Public employees are not underpaid  

It is commonly believed that public employees and teachers earn less than their counterparts in the private sector, and this compensation disparity is undermining the ability of government employers to retain staff and recruit talent. This assertion often leads to demands for either increased pension benefits or higher salaries. The general public and policymakers have embraced this statement as an unquestioned fact, even though it is not.  

On average, public employees earn 42% more than private sector employees. But averages are not very meaningful in this context. The public sector is more white-collar than the private sector. A larger share of public employees hold college and graduate degrees than those in the private sector. Therefore, it is expected that the average public employee would earn more than the average private sector employee.  

To assess the competitiveness of public employee compensation, it is important to evaluate how public employees are paid compared to private workers in the same industry, with the same education level, and with similar aptitudes. In all these comparisons, when adjusted for work hours and benefits, there is no meaningful compensation gap between public and private employee pay. In fact, when adjusting for aptitude, the results indicate that public employees, including teachers, sometimes earn more than their comparable private sector counterparts. 

Employees accept the best job offer available to them. If public employees were systematically ‘underpaid,’ that is, making less than they would if doing the exact same job in the private sector, why wouldn’t they join the private sector? The mere existence of public employees suggests that their total compensation, accounting for non-monetary benefits of public sector work such as meaning and job security, must be fair for the work asked of them.  

This piece examines the compensation of public and private sector employees, making adjustments that are often overlooked in public discourse. 

Average salaries are higher in the public sector 

According to the Bureau of Labor Statistics, state and local public employees earn wages that are, on average, 26% higher than those of private sector workers. When benefits are taken into account, this pay disparity increases to 43%.  

On average, a larger share of public employees’ compensation is composed of benefits, with benefits representing 38% of total employee costs for state and local employees, compared to 30% in the private sector.  

These public employee benefit costs are likely understated. While the Bureau of Labor Statistics accounts for direct employer contributions, it does not capture the retroactive contributions governments often make to address past underfunding. For example, a city may have paid in full the mandatory employer pension contributions for its teachers in 2010, only to realize years later that those contributions were inadequate due to overly optimistic investment assumptions. To close the gap, the city may issue pension obligation bonds, utilize lottery revenues, or amortize the shortfall over future budgets. These catch-up contributions—often made in lump sums—mean that benefit costs and total compensation for teachers employed in 2010 were understated; however, this correction is not reflected in the BLS compensation data. 

Another reason public employee benefit costs are often understated is that state and local employers tend to provide more generous retiree healthcare benefits than private employers, known as other post employment benefits (OPEB). These benefits are typically not pre-funded, meaning employers do not set aside money to cover these costs in advance; instead, they pay as the benefits are used. Even when employees and employers make OPEB contributions during working years, these amounts are often insufficient to cover future obligations. Therefore, under current funding practices, actual OPEB costs are generally not directly linked to specific employees; instead, they become a collective employer obligation incurred by government employers as former employees retire and draw the benefits. 

But public and private sector employees are not the same  

Though these averages describe the compensation of public and private sector workforces, there are also important characteristic differences in these workforces that should be understood. This is not an apples-to-apples comparison, as the pool of employees in the private sector is not the same as the pool of employees in the state and local government. In comparison to the public sector, the private sector hires more service-sector workers and fewer specialized labor, having a higher proportion of its labor force made up of part-time workers and minimum-wage employees who receive fewer benefits than professionals.  

In fact, according to the Bureau of Labor Statistics, 58% of state government jobs and 48% of local government jobs require an associate’s degree or higher, while only 27% of private sector jobs do. This structural difference means a meaningful assessment of public employees’ compensation should attempt to adjust average salaries for industry, experience, education, and aptitude. 

Adjusted public and private sector salary comparison  

How do public employees get paid in comparison to private sector employees with the same educational attainment? According to the Bureau of Labor Statistics, as discussed, public employees make more on average—but when breaking down by education, it is revealed that those with an associate’s degree or higher who work for state or local governments earn less than their private sector counterparts. This finding also holds true for public employees in the federal government. 

This analysis, however, doesn’t account for benefits, which tend to be much more generous in the public sector than in the private. A study from the Center for Retirement Research concluded that while public-sector wages were generally lower, the inclusion of defined-benefit pensions and retiree healthcare often brings total compensation to parity or higher compared to private-sector jobs.  

Additionally, a paper published in the American Economic Association Journal that adjusted compensation for both benefits and worker aptitude found that “public sector workers, especially local government ones, on average, receive greater remuneration than observably similar private sector workers.” 

But even when accounting for benefits, some estimates still found that one specific kind of public employee—teachers—are paid less than other college graduates. The Economic Policy Institute (EPI) found that public teachers’ weekly wages, when controlled for summer break, age, education, and state of residence, were 26% lower than those of other college graduates—a record-high gap and a significant increase from ‘just’ 6% in 1996​. After accounting for benefits, the EPI still found that teachers earn 17% less, and that teachers’ total compensation, adjusted for inflation, has not grown in decades.  

