August 5, 2010

Americans are Overtaxed to Overpay the Federal Workforce

The federal government does not create a traditional sellable product and thus produces no revenue outside of what it collects from taxpayers. As of 2008, the average federal salary was $119,982, compared with $59,909 for the average private sector employee. In other words, the average federal bureaucrat makes twice as much as the average working taxpayer. Add the value of benefits like health care and pensions, and the gap grows even bigger. The average federal employee’s benefits add $40,785 to his annual total compensation, whereas the average working taxpayer’s benefits increase his total compensation by only $9,881. In other words, federal workers are paid on average salaries that are twice as generous as those in the private sector, and they receive benefits that are four times greater. - Brandon Greife, The Public Sector Weight Around Taxpayers’ Necks,, May 4, 2010

Taxes and deficit financing permit the federal government to pay its employees more than they would earn in the private sector. Excessive average federal compensation redistributes wealth from less-well-paid private sector workers to more highly-paid federal employees. The federal government should not overtax the general public to provide significantly above-average pay and benefits to their privileged workers.

Comparing Pay in the Federal Government and the Private Sector

By James Sherk, The Heritage Foundation
July 16, 2010

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The federal government pays its employees substantially more than they would earn in the private sector. The current federal pay system:

  • Pays hourly wages 22 percent above that of comparable private sector workers;
  • Provides more generous health care and pension plans;
  • Provides total compensation on the order of 30 percent to 40 percent above similarly skilled private sector workers; and
  • Offers near-total job security and insulates federal employees from recessions.

Congress should not overtax all Americans to overpay the privileged workers in the federal civil service. Aligning federal compensation with market rates would save taxpayers approximately $47 billion a year. Congress should immediately act to bring equity to federal pay.

Federal Government Pays More

The federal government pays significantly more than the private sector: Hourly wages and annual income are 57 percent higher than in the private sector. Adding in the value of non-cash benefits increases the federal total compensation premium to 85 percent. Different skills justify part of this higher pay. The typical federal employee has more education and experience than the typical private sector worker.

However, the superior skills of federal employees explain only part of their higher pay. After controlling for observable skills and characteristics, federal employees still get cash wages 22 percent more per hour than comparable private workers. Federal employees in occupations that also exist in the private sector—such as computer programmers, human resource specialists, and accountants—enjoy a similar premium.[1] The federal government pays substantially more than the amount accounted for by federal employees’ skills.

Generous Benefits

The federal government also provides generous non-cash benefits: an average of $32,115 per employee annually, over triple the average non-cash compensation of the average private sector worker ($9,882 a year). The federal government gives its workers excellent health coverage and offers them both a defined benefit and defined contribution pensions. Federal employees get more paid leave than private sector workers and receive other perks that few private workers do — such as student loan repayments and on-site child care.[2]

The superior skills of federal workers explain even less of these generous benefits than they do hourly pay. The typical federal employee has almost four times greater odds of participating in a pension plan than a comparably skilled private sector worker.

Data limitations make measuring the precise cost of overcompensation for federal employees difficult. However, conservative estimates show that the federal government pays an average of 30–40 percent greater total compensation than comparable private sector workers would receive.[3]

Federal Employers Rarely Fired or Quit

In addition to higher earnings, federal employees enjoy far greater job security than private sector workers. Federal agencies rarely lay off employees for poor performance. The government does not let workers go in economic downturns, either.

The federal government has hired 240,000 net new employees even as private employers have shed 8 million net jobs. Unemployment among federal employees has only slightly risen—to 2.9 percent—during the recession.[4] The federal government insulates its employees from the business cycle.

Federal employees also enjoy much more comfortable working conditions than most private sector workers. As result, they rarely quit. In fact, federal employees voluntarily quit at just one-third the rate of private sector workers.[5]

Excessive average federal compensation redistributes wealth from less-well-paid private sector workers to more highly paid federal employees. Congress should not engage in this reverse redistribution of wealth. The ticket to financial success should not be the good fortune of landing a job with Uncle Sam.

