Last week I attended an engrossing two-day conference hosted by the Searle Center at Northwestern Law School on Government Unions in the United States. Scholars from economics, finance, law, and political science presented their research on an number of different dimensions of this theme.
One question that received a great deal of attention was whether public sector employees are compensated more generously than private sector employees with similar skills and engaging in similar tasks. This is a difficult question for two reasons. First, it is challenging to obtain comparability across individuals and jobs. Many public sector jobs have no private sector equivalent. Second, it is widely agreed that public sector accounting does not accurately represent the value of the benefits that public employees receive.
Presenters reviewed existing research and provided their own evidence. Essentially everyone who looked at the data found that public sector workers on average have slightly lower salaries. The contention was over whether higher public sector benefits more than offset this wage differential in total compensation. My own research with Robert Novy-Marx translates public sector pension costs from accounting where new benefits are discounted at 8% to accounting where new benefits are discounted at a rate that represents the liability as a promise that is invariant to asset returns. This reveals that pension benefits are around 15% of pay more expensive on average than is recognized. Conference participant Andrew Biggs argued that the differences are even larger.
Even going with our lower number, 15% of pay is larger than the public-private salary differential that are found in the data. That suggests to me that total compensation for an average public sector employee might be somewhat higher than that for a private sector employee whom these studies characterize as having comparable individual and job characteristics. I am, however, skeptical that comparability of individual and job characteristics in the public and private sector has been or really can ever be achieved. Attempting to benchmark the compensation of, say, public safety officials to private sector employees is obviously problematic. In such a case, the appropriate level of pay is simply whatever the employers and employees can agree upon – but that only leads to efficient outcomes if there is transparency about the public sector compensation packages that allows all parties, including taxpayers, to understand the value of the benefits. That transparency is currently lacking.
A related question at the conference was whether public sector collective bargaining and public sector unionization actually succeed in raising compensation. Here there was in fact no conclusive evidence. A number of speakers noted that it is possible for workers to be unionized but lack collective bargaining rights. Neither collective bargaining nor unionization seemed strongly correlated with compensation in the studies that were presented — although it is impossible in this setting to have counterfactuals (that is, to know what a given public sector employee would have earned in the absence of the union’s influence).
This all suggests that public sector unions may not be very effective at raising compensation on a case-by-case basis. But one role they clearly have played as a group is to resist measures that would bring the true costs of public sector benefits to light. Currently these costs are concealed from the public by the flawed economics of the Government Accounting Standards Board (GASB) methods. And public sector unions are clearly not in favor of changing these standards, as revealed for example by their opposition to the Public Employee Pension Transparency Act.
For the very reason that many public sector jobs have no private sector counterpart, transparency in public sector benefit costs is essential. Public sector unions could probably gain support with the public if they stopped defending the lack of transparency in public sector accounting.