Decision makers and taxpayers often hear that public employees earn less than private sector workers. In Montana, the State Human Resources Division’s latest biennial salary survey enforces this impression, concluding that public employees earn 13.3 percent less than comparable private sector counterparts. But the salary survey suffers from weaknesses in its methodology, omitting fringe benefits, comparing employees of unequal skill and experience, and evaluating public sector occupations that have no private sector equivalent (e.g. firefighters.) A new analysis from the Montana Policy Institute uses rigorous statistical analysis to compare public and private employees of similar personal and professional characteristics. They also calculate the compensation value of various fringe benefits. MPI’s new report “Public Versus Private Sector Compensation in Montana” finds that public employees earn 15.4 percent more than private sector counterparts in total annual compensation.

Montana State and Local Public Employees Earn 15 Percent More in Total Compensation Than Private Sector Workers

Bozeman – 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 cost taxpayers $138 million. 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. After the pay plan agreement was reached, a local representative of theAmerican 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,” responded Glenn Oppel, MPI Policy Director, “but the data suggest that public employees are actually compensated far more generously than their private sector counterparts.”

Much of the perception that public employees fail to earn as much as private sector counterparts is fueled by standard compensation comparisons. The State Human Resources Division’s biennial salary survey is a case in point. Salary data culled for the survey is used to determine what the state calls the “market midpoint” of compensation for 750 occupations within stategovernment.According to the salary survey, state workers are earning on average 13.3 percent less than the market midpoint.

“The state’s salary survey unfortunately suffers from a weakness in methodology,” emphasized Mr. Oppel.

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. An additional 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.

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,” explained Mr. Oppel. “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.”

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, the MPI report shows that when comparing similar employees, 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.

“We encourage lawmakers and state analysts to take a close look at the methodology we use in our report,” suggested Mr. Oppel. “It more accurately compares total annual compensation between public and private sector workers in Montana, which can better inform the decision making process on the state pay plan legislation.”

The full report is available on the MPI web site at http://www.montanapolicy.org/2012/11/public-vs-private-sector-compensation-in-montana-study-2012/.

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