How To Make A Misleading Public/Private Earnings Gap Disappear

Posted by on March 5, 2011

USA Today last week published yet another story claiming that public sector workers make more that their private sector counterparts – this one saying that Wisconsin is one of many states where this is the case. Their “analysis” used data from the Bureau of Economic Analysis, and compared total compensation (salary+benefits) between workers in the private sector and state/local government.

No matter how many times they are told that you can’t just make a straight comparison of dissimilar groups of workers, apparently they still don’t get it. Incredibly, this particular article admits as much, and even quotes economist Jeffrey Keefe, who tells them that the gross comparisons don’t account for important sectoral differences in education and other factors. In other words, their numbers don’t tell us much of anything about public versus private sector compensation. Still, there is the headline: “Wisconsin one of 41 states where public workers earn more.” How many people saw that headline, and now believe that public workers are “overpaid?”

USA Today, of course, is not alone. These assertions have lately become insidious, coming from governors, commentators, and others. But when a major national newspaper decides to run this story at this politically-charged time, based on their very own “analysis,” a separate response seems in order.

I’ve discussed this issue before, but maybe it would be more helpful to show how the data are more properly analyzed in a step-by-step fashion, using 2009 U.S. Census microdata (the American Community Survey, available from the wonderful organization IPUMS.org). Here’s how you make a false earnings gap disappear in five minutes.

I limit the sample to workers who are in the labor force and work at least 35 hours per week (full-time workers). Federal employees, family workers, agricultural workers, and the self-employed are also excluded. This permits a comparison of state/local government employees with workers in the private sector.

It is important to note, however, that these are wage and salary data only – they do not include benefits (which the Census does not collect). I use these data only to demonstrate how and why a straight public-private comparison is invalid. Remember, though, that more educated workers also tend to get better benefits in both sectors – the relationship is less strong, but the discussion below applies for benefits as well. (For careful matched comparisons of public-sector workers to private-sector workers, which include both wages and benefits, see herehere and here.)

Let’s start with the USA Today methodology – a gross comparison of all workers in the public and private sectors.  Keep in mind that these workers vary a fair amount in their hours and weeks worked, so I’ll also add a column that very crudely holds constant the number of hours worked per week by restricting the sample to those who work 40 hours (over half the sample).

According to this estimate, public employees earn roughly the same across all workers, and 12.5 percent more among those who work a standard 40-hour week. There’s a lot of underlying variation, but you can’t see it.

A majority of public employees are professionals, compared with only about one in four private sector employees. Many government workers (teachers, bridge engineers, scientists, etc.) are very highly educated. They also tend to be more experienced than private sector workers, on average. In short, their jobs and qualifications are different, and you can’t compare them as if they weren’t. So, let’s see what happens when we actually control for some of the factors that we know influence earnings.

In the table below, the dollar amounts represent the difference between public and private workers’ annual earnings from their jobs, controlling for the other factors listed (in OLS regression models). Negative numbers mean that public employees earn less, all else being equal. See the table stub for details of the models, if you’re interested.

Let’s take it one row at the time, very quickly.

First, we’ll try a slightly more refined nationwide version of the USA Today method – a model that compares workers in the public and private sectors while controlling for state (interstate differences in average earnings), as well as hours worked per week, weeks worked per year, and gender (there are more women, as a proportion, in the public sector).

With this rudimentary set of control variables, the public sector “advantage” is about $1,600 per year, which is equivalent to around three percent of the average private sector salary across all states and work schedules, for both men and women (a rough characterization of the “advantage”).

Now let’s take a look at the public/private wage gap if we add worker experience to the model (since public employees are, on average, more experienced, and would therefore make more money in either sector). This narrows the gap by about a third – roughly one percentage point. Intersectoral differences in experience, which are ignored in all sweeping comparisons of public/private employees, clearly matter.

But education is by far the most significant factor. If we add that in too, we find that the situation is completely reversed, in a rather dramatic fashion – public employees earn over 20 percent less than comparable private sector workers, a difference of almost $10,000 per year. Using the clumsy methods of USA Today and others, public servants seem to be overpaid. In reality, their earnings fall far short of comparable private sector workers.