Significant Taxpayer Savings from Pay Reform

Congress would save taxpayers approximately $47 billion a year if it reduced federal compensation to market rates.[6] This would not eliminate the deficit alone, but it would be an important step toward putting America’s fiscal house in better order.

However, Congress should reform federal pay wisely. Although the average federal worker earns above-market wages, not all federal workers do. Because the federal government bases raises largely on seniority and not performance, many highly skilled and high-performing federal workers do not earn above-market pay.

Uniformly cutting federal pay would inappropriately penalize productive federal employees. Instead, Congress should equitably reduce federal pay to market rates by:

  • Abolishing the General Schedule and implementing market-based performance pay;

  • Expanding the contracting out of non-essential tasks to the private sector;

  • Reducing the generosity of the benefits the federal government provides; and

  • Ending restrictions on dismissing underperforming federal employees, thus incentivizing increased productivity.

Reduce Federal Pay to Market Rates

Federal employees get substantially better wages and benefits than do the private sector workers whose taxes fund their paychecks. After controlling for education, experience, and other observable characteristics, federal employees earn cash wages 22 percent above comparable private sector workers. Adding in the value of non-cash benefits raises their total compensation premium to 30 to 40 percent.

If Congress reduced federal pay to market rates, it would save taxpayers approximately $47 billion a year. Congress should stop giving federal employees inflated earnings before considering raising taxes.

James Sherk is Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation.

Inflated Federal Pay: How Americans Are Overtaxed to Overpay the Civil Service

By James Sherk, The Heritage Foundation
July 7, 2010

Center for Data Analysis Report: Download PDF

Abstract: 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. Congress should align federal salaries and benefits with market rates—a simple, and fair, move that could save taxpayers nearly $47 billion in 2011. Heritage Foundation labor policy analyst James Sherk provides detailed data on why Congress should not overtax all Americans to overpay the privileged workers in the civil service.

Many news organizations have reported that the average federal employee earns more than the average private-sector worker.[1] Is higher federal pay justified given that the federal government employs a more skilled workforce than the private sector? Detailed analysis shows that the size of the wage discrepancies is not warranted:

  • The federal pay system gives the average federal employee hourly cash earnings 22 percent above the average private worker’s, controlling for observable skills and characteristics.

  • Including non-cash benefits adds to this disparity. The average private-sector employer pays $9,882 per employee in annual benefits, while the federal government pays an average of $32,115 per employee.

  • Overall, controlling for other factors, federal employees earn approximately 30 percent to 40 percent more in total compensation (wages and benefits) than comparable private-sector workers.

  • Federal employees enjoy job security irrespective of the state of the economy. Since the recession began, federal employment has risen by 240,000—12 percent. The unemployment rate for federal employees has only slightly risen from 2.0 percent to 2.9 percent between 2007 and 2009.

  • Federal employees demonstrate with their actions that they receive better compensation in the public sector than in the private sector: They quit their jobs at one-third the rate of the private employees.

  • Bringing federal compensation in line with private-sector compensation would save taxpayers approximately $47 billion in 2011.

Of course, these averages mask large differences in pay across occupations and skill levels. Many federal employees in highly skilled occupations receive market wages. However, semi-skilled federal workers earn substantially more than they would in the private sector. Congress should not cut federal pay across the board—this would unfairly penalize the federal workers who earn market wages.

Instead, Congress should implement a pay-for-performance system with pay bands based on market signals of labor demand, expand the contracting of federal work to private companies, reduce the generosity of federal benefits, and end the near-absolute job security for underperforming federal workers. Doing so would not solve the country’s fiscal problems, but would be a solid—and fair—step toward a more responsible fiscal policy. The federal government should not overtax the general public to provide significantly above-average pay and benefits to those who work in the civil service.

Productivity Determines Private-Sector Pay

In the private sector, it is productivity that determines workers’ pay.[2] Businesses that pay wages below the associated level of productivity lose quality employees to competitors paying higher wages. Businesses that pay workers more than their productivity lose customers to competitors with lower prices because of lower costs.[3] Broadly speaking, under normal economic conditions, workers in the private sector earn what their productivity merits.[4] In the public sector, they do not. The government sells few goods or services and rarely does so according to market forces, so the market cannot determine pay levels. How much do employees of the Department of Housing and Urban Development contribute to the economy? In lieu of paying on the basis of productivity, the federal government determines pay through wage formulas set by Congress.

