NJPP Monday Minute 8/2/10: Rutgers Report Compares NJ Public and Private Employee Compensation

NJPP's July 19 Monday Minute asked and answered the question: are public employees overpaid? National studies suggest that, on average, public sector employees are paid less than private sector employees - particularly in professional positions - but that public employee benefits (health insurance and pensions) tend to be better than private sector benefits.

Now that question can be asked and answered about New Jersey thanks to a new report by Rutgers School of Management and Labor Relations professor Jeffrey Keefe. His report has just been published by the DC-based Economic Policy Institute.

This is an important question in light of the governor's interest in privatizing an increasing number of public services. The most significant savings in most privatization proposals come from salary savings - from reduced salaries and the constriction or elimination of benefits.

Professor Keefe's data analysis controlled for education, experience, hours of work, organizational size, gender, race, ethnicity and disability and found that no significant difference exists between private and public sector compensation cost on a per hour basis.

But he finds that the public and private sector use substantially different approaches to staffing and compensation.

Salaries:

• New Jersey public sector workers, on average, are more highly educated than private sector workers: 57 percent of full time New Jersey public sector workers hold at least a four-year college degree compared to 40 percent of full time private sector workers.
• New Jersey state and local governments pay college educated workers, on average, 10 percent less than private employers. As noted in the July 19 Monday Minute, the earnings differential is greatest for professional employees, lawyers and doctors.
• But the public sector sets a floor on compensation. Compensation of workers without a high school education is higher for public employees than for private employees.
• State and local government employees receive a higher portion of their compensation in the form of employer-provided benefits and the mix of benefits is different from the private sector.

Benefits:

• Public employers contribute, on average, 34 percent of employee compensation to benefits compared to 31 percent in the private sector.
• Health insurance accounts for 11 percent of public sector compensation, but only seven percent of private sector employees' compensation.
• Retirement benefits are eight percent of public employees' compensation compared to four percent in the public sector. And most public employees participate in defined benefit pension plans, while more private sector employers have switched to defined contribution plans such as 401(k) plans. A significant difference between these two plans is risk. Defined contribution plans shift much of the risk from the employer to the employee.

Using a standard earnings equation, Dr. Keefe estimates that fulltime state and local employees are under-compensated by about four percent. When the number of hours worked is included in the calculation, there is no significant difference in total compensation between fulltime state and local employees and private sector employees.

It is alleged that public employee unions and collective bargaining have produced an over-compensated workforce. Eligible public employees are almost completely unionized in New Jersey. It is well known that taxpayers do not want to pay higher taxes and so exert considerable pressure on elected officials to resist increases in compensation, creating an incentive to hold government below market compensation.

This report only considers fulltime public employees in New Jersey. It makes a strong case that fulltime public sector workers are not the cause and cannot be the solution to the state's financial problems.

Lessons for privatization
It is likely that schemes to privatize state services will fail to result in savings if those services require more than a high school education - since the compensation differential between private sector and public sector salaries tends to be greatest as education levels increase.

Even in situations where a high school education is sufficient, savings may be questionable when health insurance and pensions are considered. When the Whitman administration privatized janitorial services in state buildings, state employees lost their jobs and benefits. The average state salary for a custodian at that time was just under $20,000 with benefits. When state office buildings were raided after the private contractor was hired, it was discovered that a number of the new cleaning staff were undocumented workers working off the books at below minimum wage with no benefits. The only person who benefits from this situation is the private contractor as long as he doesn't get caught.

The actual cost to the public of low wage private sector workers is greater than people think. People with no health insurance, no vacation or sick days and no retirement are cheaper for their private sector employers to hire, but ultimately are supported by public services.

The children of the person who drives the privately owned school bus, often qualify for New Jersey's FamilyCare program because they have no other health insurance. That driver personally may use emergency rooms in the hospital more because he or she can't afford to go to the doctor. If that person's child is very sick, New Jersey generally allows her to take paid family leave so she can take care of her child. If that person has no employer-sponsored retirement plan, she will need greater public support in his or her old age.

What everyone seems to forget is that when the private sector fails to provide for its workers, it is the public and the taxpayer who picks up the slack. What may seem like a good deal often doesn't include the hidden costs.