Again, this doesn’t include benefits, which, once accounted for, help to narrow this gap substantially (overall, public employees earn around five percent less in total compensation). Nor does it show that some public sector workers – those in the lower-skill, lower-wage jobs – would probably earn less in the private sector. And, finally, this is not a comprehensive model (e.g., it does not include firm size and other factors) or analysis – see the papers linked above for better ones.

But it does show that context matters – a lot. As I’ve pointed put before, it makes little sense to claim that IBM employees are overpaid just by comparing them to Walmart workers.

What it also shows is that the USA Today story, as presented, was irresponsible. In a charged political atmosphere, as Wisconsin protesters were camping out inside the capitol, one of the nation’s largest newspapers chose to run a story under a headline calling them overpaid – when they’re not – based on an analysis that couldn’t have been more simplistic or inappropriate.

That’s bad research. And bad journalism. And we don’t need any more of either.


14 Comments posted so far

  • Since the Wisconsin debate is about teachers’ unions, why not compare the average public school teacher compensation package in Milwaukee ($100,005 per year) to the average private school compensation package there? That might not be totally comparable for a number of reasons, but at least it would avoid the error of treating all college graduates (whether they majored in social work or engineering) as if they have equivalent educational backgrounds, for example.

    Comment by Stuart Buck
    March 5, 2011 at 4:11 PM
  • Thanks for the comment, Stuart.

    First, just for the record, according to the Wisconsin education department, there is only district where 2009-10 total compensation exceeds $100K, and Milwaukee is around $86K. Perhaps these data are incomplete somehow, but one has to wonder why. (Source: http://dpi.state.wi.us/lbstat/xls/tasr10.xls).

    Second, in order to address the type of concern you raise, I actually tried a model fitting occupation fixed effects (about 35 major occupational categories), as well as one with an occupation-by-sector interaction. Both had a negligible effect on the final results, so I omitted them in the interests of simplicity.

    Finally, your argument that people have different degrees, fields, etc., is precisely my point: One must account for these differences in order to make comparisons.

    Thanks again,
    MD

    P.S. Strictly in my personal view, the situation in Wisconsin is about more than just teachers’ unions.

    Comment by Matthew Di Carlo
    March 5, 2011 at 4:40 PM
  • The manager of financial planning for Milwaukee Public Schools puts the figure at $100,005. See http://online.wsj.com/article/SB10001424052748703408604576164290717724956.html

    I’d be very interested to see a direct comparison to what teachers earn in private schools. I suspect that the situation would be similar to the national data (public school average wages, $46,500; private school average wages, $36,300) according to NCES (http://nces.ed.gov/fastfacts/display.asp?id=55). That’s not controlling for educational level, of course, but if private school teachers worked within a system where they got a $4,000 salary bump merely for getting a master’s degree, more of them would get master’s degrees. (Which is to say that controlling for educational level is a tricky business, given what it implies about the counterfactual.)

    And none of this is to say that public school teachers in Milwaukee are necessarily overpaid (it might be that private school teachers are underpaid), but it would be a much more relevant comparison than a generic regression, I think.

    Comment by Stuart Buck
    March 5, 2011 at 6:31 PM
  • Private school quality varies more than public school quality, if you can imagine it. Yes, it’s scary. If you arrange by tuition for a rule of thumb and then examine their college admissions, you can pretty much see what goes on. The top drawer private schools hire teachers with only masters or doctorate credentials and they charge from a low of fifteen thousand to around twenty six thousand dollars a year. The low end private schools often charge less than a public school spends per pupil. It’s not scientific, but it’s not deceptive to look at inputs.

    My paycheck says I make forty thousand a year including benefits so that’s thirty-six take home after ten years of experience in Florida. Yet my governor says I am making too much, and is easily as exercised as Walker over my greed.

    Let me point out one thing nobody has mentioned. Health costs for Americans have risen from seven percent of GDP in 1970 to sixteen percent in 2005. (kff.org) Government health plans retain risk and manage cost in a way that holds their rate of cost increase down to about half that of private insurance.

    Maybe they should be looking at other methods of saving money.

