Benefits Help Close Wage Gap between Public and Private Sector Employees

September 15, 2011 ( - A new issue brief from the Center for State and Local Government Excellence, Comparing Compensation: State-Local Versus Private Sector Workers, finds pension contributions and retiree health insurance help close the gap between public and private sector worker compensation.

The report notes according to the Bureau of Labor Statistics’ Current Population Survey data, average wages for state-local sector workers between 25 and 64—even without controlling for education and other factors—are lower than those in the private sector, and the ratio of public to private sector wages has been declining over time. State and local workers have a wage penalty of 9.5%.  

However, the researchers’ calculations show that state/local benefits nearly offset the private sector wage premium, such that compensation in the public sec­tor is 4% less than that in the private sector.  

According to the report, pensions are more generous in the public sector. First, a greater percentage of workers has an employer-sponsored plan in the public sector than in the private sector—76% vs. 43%. Second, among those employers who do sponsor plans, costs to the employer are higher in the state-local sec­tor, despite significant employee contributions, than in the private sector.  

The researchers contend that contributions to private sector 401(k) plans and public sector defined benefit plans are not comparable. The public sector contribution guarantees a return of about 8%, whereas no such guarantee exists for 401(k)s. Thus, the public sector contribution under­states public sector compensation.   

In addition, retiree health insurance is much more prevalent in the public sector than the private sector. Unfortunately, no data are readily avail­able to confirm this pattern, so estimates are required, the report notes. In the private sector, the Medical Expenditure Panel Survey provides information on retiree health insur­ance offerings by firm size, and the Census shows the distribution of workers by firm size. Combining the two pieces of information yields an estimate of private sector coverage of 18%. In the public sector, our assumption is that the percent of the state-local work­force potentially eligible for retiree health is the same as that enrolled in employee health insurance—roughly 65%.  

The researchers conclude that adding retiree health insurance increases public sector compensation much more than private due to the higher cost and more extensive coverage in the public sector.  

The Issue Brief can be found here.