However, comparing salaries across fields by controlling for education and years of experience doesn’t reveal much. There are significant disparities among college majors and industries. For example, according to the 2023 Census American Community Survey, the median computer science graduate with a bachelor’s degree only earns $101,600 a year, while the median Marketing graduate only earns $75,930—yet few people would immediately conclude that computer science majors are “overpaid”, and marketing majors “underpaid”. Not all college graduates and fields of work have the same earning potential. Not all jobs performed by college graduates are equally demanding. Additionally, it is also important to note that degree choice tends to reflect the underlying aptitudes of students, which cannot be assumed away.  

Wage differences do not necessarily indicate a problem. It can be a reflection of intrinsic differences in populations and the sacrifices and competitiveness of different fields. The gap in earnings between teachers, or all public employees, and other college graduates in the private sector could be explained by self-selection effects. It is possible that the most career-driven and productive college graduates tend to be drawn to the private sector, which is willing to offer one-to-one salaries proportional to individual competence, whereas the public sector opts for generalized collective wage agreements—a system that research repeatedly shows tends to drive away the most productive employees.  

Going further than the EPI, a paper written by Jason Richwine and Andrew Biggs with Heritage Foundation aimed to investigate the public teacher pay gap, adjusting for aptitude. Though teachers tend to be paid less than other college graduates, the paper concluded that the wage gap between Teachers and other graduates was driven by the fact that, on average, the teaching profession tends to attract college graduates with lower aptitudes than the average college graduate.  

For example, students who intended to be education majors, on average, scored in the 38th percentile on the SAT, which is significantly below the average for college-bound seniors. Another paper found that those with the highest ACT scores are less likely to become teachers, and the most likely to leave the profession.  

Richwine and Biggs found that replacing educational attainment with a more meaningful measure of competence eliminates the observed teacher pay gap, as non-teachers of the same aptitude level tend to earn the same as teachers (controlling for summer break). The authors find that public teachers’ total compensation is 52% higher than their estimated fair-market value.  

This suggests that comparing teachers’ wages to those of other college graduates is inappropriate, as teachers’ formal education credentials aren’t a reliable predictor of their actual market-earning potential. This is further supported by another study, which found that just 3.7% of Georgia elementary teachers and 5.4% of high school teachers who left their jobs for a non-education field were earning more than the minimum teaching wage a year after their exit.  

Public employees also receive a benefit that cannot be captured in balance sheets. Most notably, public employment is known for its job security, a feature Richwine and Biggs estimated employees value at about 8.6% of compensation. 

But, are the work hour estimates fair? Aren’t teachers more likely to work overtime? Not according to the data available. A 2014 paper using the American Time Use Survey (ATUS) found that teachers work on average 39.8 hours per week, while nonteacher college graduates work 41.5 hours. In 2019 update, Dick Startz applied the same methodology to more recent ATUS data and confirmed the pattern: full-time teachers averaged 42.2 hours per week, while similarly educated nonteachers worked 43.2 hours. 

You get what you pay for 

The consensus among analyses is that, on average, when accounting for experience, education, and benefits, public employees tend to make about the same—or more—than equivalent private sector workers. This doesn’t mean that compensation is always perfectly efficient, or that bargaining is irrelevant; instead, it suggests that observed compensation levels do not indicate a systemic undervaluation of public sector work.  

This shouldn’t be much of a surprise. Compensation—in total terms, including salary, work conditions, and benefits—is accepted by workers who would have gladly accepted better employment if it had been offered to them. Employees take and stay in the best job they could find, one that maximizes each person’s preferences and values. Beyond compensation, for example, some individuals value a work-life balance and meaning, while others prioritize novelty and growth. Some can speak well, code effectively, or lead; others cannot. If public employees were ‘underpaid,’ why wouldn’t they simply take an equivalent private sector job that pays more? If compensation is inappropriate, why wouldn’t agencies or government branches compete in a salary arms race to poach the best people? If they can’t or won’t, that suggests their total compensation is likely fair for the work asked of public employees. 

If public employees were systematically underpaid, we would simply observe large-scale exits to the private sector, which we don’t. In fact, public employee and teacher turnover rates tend to be much smaller than those of the private sector. 

Despite much research indicating otherwise, public employees often report feeling underpaid. This persistent grievance suggests that government employers should consider shifting their compensation so that salaries represent a larger share of total compensation, in lieu of benefits, as is more common in the private sector. It might also be worth considering offering performance bonuses or more individualized compensation, rather than relying solely on rigid pay bands and structured rules.  

It is possible that, though public employees are not ‘underpaid’, governments could still attract better talent by increasing compensation. Of course, there must be an optimality analysis in terms of talent and compensation. Higher pay can help attract a broader pool of applicants, allowing employers to be more selective. But across-the-board raises can lead to diminishing returns or reward underperformance. 

The popular sentiment that government workers are systemically underpaid doesn’t hold up under scrutiny. Broad claims of underpayment overlook essential differences in the composition of public and private workforces. When accounting for education, work hours, benefits, and aptitude, most analyses find that public sector compensation is, on average, equivalent and sometimes more generous than in the private sector.  

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Source: https://reason.org/commentary/public-employees-are-not-underpaid/