Montana Taxpayers Foot the Bill for the Public Sector Pay Premium

By Glenn Oppel, Policy Director, Montana Policy Institute

In a year when most state legislatures were engaged in budgetary belt-tightening, Montana Governor Brian Schweitzer and public employee union representatives agreed to a pay plan package that would make any private sector worker envious. According to the agreement, each of the next two years state workers would receive both a five percent raise in pay and a 10 percent increase in the state contribution toward health insurance premiums. The price tag is estimated at $138 million.

After the pay plan agreement was reached, a local representative of the American Federation of State, County, and Municipal Employees (AFSCME) argued that it was necessary to “bring us closer to being compensated fairly with those in the private sector.” Union representatives would have the public accept as conventional wisdom their caricature of the underpaid public employee, but the data suggest that public employees are actually compensated far more generously than their private sector counterparts.

Public sector unions have a vested interest in advancing the myth that they’re undercompensated, as it gives them more power at the bargaining table. But state analysts tasked with comparing public and private pay have been encouraging it, also. In June 2012, legislators on the Legislative Finance Committee received a report outlining the results of the State Human Resources Division’s biennial salary survey. Salary data culled for the survey is used to determine what the state calls the “market midpoint” of compensation for 750 occupations within state government. According to the salary survey, state workers are earning on average 13.3 percent less than the market midpoint.

The state analysts are far more likely to shoot straight than AFSCME’s research shop, but their salary survey unfortunately suffers from a weakness in methodology. By relying on salary ranges for occupational categories, the state’s report has grossly oversimplified the compensation question. For instance, many positions in the public sector, such as correctional officers and fire fighters, have no private-sector equivalent. Additionally, employees within these categories are not interchangeable; some are more educated, some are older, some are more experienced. Comparing only occupational categories ignores all of this variation.

A final shortcoming in the salary survey is that it doesn’t include the value of employee benefits – health insurance, paid leave, pension, etc. – which make up a considerable portion of any worker’s compensation.

In sum, merely matching a state job to an occupational category will not yield apples-to-apples comparisons with private sector occupations and compensation. This is an argument that both conservative and liberal analysts have agreed with when analyzing compensation in the public and private sector.

To facilitate a more accurate comparison, the Montana Policy Institute has released a report that uses the “human capital” approach to achieve apples-to-apples comparisons between public and private sector pay. Our report starts by using government data to compare public and private employees of similar personal and professional characteristics. For instance, instead of comparing pay in broad occupational categories, we compare public and private employees of similar work experience, education, gender, race, and disability status. Additionally, we calculate the annual compensation value of fringe benefits on top of annual wages, including pension, paid leave, and health insurance (including retiree health).

The results of the analysis are telling. Whereas the state’s salary survey concludes that that average state employee is earning 13.3 percent less than the market midpoint, our report shows that after adjusting for age, work experience, education, gender, race, and disability status, state and local public employees are in a statistical dead-heat with their private sector counterparts in terms of take-home pay. Where state and local public employees surpass private sector workers in total annual compensation is from their various fringe benefits. When compensation from fringe benefits is factored in, state and local public employees earn nearly 15.4 percent more in total annual compensation than comparable private sector workers.

Last session, lawmakers didn’t act on the previously-negotiated pay plan, citing concerns over revenue forecasts and challenges faced by private sector workers. With fiscal analysts projecting a $457 million surplus, union representatives will lobby vociferously this coming session for some follow through from legislators. Half a billion dollars seems like a lot of extra money, but our fiscal house is not exactly in order. As the Montana Policy Institute details in another study on Montana’s budget, there are long-term structural deficits that could break the bank in the near future, including unfunded liabilities of $3.8 billion in its pension programs for state workers and teachers.

This fiscal sleeping giant, and others, should be priority number one for lawmakers, and true solutions could easily consume whatever surplus materializes.


