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Overpaid or underpaid? A state-by-state ranking of public-employee compensation

Overpaid or underpaid? A state-by-state ranking of public-employee compensation

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This paper ranks all 50 states according to how costly their public-employee
compensation packages are relative to private-sector standards. Each state’s package is
placed into one of five categories: modest penalty, market level, modest premium, large
premium, or very large premium. The results show that national-level analyses obscure
significant differences in compensation from state to state. Connecticut, for example,
pays its state employees 42 percent more than what similar private-sector workers
receive, but Virginia pays its state workers about 6 percent less. State-by-state political
interest in public-sector pay aligns fairly well with our results: In states where public sector pay is an active political issue, state government employees appear to be better
compensated than similarly-skilled private sector workers. In states where state
government compensation is at or below market levels, pay for public employees is
generally less controversial.
This paper ranks all 50 states according to how costly their public-employee
compensation packages are relative to private-sector standards. Each state’s package is
placed into one of five categories: modest penalty, market level, modest premium, large
premium, or very large premium. The results show that national-level analyses obscure
significant differences in compensation from state to state. Connecticut, for example,
pays its state employees 42 percent more than what similar private-sector workers
receive, but Virginia pays its state workers about 6 percent less. State-by-state political
interest in public-sector pay aligns fairly well with our results: In states where public sector pay is an active political issue, state government employees appear to be better
compensated than similarly-skilled private sector workers. In states where state
government compensation is at or below market levels, pay for public employees is
generally less controversial.

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Published by: American Enterprise Institute on Apr 24, 2014
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1
Overpaid or Underpaid? A State-by-State Ranking of Public-Employee Compensation
Andrew G. Biggs Jason Richwine
April 2014  ________________________ AEI Economic Policy Working Paper 2014-04 April 24, 2014
 
2
Overpaid or Underpaid?  A State-by-State Ranking of Public-Employee Compensation
Andrew G. Biggs
andrew.biggs@aei.org
Jason Richwine
 jason.richwine@gmail.com
April 2014
Abstract
 
This paper ranks all 50 states according to how costly their public-employee compensation packages are relative to private-sector standards.
Each state’s package is
 placed into one of five categories: modest penalty, market level, modest premium, large  premium, or very large premium. The results show that national-level analyses obscure significant differences in compensation from state to state. Connecticut, for example,  pays its state employees 42 percent more than what similar private-sector workers receive, but Virginia pays its state workers about 6 percent
less
. State-by-state political interest in public-sector pay aligns fairly well with our results: In states where public-sector pay is an active political issue, state government employees appear to be better compensated than similarly-skilled private sector workers. In states where state government compensation is at or below market levels, pay for public employees is generally less controversial.
 
3 |
Page
 
Introduction
Compensation for government employees has become a major policy issue across the nation. As governments at all levels struggle to balance their budgets, leading to tax increases and reductions in government services, many citizens have come to believe that government employees receive excessive compensation, especially in terms of retirement and healthcare benefits. As the data outlined in this study will demonstrate, in some cases these beliefs are correct. However, a remarkably large variance exists in the way that different states pay their employees. For a number of states, public-sector compensation is not a major problem
 — 
in fact, some states appear to pay  below-market compensation to their employees. In other states, however, state workers enjoy compensation that is far above market levels. The purpose of this report is to document the state-by-state variation in government employee compensation, ranking all 50 states according to how costly their compensation packages are relative to what private-sector employers offer to similarly-skilled employees. We track the relative generosity of wages and benefits, including pensions, health coverage, retiree health care, paid time off, and taxes paid
 by employers on their employees’ behalf. We also consider the va
lue of job security and working conditions. Finally, we discuss some potential reforms to public-sector compensation in states in which changes may be desirable. The report has two main sections: first, a summary of the results in a readable format and then a detailed methodological appendix.
The Importance of Getting Public-Sector Pay Right
Most observers hold that a fairly-paid public employee is one who receives salaries, benefits, and  job amenities equal in total value to what he or she would likely receive in a private-sector job. In other words, states should pay their employees the market value of their skills. If the total compensation  package exceeds that value, then the publi
c employee could be said to be “overpaid.” If it is below that value, then the employee is “underpaid.”
This standard for setting public-sector compensation tends to result in an efficient provision of government services and is intuitively fair to public workers. If a state offers below-market compensation to its workers, the state may have difficulty attracting and retaining the workers it needs. By contrast,  paying above-market compensation to public employees imposes a needless cost on taxpayers. This standard requires that we do more than simply compare average public-sector salaries to average salaries outside of government. Such an approach would be as faulty as claiming gender pay

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