How the Government Sets Pay Rates

In theory, the Office of Personnel Management constructs federal pay scales to reflect market wages for similar private-sector jobs. In practice, government wages frequently bear little resemblance to market pay.

The basic federal pay scale is the General Schedule (GS) which covers roughly 70 percent of federal civilian employees. Separate pay systems cover political appointees, senior executives, and blue collar workers. This paper reports averages for employees across these different pay systems.

The General Schedule consists of 15 pay grades and 10 steps within those pay grades. GS grades 1 through 7 denote entry-level positions, while grades 8 through 12 mark mid-level positions and grades 13 through 15 are top-level and management positions.[5] The General Schedule also incorporates locality pay adjustments to account for cost-of-living differences across the country and overseas.

Table 1 displays the 2010 General Schedule for the Washington, D.C., metropolitan area, where one in six of all civilian federal employees work.

Federal employees advance through the steps of the General Schedule by seniority, with faster promotions possible for what managers deem good performance—which may or may not relate to workers’ productivity. Except in cases of extreme misconduct, a civil servant will reach the GS-10 grade if he or she remains on the job long enough.[6]

Many federal jobs also involve career ladders that provide for advancement through the grades of the General Schedule. Federal employees begin at the entry level grade for their position and advance, typically annually, through the grades in their career ladder until they reach their full performance level. For example, the Department of Labor had an opening for a staff assistant at a GS-9 level ($51,630 to $67,114 a year).[7] The career track for this position goes from a GS-9 to a GS-11. Consequently, the next year the Department of Labor would promote that staff assistant to the GS-11 grade. That employee would then advance by seniority to step 10 of grade 11, which in the 2010 General Schedule amounts to $81,204 a year.

2010 US General Schedule Pay Tables for the DC Metropolitan Area

Significance of a Federal Premium. Very few staff assistants in the private sector earn $81,000 a year with full benefits. But the competition that forces companies to keep costs down does not constrain federal payrolls. Taxes and deficit financing permit the federal government to pay its employees more than they would earn in the private sector. Most Americans find taxing lower-earning private-sector workers to inflate better-paid federal employees’ paychecks offensive. Few support reverse redistribution of wealth. But excessive federal pay has broader importance.

Prices send signals about where individuals should work. Although necessary to keep the government running, most federal jobs contribute little or nothing to economic growth. If the federal government overpays its employees, it will lure more productive workers into less productive tasks. The economy grows faster when workers channel their ambitions into productive activities; landing a job with the government should not be the key to getting ahead. Additionally, the taxes that fund government salaries discourage investment and entrepreneurship. Overpaying government employees means less economic growth and fewer jobs for everyone else.[8]

Pay Differentials between the Private Sector and Federal Government

Higher Average Earnings. Table 2 displays various measures of average pay for civilian federal employees and private-sector workers.

The average federal employee earns an annual salary almost 60 percent greater than the average private-sector employee—$79,000 vs. $50,000 a year. Including the value of benefits, such as retirement plans, increases the total compensation gap to 85 percent.

Government Employs Skilled Workforce. The government hires more highly skilled workers, on average, than the private sector. Chart 1 shows the average education level of full-time federal and private-sector workers: 83 percent of federal employees have more than a high school education compared to only 59 percent of private-sector workers. Over one-fifth of federal workers hold more than a bachelor’s degree, more than double the rate in the private sector. The average federal employee is also five years older than the average private-sector worker.

A more skilled workforce naturally earns more than a less skilled one; education and experience increase workers’ productivity. The fact that federal employees earn more on average than private-sector workers does not by itself prove that the government overpays them.

Education Levels in the Private Sector and Among Federal Employees

Accounting for Differences in Productivity

Any analysis of pay differences should account for the greater skills of federal employees. Economists have developed statistical techniques to do just that. One of the most frequently used methods, the Oaxaca decomposition, breaks pay differences between groups into a portion explained by differences in observed characteristics (such as education) and an “unexplained” portion for which these differences cannot account. The unexplained difference in pay estimates how much private-sector workers would earn with their measured skills if they worked in the federal government. Appendix A explains the Oaxaca decomposition in greater detail.