In the Media:

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MTPR Evening Edition Commentary: (at 20:30)

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Public vs. Private Sector Compensation in Montana (2012)

By Glenn Oppel, MPI Policy Director

Click here for full study. (PDF – 4MB)

The State Human Resources Division (Division) of the Montana Department of Administration plays a key role in the adoption of a pay plan for state employees in Montana. It is for all intents and purposes the sole source of data on compensation used by policymakers and agency managers. Unfortunately, the data the Division produces is based on a flawed methodology and limited data.

The Division conducts a salary survey of Montana and surrounding states on a biennial basis to arrive at a private sector comparison for occupations and offices in state government. With the most recent survey, the Division determined that on average a majority of the public sector occupations studied have earnings that are 13.3 percent below what they call the “market midpoint.” The Division’s methodology is open to criticism on a number of points:

• Many positions in the public sector have no private-sector equivalent. Correctional officers and fire fighters, for instance, have no direct private sector equivalent. Comparing occupations like these to a “market midpoint” yields very little useful information.

• Comparing earnings among occupations does not account for the differences in age, education, and experience for the employees who work in these occupations.

• The Division’s analysis doesn’t include the value of employee benefits — health insurance, paid leave, pension, etc. — which make up a considerable portion of public employee compensation.

This new analysis from the Montana Policy Institute compares employees of similar personal and professional characteristics in both the public and private sectors of Montana. Instead of comparing pay in broad occupational categories, this report uses regression analysis to compare public and private employees of similar work experience, education, gender, race, and disability status. It also analyzes total compensation (which the state fails to do), including take-home pay as well as fringe benefits.

This report details the methodology and finds that public employees in Montana actually earn over 15 percent more than comparable employees in the state’s private sector.

Sidney Herald: Sidney’s second in business ratings

Among the state’s 25 largest cities, Sidney was ranked second in business-friendliness for 2011 in the latest study by the Montana Policy Institute and American Indicators.
The study based rankings of three categories: Economic Vitality, Business Tax Burden and Community Allure.

To continue the article, click the link below.
MPI’s Business Friendly Study mentioned in Sidney Herald.

Teen Unemployment and The Minimum Wage Study (2012)

Click here for full study (PDF – 4MB)

By Glenn Oppel, MPI Policy Director

As the Great Recession persists, unemployment remains a key concern in Montana and the nation as a whole. Although the jobs situation in Montana is somewhat better than the national average, the unemployment rate for working-age teens (16-19) is historically very high. Moreover, fewer and fewer teens are actually entering the workforce.

Figures provided by the U.S. Census Bureau demonstrate that teen employment prospects are dismal:

• Between 2006 and 2011, the teenage unemployment rate in Montana almost doubled from 10.2% to 19.4%. The highest rate for that period was 24% in 2010.

• Montana teens with less than a high school education have seen their unemployment rate double from 10.4% in 2006 to 20.8% in 2011.

• The average hours worked per week for Montana teens fell from 12.1 to 8 hours – a decrease
of 34%.

• The percentage of Montana teenagers who have a job declined from 48.2% in 2006 to 36.6%
in 2011.

• From 2006 to 2011, teen employment share in all industries dropped from 6.3% to 4.2%; in leisure and hospitality from 18.9% to 13.9%; in retail trade from 10.2% to 5.2%; and for all other services from 4% to 1.6%.

A recent analysis of state-specific employment effects of the minimum wage finds that increases in the federal and state minimum wage rates have accelerated this trend. According to simulations run as part of this analysis, increases in the minimum wage from the base of $5.15 in 2006 to $7.35 in 2011 cost Montana teenagers 1,178 jobs . Teen jobless rates could get even worse as Montana’s minimum wage is adjusted annually to the Consumer Price Index (CPI) despite job market realities or unemployment trends. Montana’s 2012 minimum wage rate is currently $7.65 and will increase to $7.80 in 2013 if the CPI continues to hover at close to two percent.

Minimum wage proponents may see annual increases as “raises” to poorer workers. What they fail to realize is that minimum wage increases serve as a tax on employers that would otherwise employ more low or unskilled workers if not for higher labor costs. This is especially true for working-age teens as our issue brief will show. Policymakers in Washington, DC and Helena should consider the disproportionate impact that minimum wage increases have on our youth as they struggle to find their first job.