The Fraser Institute recently released a study indicating that public sector workers enjoy 12% higher wages than private sector employees after controlling for a number of factors including age, education, tenure type of job, and location. Unfortunately, this 12% figure understates the real gap.
Because the study’s authors could not get sufficient data to measure non-wage benefits, such as pensions, insurance, and vacation, they couldn’t properly compare total compensation between the public and private sectors. The 12% figure would certainly rise if we had this data.
There is another important factor as well: competence. “In 2011, 0.6 per cent of government employees lost their jobs—less than one sixth the job-loss rate in the private sector (3.8 per cent).” In the private sector, it is weaker workers who tend to lose their jobs. Even when the official reason for job loss is the elimination of a position, the truth is that companies do their best to eliminate poor performers. The government does a poor job of getting rid of people who can’t or won’t work.
To be clear, I’m not saying that all government workers are weak. In any large population you get a lot of variance. But because too many poor performers get to keep their government jobs, the average competence gets dragged down compared to the private sector. The result is that some government workers could not get and keep a similar private sector job. On average, these people would have to find lower-paying work if they had to move to the private sector.
If we had a way to measure this competence effect, public sector wages would start to look even better. So, the Fraser Institute’s figure of a 12% wage gap significantly understates the real gap if we factor in non-wage compensation and competence.