Data. To determine how much of a pay premium the federal pay system gives the average federal worker, The Heritage Foundation examined data from the Bureau of Labor Statistics’ Current Population Survey (CPS) for 2006 through 2009.[9] The author of this report used an Oaxaca decomposition to examine the explained and unexplained differences in federal and private-sector pay. He restricted the analysis to full-time employees between the ages of 25 and 65. The analysis controls for differences in age, education, marital status, race, gender, citizenship and nativity, state, year, and size of metropolitan area. The study looks at workers in the federal bureaucracy—federal employees in the field of public administration. This excludes some federal workers, such as postal employees. Appendix B explains the data used and methodology in greater detail. Appendices E and F present results for alternative definitions of federal employees, including postal workers.

Higher Cash Hourly Wages. Looking first at cash earnings (excluding benefits such as health insurance) the average federal employee earns $28.64 an hour compared to $18.27 an hour in the private sector—56.8 percent higher pay. The different skills and characteristics of federal employees only partially explain these higher cash wages.

Differential in Hourly Pay for the Federal Government vs. the Private Sector

A portion of federal workers’ higher cash pay comes from their higher skills. Private-sector workers with the same characteristics as the average federal employee earn 19.6 percent more than average private-sector hourly pay. However, skill differences explain only a minority of the pay gap. The government pays the average federal employee 31 percent more than what can be accounted for by observable characteristics like education and demographics.[10]

Controlling for Occupation. This analysis ignores occupational wage differentials. Some occupations earn higher wages than others; for example, managers typically make more than administrative staff. If the federal government employs a different occupational mix than the private sector, this may account for federal workers’ otherwise unexplainably higher wages.

Hourly Pay in the Federal Government and Private Sector, Controlling for Occupation

Controlling for occupation presents serious challenges, however, because many federal occupations exist only in government. The Internal Revenue Service’s agents, for example, have few private-sector counterparts. This makes it difficult to distinguish between higher pay in occupations that exist in the federal government and the federal government paying more in general. Two approaches to estimating the actual federal wage premium involve controlling for occupational wage differences at an aggregated level or examining only those workers in occupations that exist in both sectors.

Broad Occupational Controls. The first method involves grouping occupations into broad categories of similar positions. The Bureau of Labor Statistics classifies respondents to the Current Population Survey into occupational categories, such as “Business and financial operations,” “Healthcare practitioner and technical,” and “Office and administrative support” occupations.[11] Table 4 displays the Oaxaca decomposition of the federal–private pay gap using the same methodology as in Table 3, but including controls for these broad occupational categories.

Controlling for occupation raises the amount of the federal–private pay gap that observable characteristics explain to 28.5 percent. That still leaves the federal government paying an unexplained 22 percent average premium—above and beyond what the skills, demographic characteristics, and occupations of federal employees account for.

Occupations Common to Both Sectors

Such broad occupational groupings aggregate hundreds of distinct occupations with different earnings into single categories. Another method is to compare only workers in occupations that exist in both the federal government and the private sector. Many occupations fall into this category: lawyers, receptionists, janitors, and human resource managers, to name a few.[12]

Table 5 shows the wage decomposition for workers in occupations common to both sectors. The government pays these workers a smaller premium than in the overall federal workforce: $29.74 an hour vs. $20.91—a 42.2 percent premium. Observable characteristics, such as education, demographics, and occupation explain about half (19.9 percent) of that difference. That still leaves the federal government paying its average employee 18.6 percent more an hour than otherwise comparable private-sector workers.[13] Looking only at federal employees in occupations that are directly comparable to private-sector workers reduces the federal pay premium only modestly.

Hourly Pay in Occupations Common to the Federal Government and Private Sector

Differences by Occupation. The federal government pays its employees an average of approximately one-fifth more than comparable private-sector workers receive. However this premium differs across occupations. Federal employees in some occupations earn less than they would in the private sector and federal employees in other occupations earn much more. Table 6 shows the unexplained hourly pay premium from Table 5 for individual occupations.

