
|Written by John Schmitt|
|Wednesday, 23 February 2011 11:00|
For over a year now, a debate has been raging over whether public-sector workers are paid too much. In the last few days, spurred by the protests in Wisconsin, Jim Manzi, Kevin Williamson and other conservative newcomers to the debate have been embarrassing themselves and making things uncomfortable for some of their fellow conservatives who have been engaged in the debate longer.
Manzi criticizes recent research in this vein by Rutgers University economist Jeffrey Keefe, who has analyzed the pay of state and local employees nationally and in several states including Wisconsin, for the Economic Policy Institute. (The National Institute for Retirement Security, the Political Economy Research Institute, and CEPR have done similar research.) For Wisconsin, Keefe's standard human capital model showed that state and local public workers receive about five percent less in total compensation than a worker with similar basic characteristics in the private sector.
John Boehner: ""It’s gotten to a point where the average federal worker makes twice as much as the average private sector worker."
Tim Pawlenty: "Federal employees receive an average of $123,049 annually in pay and benefits, twice the average of the private sector. And across the country, at every level of government, the pattern is the same."
Rand Paul: "The average federal employee makes $120,000 a year. The average private employee makes $60,000 a year."
(Hat tip: RolandC.)
What all of these raw comparisons ignore is that the federal, state, and local work forces are on average much better educated and older than the private-sector workforce. The EPI, NIRS, PERI, and CEPR research is a response to these conservative talking points that ignore systematic differences in the public- and private-sector workforces.
"[Keefe's] use of the statistical tests that he claims show that the total public–private compensation gap is “statistically significant” are worse than useless; they are misleading. The whole question — as is obvious even to untrained observers — is whether or not there are material systematic differences between the public and private employee that are not captured by the list of coefficients in his regression model. His statistical tests simply assume that there are not."But, of course, Keefe and the others who have used this approach in response to conservative talking points, are doing a *far better* job of taking "material systematic differences" between the public and private sector into account than conservatives have to date. I can only imagine that Manzi went to town on the human capital models only because he was not aware that Boehner, Pawlenty, Paul, and many others have been ignoring not just some, but *all*, of the systematic differences between the two sectors.
Meanwhile, Manzi's attacks on human capital models must be making at least two conservative think-tankers uncomfortable. Andrew Biggs of the American Enterprise Institute and Jason Richwine of the Heritage Foundation have been using human capital models to argue that federal workers are overpaid by something like 30 percent. But, Manzi argues that the human capital approach that Keefe, Biggs, and Richwine use, is so flawed that we can't possibly know: "if Wisconsin’s public employees are underpaid, overpaid, or paid just right...this study sure doesn’t answer the question." If the approach can't possibly establish that state and local employees are underpaid, it can't possibly establish that federal workers are overpaid either.
What should the rest of us think about human capital models? We use them a lot at CEPR to show broad trends in the data: better-educated workers earn more on average than less-educated workers and the gap has been rising over time; union workers earn more than non-union workers, even after you control for their higher average age and education; state and local government workers earn a bit less than private-sector workers with similar characteristics; black workers earn less than white workers with similar observable characteristics, suggesting that discrimination may still be a problem for African Americans. But, we are also well aware of the limitations. Human capital models leave most of the variation in wages unexplained. As a result, they are poorly suited to setting wages in the public (or private) sector.
So, how can we set wages in the public sector? Well, collective bargaining, in a setting with financial transparency and electoral oversight, is one idea that comes to mind.