Friday, April 25, 2014

New AEI paper grades all 50 states on public-sector compensation

Public-sector compensation has been politically salient in some states but a non-issue in others. States such as New York, California, and Ohio always seem to be discussing pension shortfalls, "windfall" retirements, excessive job security, etc. But where are these issues in Kansas? Or Virginia?

As Andrew Biggs and I show in a new American Enterprise Institute working paper, there is tremendous variation in the generosity of public-sector compensation (wages plus benefits) across states. Some states offer a large premium to public employees relative to what they would earn in the private sector, while other states appear to pay less than market levels. And, not surprisingly, the political salience of public-sector pay is positively correlated with its generosity.

The following table ranks each state from least generous (relative to private-sector pay in that state) to most generous. Because we shouldn't make too much of small differences between states, the states are sorted into five broad categories:

Table 2. Total Compensation Categories
Category label
“Modest penalty”
-6% or less
“Market level”
-5% to +5%
Kansas, Indiana, Minnesota, Georgia, West Virginia, Mississippi, South Dakota, North Carolina, Vermont, Colorado, Washington, South Carolina, Kentucky, Idaho, Arizona, Nebraska, Tennessee, Utah
“Modest premium”
+6% to +10%
Alaska, Missouri, Florida, Arkansas, Texas, Oklahoma, Maryland, Iowa, Montana, North Dakota, New Hampshire, Delaware
“Large premium”
+11% to +20%
Alabama, Louisiana, Wisconsin, Oregon, Ohio, Hawaii, Massachusetts, Nevada, Maine, New Mexico, Michigan
“Very large premium”
New Jersey, California, Rhode Island, Illinois, New York, Pennsylvania, Connecticut
Source: Authors’ calculations

Clearly, studies that evaluate public-sector pay by lumping all state workers together are not helpful for policymakers. The goal of our new paper is to help each state individually decide whether it needs to consider pay reform.

All of the main take-aways come in the first 15 pages of the paper. For those interested in delving deeper--much deeper--we've included a lengthy methodological appendix. The appendix is probably the most comprehensive discussion of technical and corollary issues ever put together on this topic. Want to know more about taking logs in a wage regression? Controlling for firm size? Breaking down the premium by education level? Accounting for salary growth in pension valuation? Adjusting the discount rate on deferred compensation to include market risk? Valuing job security? Considering other job amenities?

It's all there, contained within 87 pages, 14 figures, 5 tables, and 120 end notes. The paper is meant to be as much a resource for academic students of the issue as it is for state policymakers.