In several occupations, federal employees do not receive higher cash pay than private-sector workers. In three occupations the difference is actually negative, although not statistically significant. In other occupations, however, federal workers get paid 40 percent or more above what comparable private-sector workers earn.

Table 6 suggests that the federal workers not getting paid above market rates generally work in highly skilled occupations: engineers, physical sciences, lawyers, and economists. Workers in these occupations earn high wages in the private sector and the government does not pay more than necessary to attract them. Some federal employees would earn more if they left the government. John Roberts, for example, makes $223,500 a year as Chief Justice of the United States. He would almost certainly earn more in private practice.

The federal employees with the largest wage premiums tend to work in more moderately skilled occupations: bookkeeping clerks, security guards, social workers, and receptionists. There are, of course, exceptions to this trend. However, the federal government generally pays employees in semi-skilled occupations very generously. This causes much of the average federal pay premium.

Generous Federal Benefits

On average, federal employees receive higher cash earnings than the private-sector workers whose taxes fund their salaries; observable characteristics account for only a portion of this gap. An employee of the federal government earns an average of 22 percent an hour more than a comparable private-sector worker.

However, hourly wages represent only part of federal employees’ total compensation. The federal government also provides its employees with generous benefits. These benefits include:[14]

  • Federal Employees Health Benefits Plan (FEHBP). Federal civilian employees may enroll in the FEHBP. The FEHBP allows federal workers to choose from a menu of health care plans, with the government contributing to the cost of the premiums. No age, health, or pre-existing condition restrictions exist in the FEHBP nor does the government impose waiting periods before benefits start. The FEHBP does not cap lifetime medical expenditures. The federal government contributes a maximum of 72 percent of the weighted average cost of the premiums across all of the available plans.

  • Federal Employees Retirement System. Federal employees are automatically covered under the Federal Employee Retirement System (FERS), which includes both a defined-benefit and a defined-contribution pension plan.[15] Employees in the defined-benefit pension with 30 years of experience may retire at the age of 56 with a full pension. Employees with less tenure may retire with full benefits at 60 or at 62.[16] They receive annual benefits of 1 percent of their average pay in their three highest earning years multiplied by their number of years of service.[17] Any federal employee willing to accept reduced pension benefits may retire at age 56.[18] Unlike Social Security, federal employees may collect their pensions while working in a non-federal job. This allows federal employees to retire in their late 50s and take a job in the private sector while collecting pension benefits from the government.

    Tax dollars—not employee contributions— cover the overwhelming majority of these costs for federal employees’ retirements. Federal employees may also enroll in a defined-contribution Thrift Savings Plan (TSP) that functions similarly to a 401(k). Employees in the TSP receive matching contributions from the government of up to 5 percent of their pay. Federal employees in FERS also receive Social Security benefits.

  • Paid Leave. Full-time federal employees with less than three years of experience receive 13 days of paid leave a year. Those with three to 15 years of service earn 20 days of paid leave annually, while those with 15 or more years of service earn 26 days of paid leave. These leave benefits have a cash value: workers on the General Schedule can cash out up to 30 days of paid leave. Full-time federal employees also earn 13 paid sick days a year and receive all federal holidays off—an additional 10 days of paid time off a year. The paid sick leave days carry over without limit each year and unused sick leave counts as time served for calculating pension benefits.

  • Student Loan Repayment. Many federal agencies also repay student loans. These payments are capped at a maximum of $10,000 a year or $60,000 total and cover federally insured student loans. To receive loan repayments an employee must commit to working in the agency that repaid the loans for at least three years.

  • Federal Employees’ Group Life Insurance. The federal government offers group term life insurance without a medical examination to its full-time and part-time employees. The federal government pays one-third of the cost of the premiums for basic life insurance, with federal employees covering the remaining two-thirds.

  • Employee Welfare Benefits. The federal government provides many other benefits to its employees. Many federal buildings offer on-site child care. Federal agencies also offer child care subsidies to lower-income federal employees, health care flexible spending accounts, and parking and commuter subsidies. Federal employees may also enroll in federal life insurance, dental, vision, and long-term care insurance plans. The Office of Personnel Management oversees the administration of these plans, but federal employees pay the full cost of the premiums.

