Estimating the Value of Public Sector Job Security

Something to think about when considering the Jeff Adachi pension measure.

Mike

http://mjperry.blogspot.com/2011/07/estimating-value-of-public-sector-job.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FmmMP+(CARPE+DIEM)

Estimating the Value of Public Sector Job Security
AEI economist Andrew Biggs and Heritage Foundation Policy Analyst Jason Richwine have co-authored a series of articles on private vs. public compensation, for example see their WSJ articles "The Public Worker Gravy Train<http://online.wsj.com/article/SB10001424052748704657704576149941061124736.html>" and "The Government Pay Bonus<http://online.wsj.com/article/SB10001424052702303828304575180421298413374.html>," and a longer more technical working paper "Comparing Federal and Private Sector Compensation.<http://www.aei.org/docLib/AEI-Working-Paper-on-Federal-Pay-May-2011.pdf>"

From the abstract of the working paper (emphasis added):

"Public sector compensation has come under increased scrutiny from politicians and the media, but comprehensive technical comparisons of federal and private compensation have been largely absent from the discussion. Drawing from the academic literature and using the most recent government data, this report measures the generosity of federal salaries, benefits, and job security. Compared to similar private sector workers, we estimate that federal workers receive a salary premium of 14 percent, a benefits premium of 63 percent, and extra job security worth 17 percent of pay. Together, these generate an overall federal compensation premium of approximately 61 percent."

In a post today on The Enterprise Blog<http://blog.american.com/2011/07/the-value-of-public-sector-job-security/>, Andrew Biggs writes:
"In our work on public sector pay, Jason Richwine and I have attempted to put a dollar value on the greater job security enjoyed by government employees, which acts as a free insurance policy against losing your job. Estimating the value of job security from the data is tough, however, for technical reasons outlined in our working paper on federal pay. Instead, we use an economic model, calibrated with a variety of data, to arrive at an estimate. Our baseline result was that job security for federal government employees was equivalent to a 1.5% to 3% increase in pay."

Andrew then points to a recent CD post<http://mjperry.blogspot.com/2011/07/markets-in-everything-supplemental.html> on the market for private job loss insurance, which allows him to estimate the "implicit value of public sector job security" based on differences in market-based insurance premiums by occupation:

"I compared salaries between public and private sector workers' net of supplemental unemployment insurance premiums sufficient to protect against all loss of income during unemployment. The difference in salaries indicates the job security premium paid in the public sector. The answer I found was around 2.4 percent, which was right in line with our baseline results. Given that total compensation for a typical federal employee is well over $100,000, even this baseline 2.4 percent job security premium is worth several thousand dollars. When you add that it protects a job paying a wage and benefits premium, the value of public sector job security is far higher."

MP: It's interesting that the empirical evidence from market-based insurance premiums for unemployment supports the estimates from a more theoretic, economic model developed by Andrew Biggs and Jason Richwine.

Mike

Mike,

  Indeed! But I would encourage using the term "government sector" or "involuntary sector" or something of the sort, rather than "public sector". I think governments have too long gotten away with monopolizing use of the word "public", and that we need to get back to a broader definition of the term which recognizes that non-government options can also be public options. There is actually quite a bit of existing language that supports this -- consider for instance holding a "public dialogue", eating in a "public restaurant", or a company "going public" -- none of these meanings imply government running the show.

Love & Liberty,
                                  ((( starchild )))

Of course...that's why I avoid saying that...my apologies for the author.

Mike

Mike,

  Sorry for any implication that you were the one saying "public sector". I wasn't trying to affix blame, just making the general point.

Love & Liberty,
                                ((( starchild )))

Point well taken... :>)

Mike

I haven't followed this whole discussion, but don't be too sure that all public sector jobs have much job security. I was fired from a State of California public sector job for whistleblowing, and I had NO job security.

Government workers as a whole have more job security than nongovernmnet workers.
What is true of a class isnt always of every individual of that class. Women as
a class live longer than men. That does NOT mean that every woman lives longer
than every man.

Les Mangus

It is impossible to figure the value of government jobs because (1) there is no
market and (2) the payers cannot cut off the money. In the nongovernment sector
wages of employees are to a great extent determined and limited by the
willingness of buyers to pay for the good or service they are producing. But
government employees are never subjected to any such market test. The late great
economist Murray Rothbard said that government agencies are islands of chaos in
the economic system. Their revenues and wages are totally arbitrary. They
(revenues and wages) tend to rise uncontrollably because there is no
countervailing force. In a normal market prices are established by supply and
demand. But in a normal market buyers are not forced to buy. This makes rational
pricing in the government sector totally impossible.

Les Mangus

All true Leslie….and while it is difficult to calculate, it definitely is a number. And an educated guess could be useful in the debate. But this article seems to estimate it pretty low relative to what I believe it really is. So I’m not sure how useful it will be.

Mike

Hi Les,

Who am I to argue againt Murray Rothbard. However, it is worth pointing out that the market does have an influence on government workers' pay each time the public votes for or against a bond measure, a tax hike, an initiative, a referendum, etc. For example, if pension reform passes, the public/market has spoken that pensions are too high.

Maecy

For a look at another and less-noticed aspect of wasteful and dysfunctional city government, I strongly recommend reading the current SF Weekly's cover story on city commissions -- http://www.sfweekly.com/2011-07-27/news/san-francisco-commission-inefficien-joe-eskenazi/ . One of the better pieces I've read on explaining how City Hall actually works.

Love & Liberty,
                                  ((( starchild )))

That is a good article! Interestingly, the article points out that in the commission world, all proposals are created equal -- perhaps fairly so, but creating an unsustainable situation. Good too about politicians using commissions as spring boards for their own pet projects -- I guess they do that in the absence of a convenient civil grand jury report.

Marcy

Right on, Marcy. I am trying to put together the next SF Liberty Coalition event for August 18th on this topic, so let me know if you have any thoughts or ideas on it.

  You mention the civil grand jury -- that may well be the focus of some future event. Sadly, I think in some ways the grand jury right now functions as just another one of these myriad commissions whose reports are rarely read or acted upon -- if it had more power and influence, it could potentially play an important role. Unlike other city commission members, grand jurors are not appointed by the politicians, giving them more independence.

Love & Liberty,
                                  ((( starchild )))

Okay, so this is from The Onion, but it still has a disturbing ring of truth about it...

http://www.theonion.com/articles/drunken-ben-bernanke-tells-everyone-at-neighborhoo,21059/

Okay, so this is from The Onion, but it still has a disturbing ring of truth about it...

Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is

  LOL, Terry! I can totally imagine that bar scene! When stories in the Onion seem to have more "truthiness" about them than stories in the New York Times, what can we conclude?

  In a somewhat similar vein, check out the letter below in which a senior citizen verbally cleans Alan Simpson's clock. (NOTE - I actually *do* think Social Security retirement benefits need to be reduced by one means or another; many retirees are slated to get back way more than they paid into the system, and in the current economic mess, that is *not* a viable option in the absence of other drastic reforms which seem politically unlikely to happen -- but I can sympathize with the letter writer, who is spot on that people like Simpson are to blame for the mess, and hypocritically refuse to take responsibility and share the sacrifice they advise for others).

Love & Liberty,
                                     ((( starchild )))