Some Evidence That The Federal Pay Scale Is Too Low

As I said last week, I think the question of whether or not public employees are overpaid is a little bit nonsensical. That said, the question of whether or not some particular compensation scheme is more or less generous than it ought to be makes perfect sense. For example, this AEI working paper (PDF) dedicated to the proposition that federal employees are “overpaid” seems to me to actually offer evidence that the federal pay scale is too stingy.

The authors describe the federal government’s official methodology:

The process is complex, but the Pay Agent essentially seeks to assign a general schedule (GS) level to a variety of private sector jobs within a broad set of occupational categories. Salaries for these jobs are then compared to salaries for federal positions at the same GS level. Private sector jobs assigned to a given GS level are typically seen to be more highly paid than their federal counterparts.

They characterize the Pay Agent’s method as concluding that federal workers are “underpaid.” But they criticize this method:

[T]he Pay Agent’s approach fails to account for different skill levels that private and public workers may possess in seemingly similar jobs. More specifically, there is evidence that the federal government hires workers at higher positions than they could hold in the private sector and then promotes them more quickly as well. This means, for example, that a senior accountant in government might qualify only as a junior accountant in the private sector. This senior accountant would be “underpaid” compared to private sector employees only because he is under-qualified by private sector standards. A study of BLS occupational data by Famulari (2002) finds that, “Federal workers have significantly fewer years of education and experience than private sector workers in the same level of responsibility in an occupation.” Famulari finds that these differences play out through federal hiring and promotion practices.

This is part of their case that federal workers are “overpaid.” But this entire discourse is unduly moralized. Let’s look at what AEI is saying is happening. The federal government needs to fill some jobs. But it offers salaries that are less than the salaries that a person doing a similar job could get in the private sector. Naturally, this means that the federal government ends up attracting less-experienced applicants. Hiring is then done from this less-experienced pool. And since the people who are hired are doing jobs they’d be underqualified for in the private sector, they are making more money than they would be in the private sector.

Which is all just to say that like all workers, federal workers are neither underpaid nor overpaid. The compensation and the nature of the work determine the applicant pool and on average everyone is getting paid some amount of money that someone is willing to pay him in exchange for work that he’s willing to do. But according to AEI, federal workers are underqualified and inexperienced because the pay scale is stingy relative to the private sector pay scale. Prima facie it looks like an argument that moving forward we ought to offer higher salaries going forward in order to recruit and retain more experienced personnel.

Now perhaps that conclusion is wrong, but this is the right kind of question to be asking. Are we spending too much money on hiring overqualified applicants or is stinginess leaving us with a thin applicant pool? For federal workers, the AEI analysis seems to suggest the latter.