These are more generous benefits than the average private-sector employer offers. Consider paid leave. A private-sector worker with 10 years experience at a firm earns an average of 23 days of paid time off a year.[19] A federal employee with that experience receives 33 days of paid leave a year (20 days of leave and 13 sick days). Those numbers exclude federal holidays; few private-sector employers give paid vacations for Columbus Day, Veteran’s Day, or Martin Luther King Jr.’s birthday.

Measuring Individual Benefits

Bureau of Economic Analysis data show that the average private-sector worker earns $9,882 a year in non-cash compensation while the average federal civilian employee receives $32,115 a year, over three times as much.[20] These figures include health and life insurance, retirement benefits, and employer contributions for mandatory government benefits, such as Social Security. They exclude some benefits, such as the value of paid leave and student loan repayments.

Determining exactly how generous federal benefits are for individual workers is challenging. The Bureau of Economic Analysis uses administrative records to measure the total spent on compensation and total government employment. It does not measure compensation for individual employees. Surveys do not answer this question clearly because most employees do not know how much their benefits cost their employers.

However, surveys can answer some questions about employer-provided benefits. The annual March supplement to the Current Population Survey asks workers whether they have an employer-sponsored pension plan and whether they receive health insurance from their employer. The Bureau of Labor Statistics also estimates the employer contributions toward health costs that these workers receive. Table 7 shows pension and health benefit receipts for federal and private-sector workers.

The federal government offers far more generous benefits than does the typical private-sector employer. While less than half (47.9 percent) of private-sector workers participate in an employer-sponsored pension plan, over four-fifths (81.4 percent) of federal workers do. Federal employees are 7 percentage points more likely to receive health insurance coverage through their employer.[21] They also receive an estimated $1,600 more in employer contributions toward health costs than do private-sector workers.

Employer Benefits by Sector

The Heritage Foundation compiled data from the 2006 to 2009 March supplements to the CPS to determine how much of this difference in benefits are explained by observable differences. The analysis controls for age, education, marital status, race, gender, citizenship, state, year, and metropolitan status. Appendix D explains the data and methodology in greater detail.

Greater Health Benefits. The top panel of Table 8 reports the Oaxaca decomposition for estimated employer contributions to health benefits. The federal government contributes 33.0 percent more toward health care costs than private-sector employers. Observable characteristics explain only 9.1 percent of these greater benefits. Federal employees receive 22.0 percent more in employer payments toward their health care than their observable characteristics explain.

Difference in Employer Contributions for Health Care

This analysis does not account for occupational differences. The lower panel in Table 8 analyzes employer health benefits for federal employees in occupations with private-sector counterparts. In directly comparable occupations, federal employees receive 11.1 percent more in employer contributions than their observable characteristics can explain. The federal government provides more generous health benefits than the private sector.

More Generous Pension Coverage. The federal government also covers far more of its employees with pension plans than private employers. The CPS asks workers about whether their employers offer pension plans and, if so, whether they participate in them. Table 9 shows the Oaxaca decomposition of pension participation for federal and private-sector workers. The top panel shows the results without occupational controls; the bottom panel shows the results for workers in occupations that exist in both the federal government and the private sector.

Difference in Federal Employees' Odds of Participating in an Employer-Sponored Pension Plan

The results report the difference in odds of receiving pensions after retirement for federal and private-sector workers. The overall federal workforce has roughly five times greater odds of receiving a pension than private-sector workers, after controlling for other observable characteristics. Restricting the analysis to federal workers in occupations that also exist in the private sector still shows federal workers have almost quadruple the odds of receiving a pension than anything besides working for the federal government explains.

To interpret these figures, consider a private-sector worker who has a 50 percent likelihood of receiving a pension, given his observable characteristics. This represents even 1-to-1 odds of receiving a pension. A federal employee in this occupation with these same characteristics would have nearly 4-to-1 odds of having a pension—nearly an 80 percent chance. Federal workers receive far more generous pension benefits than private-sector workers.

