1. Opinion

Public sector costs, benefits

Published Sep. 25, 2012

Ever have a bad day at the Department of Motor Vehicles? Or had a math teacher flunk your brilliant child? Then you have a feel for why public employees are such easy targets for budget cuts.

With private sector jobs hard to come by and state budgets under strain, public employees are often viewed as overly job-protected and, in many instances, as lazy, uncaring and overpaid.

The idea of reducing their compensation resonates well with many voters. In several states, public employees have taken salary cuts or been made to increase their contributions toward health and pension benefits. Florida lawmakers are considering a proposal that will reduce the number of deferred vacation and sick days that can be accrued each year.

Public versus private compensation. In Florida, New Jersey and Wisconsin respectively, Govs. Rick Scott, Chris Christie and Scott Walker assert that public employees are paid 30 percent more than private sector employees. Of course, they want good public employees, and they realize that compensation must meet the market. But if they are correct and public employees are overpaid, then compensation packages can be reduced without too many workers finding better jobs.

Unfortunately, their analysis simply consists of comparing average salaries in the public sector to those in the private sector with no allowance for differences in job requirements and qualifications. The percentage of public employees with advanced degrees is higher than in the private sector because they are our teachers, professors, lawyers, health care workers, and others charged with highly professional responsibilities.

Salary comparisons are quite complex as total compensation includes a mix of current items (wages, salaries, health coverage) and deferred items (pensions, future health benefits). More sophisticated studies have shown that when the entire compensation packages are compared, there is no premium for working in the public sector.

Of course, in our current economic climate, employees have fewer alternatives and so employers can cut compensation more freely. But if they are to avoid a large exodus of the best public employees when better times return, states that implement these cost-saving cuts must be prepared to respond to the market. For instance in Wisconsin, the current budget calls for a reduction in current salaries as well as for limits on the growth of future compensation, which can grow no faster than the consumer price index. Since the wage index rises more rapidly than the CPI during economic recoveries, Wisconsin may have to alter this limit on wage growth when the recovery comes and the need for more nurses, snow-plow operators and teachers grows.

The trade-off between salary and benefits. Historically, the nonsalary items in public payrolls constitute a greater fraction of total compensation than in private sector payrolls. This is understandable since larger employers have a cost advantage when providing nonsalary benefits. Compared to smaller employers, large organizations — whether public or private — find it less expensive per employee to offer a range of benefits, such as health insurance, sick days, holiday pay and pensions. In addition, tax breaks further incentivize this option.

Because of these cost savings and tax advantages, it is simply cheaper for large state employers to offer more benefit-laden compensation packages and for their employees to accept them. Taxpayers also benefit from this arrangement as public payrolls are less costly than they otherwise would be. Even though this greater benefit-to-salary ratio provides lower cost to both public employers and the taxpayers, public employees are often charged with receiving excessive benefits. Such criticism is focusing on just one component of a compensation package when it is the entire package that must be competitive.

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One final note: Compensation packages can be designed to fight a brain drain. States that lose experienced professionals at the point of their maximum career productivity suffer many negative consequences. As examples, the loss of engineers and scientists stymie economic development efforts; the exodus of health care workers reduces the quality of life; and the departure of teachers has tragic implications for our ability to successfully compete in the global marketplace. The trick is to design a golden handcuff that will encourage valuable employees to remain after their skills and productivity are maximized around mid career. One option would be to make their unused sick leave redeemable for health insurance premiums in retirement, but forfeited by workers who resign prior to age 65.

William L. Holahan, far left, is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, near left, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.


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