    Comment by Bob Calder
    March 5, 2011 at 7:51 PM
  • Teaching in public school and in private school isn’t anywhere near the same job. I have done both. In private school they have entrance exams. They don’t take special ed students which in turn means that the teachers dont have to spend 8-12 hours a week making modifications (thats my low estimate)Also, no ESL students and you have the option of kicking bad students out which is extremely difficult to do in public schools. Again, they are not nearly the same job.

    Comment by Dwal
    March 5, 2011 at 9:50 PM
  • I don’t know about Wisconsin, but I have friends who teach in Catholic schools in NJ who have NO college credits, let alone a degree and many of their high school’s mostly hire early elementary teachers who are NOT qualified to teach their subject areas. They do this in order to report a high percentage of staff members who have college degrees.
    In NJ, public HS teachers MUSTnot oly have 30 college credits within their subject areas, but they must have a minimum of a 2.75GPA in them. Some people may not think that is a big deal, but most people earning a higher GPA than that in math or science are not interested in teaching and absolutely will not be in this climate.

    Comment by sadinNJ
    March 5, 2011 at 10:26 PM
  • SadinNJ, I’m not going to lie, I take a certain offense to your previous comment. I had a 3.5 in science and I chose to teach public HS instead of going to medical school because I knew I would enjoy the career. To say anyone with a high GPA in their specialization is ‘not interested in teaching and absolutely will not be in this climate’ is very close-minded.

    But yes, as SadinNJ says, many private and religious schools do not require their teachers to be certified or highly-qualified in any content area. This is partially due, I believe, to the fact that these schools are not held to the same state requirements that publics schools are.

    Comment by JSmith
    March 6, 2011 at 12:56 AM
  • [...] How To Make A Misleading Public/Private Earnings Gap Disappear is from The Shanker Blog. [...]

    March 6, 2011 at 1:55 AM
  • Note to readers: An earlier version of this post stated that the source of the USA Today data was the Bureau of Labor Statistics. This has been corrected to the Bureau of Economic Analysis. I apologize for the error.

    Comment by Matthew Di Carlo
    March 6, 2011 at 10:02 AM
  • My son went to a Catholic School in NJ…all of his teachers were certified and the school is accredited ….He got superior instruction in Math and Science as well as all of his other subjects…He now goes to a public HS,,,all’s well…What is making me really sad is… How Gov Christie is trying to destroy our public schools..programs cut,teachers laid off,their pension system has been underfunded for 15 years or more, he has turned the public against teachers…he claims he is after the union…but he is not touching them…they still collect all their $$$..and the schools and kids and teachers are hurting….he claims the state is going bankrupt because of teachers yet he wants to pour a billion dollars into private and charter schools…tax payers money…I have a problem with that…fund the public schools..and make changes that make sense…private,charter and parochial schools have no problem raising funds on their own…tax dollars are the publics money and and they should be used to fund public schools…Just sayin’

    Comment by really sad in NJ
    March 6, 2011 at 5:42 PM
  • [...] How To Make A Misleading Public/Private Earnings Gap Disappear is from The Shanker Blog. [...]

    March 9, 2011 at 9:08 PM
  • The idea that teachers get a $4000 increase just for getting a master’s degree is curious. I want to teach where that happens. I have two masters degrees, one in my content, one in education, and I make less than a $1000 more than my non-master’s degree coworkers. Also, in Ohio the master’s degree is now required after a certain number of years teaching–but there is no help with the expense of that. Contrast that with my sister, who works for a private utility company: any college classes she wants to take are fully paid, including books. And her sick leave, vacation and insurance are better than mine.

    The difference between districts makes it nearly impossible to come up with fair comparisons, anyway; pay scales and benefits can be radically different in the same county, so numbers for the whole state are at best misleading.

    Comment by Jeannine Jordan
    March 21, 2011 at 9:13 AM
  • [...] to compare how this factor “operates” on people who are otherwise similar. For example, in a previous post, I compared public and private sector workers’ earnings. In order to uncover the “effect” of [...]

    May 10, 2011 at 8:58 AM
  • [...] much demolished the argument that government workers are overpaid. My colleague, Matt Di Carlo, has addressed this as [...]

    September 22, 2011 at 9:06 AM

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