Estimates of Federal Total Compensation Premium

All working Americans should have access to a retirement savings plan, not only federal employees. Congress should encourage all private employers to offer retirement savings plans, such as the automatic IRA or a 401(k) to their employees.[22]

Differences in Total Compensation. BEA figures for civilian government employees indicate that the average federal employee receives 85 percent more in total compensation than the average private-sector worker.[23] However, measuring exactly how much of this overall compensation gap is explained by federal employees’ greater skills and productivity poses serious challenges.

Because the March CPS does not provide information on the value of benefits beyond health care contributions, it is not possible to directly answer what portion of that premium is comparable to private-sector wages, and what portion represents taxpayer generosity. However, it is possible to approximate the portion of the compensation gap unexplained by workers’ characteristics by assuming that it follows the same breakdown as cash earnings.

This is a strong assumption. Total benefits generally rise with income, but not one-to-one.[24] Making this assumption will underestimate the federal compensation premium. Observable characteristics explain a smaller proportion of the difference in benefits between the sectors than they did hourly pay. Consequently, the following estimates are lower bounds on the unexplained federal compensation premium.

The three rows of Table 10 show the results of applying the ratio of unexplained to explained pay differences from the hourly pay models to the aggregate compensation premium. Appendix H explains this methodology in detail.

These estimates are necessarily rough approximations combining data from different data sources. Nonetheless, they give insight into the magnitude of total compensation that federal employees earn: 30 percent to 40 percent greater compensation above and beyond their observable skills. These figures are imprecise approximations of the federal compensation premium. They show that federal employees earn substantially greater total compensation than private-sector workers, even after accounting for their different skills.

Government Jobs: Almost Impossible to Lose

Federal civil servants receive another perk that few private-sector workers enjoy: near-absolute job security. In the private sector, businesses cut hiring and increase layoffs when sales drop. Since the recession began in December 2007, private-sector employers have shed 8 million net jobs. Tens of millions of private-sector employees go to work each day knowing they could lose their job at any point.

Federal employees do not. Civil service rules make it prohibitively difficult to fire federal employees for bad performance once they pass their probationary period—one year on the job. Most federal employees who perform poorly never get fired. They keep their jobs unless their supervisor works through an arduous process of exhaustively documenting their performance and working through a complex appeal process.

Federal Employment Accelerated While Private Employment Shrunk

The federal government provides its employees with an additional perk: employees who leave government service get preferential treatment if they want to come back. Former federal employees with career status (three or more years on the job) do not have to go through public merit competitions for re-hire. Though the government does not guarantee them a new position, it moves them to the front of the line. Few private-sector workers leave their jobs with similar assurances of re-employment.

Federal employees also do not have to worry about their jobs being eliminated due to economic downturns. The federal government has added 240,000 workers since the recession began—a 12 percent increase.[25] In the private sector, the adult unemployment rate jumped from 4.2 percent to 9.4 percent between 2007 and 2009. For federal employees, unemployment barely budged from 2.0 percent to 2.9 percent.[26] Deficit spending and taxes have kept federal payrolls growing even as the economy has experienced its worst slump since the Great Depression. Federal employees have been insulated from the recession.

Even this figure overstates federal unemployment rates because many federal employees voluntarily retire once they qualify for pension benefits.[27] This allows them to earn a double income: They retire on their pension and look for a second job in the private sector. Unemployed federal retirees enjoy much more comfortable jobless spells than unemployed private-sector workers.

The new health care legislation will worsen the imbalance between private and federal payrolls even more. The government will need to hire tens, possibly hundreds, of thousands of employees merely to implement the new health care regulations. Even as the taxes and regulations in the health care bill cost jobs in the private sector, they will swell the federal government’s payrolls.

Federal Employees Rarely Quit. Federal employees know they get a better deal through their employment. The proof is that they rarely quit. Approximately 2.5 percent of private-sector workers voluntarily left their jobs each month in 2006 and 2007. During that same period, between 0.6 percent and 1 percent of federal employees voluntarily left their jobs, roughly a third the private-sector rate.[28] Since the recession began, that disparity has only grown. If federal employees earned market compensation they would leave their jobs at rates more similar to private-sector workers.

Monthly Job Quit Rates

Reduce the Deficit by Cutting the Federal Payroll

Federal employees earn between 30 percent and 40 percent more than equivalently skilled private-sector workers. This represents costly forced sacrifices by lower-earning American taxpayers. The federal government will spend an estimated $180 billion on wages and salaries for civilian federal employees in fiscal year 2011, and another $64 billion on benefits—a total compensation of $244 billion.[29] There is a part of this inflated pay that Congress cannot touch. Congress has contractually obligated the taxpayers to fully fund the generous pensions of the civil service retirement system. Although giving such generous pensions to federal employees was a mistake, Congress should not retroactively void those contracts.

However, most federal compensation is not a contractual obligation and Congress can reduce it in those positions which are overcompensated. If Congress reduced this federal pay to market rates this would save taxpayers about $47 billion a year[30]— more than eliminating the entire Department of Commerce, Department of the Interior, or Department of Energy. It would be enough to fully offset the cost of patching the alternative minimum tax in 2012.

Some Members of Congress have proposed raising taxes to reduce the deficit. Congress should reject these proposals. Higher taxes reduce the incentive to invest and create new businesses— which will cost jobs. Congress should instead reduce government spending. Aligning federal pay with market rates would reduce government spending relatively painlessly.

Not All Federal Employees are Overpaid. The fact that the General Schedule and other federal pay scales over-compensate federal employees on average does not mean that all federal employees are overpaid. Many high-performing federal workers actually earn below-market wages. The pay scale and seniority-based system the government uses divorces federal pay from individual performance. The average federal premium is small relative to the dispersion of federal pay from market rates.[31] As a result, Congress should not uniformly reduce the pay of all federal employees.

What Congress Should Do

Instead of a uniform pay cut, Congress should take several steps to equitably align federal pay with market rates. Congress should:

  • Abolish the General Schedule and implement performance-based pay. Congress should replace the General Schedule with pay-for-performance systems tied to market compensation. The Office of Personnel Management should set broad pay bands for each occupation and region of the country with managerial discretion to award raises for good performance, subject to budget limitations. OPM should adjust these pay bands up or down based on qualified applicant-to-position ratios and quit rates. This would align federal pay with market rates while allowing high-performing federal workers to earn what their skills merit.

  • Hire More Private Contractors. Many jobs performed by federal employees are not inherently governmental tasks and can be performed by private-sector workers. However, federal regulations deter government agencies from hiring private contractors for this work. Congress should eliminate these regulations and instead require the federal bureaucracy to compete on cost and quality with private-sector workers to perform non-inherently governmental tasks. This would expose federal employees to the same market competition that private-sector workers face each day. This competitive pressure would force federal agencies to reduce compensation to market rates in order to keep work in-house. To the extent that more work was contracted out, it would also create more jobs for private-sector workers.

  • Reduce Federal Benefits. Congress should reduce the generosity of its benefits to market rates. Paid leave should be reduced to comparable levels at private corporations. Congress should re-examine the utility of the existing defined-benefit plans and consider moving federal workers to a fully portable and funded 401(k)-style system instead.

  • End Dismissal Restrictions. Federal workers who have passed their probationary period can only be fired with great difficulty. As a result, some federal workers slack off knowing they will not lose their jobs. Congress should allow government managers the same discretion to remove poor performers as that of private managers.


The federal government pays its employees substantially more than they would earn in the private sector. The current federal pay system:

  • Pays hourly wages 22 percent above that of comparable private-sector workers;

  • Provides more generous health care and pension plans;
  • Provides total compensation on the order of 30 percent to 40 percent above similarly skilled private-sector workers; and

  • Offers near-total job security and insulates federal employees from recessions.
Congress should not overtax all Americans to overpay the privileged workers in the federal civil service. Aligning federal compensation with market rates would save taxpayers between $40 billion and $50 billion a year. Congress should immediately act to bring equity to federal pay. Congress should abolish the General Schedule and implement performance-based pay, require federal agencies to compete with the private sector, and bring the benefits to market levels.

James Sherk is a Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation.

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