Federal Employees: Overpaid or Underpaid?

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By on April 26, 2017 in Pay & Benefits with 0 Comments

Two cartoon people with one holding a small dollar sign and the other holding a larger dollar sign depicting salary variation

How do federal salary and benefits compare to the private sector? The federal government is a large employer and money spent on salary and benefits for employees is significant.

Federal employees receive compensation in wages and benefits, including health insurance and pensions. According to the Congressional Budget Office, the federal government spent about $215 billion in fiscal year 2016. About 65 percent of that amount is for employees in the Departments of Defense, Veterans Affairs, and Homeland Security.

Various groups periodically weigh in on this question of federal pay with widely disparate answers. Part of the differential is because some studies include benefits while others only look at salaries.

A new report from the Congressional Budget Office (CBO) has been issued that weighs in on the topic. The CBO considered wages and benefits and concluded the federal compensation package is higher than the private sector.

There is a wide disparity between less educated federal workers and those with more education. Generally, federal employees with less education fare much better in the government that similarly situated employees in the private sector.

Federal Workers are Underpaid

The Federal Salary Council, for example, whose members are primarily representatives of federal employee unions, conclude each year that federal employees are underpaid by a significant amount. It announces each year that federal workers are underpaid by about 35%.

As noted below, however, much of the differential between federal and private sector employees is the higher benefits package for federal workers and not just the salary differential. (See Federal Salary Council Sees Federal Workers as Substantially Underpaid)

While the recommendations from the Salary Council have not changed substantially over the past years, the routine proclamations have not had as much of an impact as might be expected.

As federal pay expert Howard Risher noted in an article: “The recommendations submitted by the Pay Agent to the President have been rejected annually for two decades. It’s clear the reported conclusions are not credible. I doubt if even the union members of the Federal Salary Council believe employees on average are paid 34.6% below market rates.”

On the other hand, the Federal Salary Council has successfully been pushing for years to have more federal employees added to the locality pay system. The number of geographic areas covered by locality pay have expanded significantly over time, and the number of federal employees covered by locality pay have been going up.

While the President’s Pay Agent does not usually accept all or even most of the Salary Council’s proposals, the persistent recommendations for expansion have generally paid off over time. (For more see this compilation of FedSmith articles on Locality Pay).

Federal Workers are Overpaid

On the other side of this issue, there have been studies concluding that federal employees are generally paid substantially more than private sector workers. These studies usually consider salary and benefits rather than just federal salaries.

For example, using data from the Bureau of Economic Analysis—a Department of Commerce agency—Chris Edwards, the director of tax policy studies at the Cato Institute, noted that total federal compensation in 2015 averaged $123,160 or 76 percent more than the private-sector average of $69,901.

Another study from the Heritage Foundation found federal employees are paid 22 percent higher wages, on average, than similar private-sector employees. The Heritage study concluded higher wages for the federal workforce are possible “because the federal government operates outside of market forces that keep wages in line with productivity; it does not have to compete for taxpayer dollars and has significant advantages in its ability to finance deficits.” (See Blueprint for Reform: A Comprehensive Policy Agenda for a New Administration in 2017)

View From the Congressional Budget Office

A new report from the Congressional Budget Office generally comes out between the other two competing points of view.

As readers often point out in discussing this topic, the federal workforce is different than many private sector jobs. The CBO acknowledged this and considered it in its report:

On the whole, federal workers tend to be older, more educated, and more concentrated in professional occupations than private-sector workers. To account for such differences, the Congressional Budget Office has used data for 2011 through 2015 reported by a sample of households and employers to estimate differences between the cost of wages and benefits for federal employees and the cost of wages and bene ts for similar private-sector employees, defined as those having a set of similar observable characteristics….CBO sought to account for differences in individuals’ level of education, years of work experience, occupation, size of employer, geographic location (region of the country and urban or rural location), veteran status, and various demographic characteristics (age, sex, race, ethnicity, marital status, immigration status, and citizenship).

The CBO report concluded:

  • Federal civilian workers whose highest level of education was a bachelor’s degree earned 5 percent more, on average, in the federal government than in the private sector.
  • Federal civilian workers with no more than a high school education earned 34 percent more, on average, than similar workers in the private sector.
  • Federal workers with a professional degree or doctorate earned 24 percent less, on average, than their private-sector counterparts.

Based on this analysis, the federal government would have reduced the money it spends on salaries by 3 percent by decreasing the pay of its less educated employees and increasing the pay of its more educated employees to match the wages of their private-sector counterparts.

During the 2011–2015 period, the federal and private sectors were much more different with regard to benefits than with wages. Benefits are generally higher in the federal sector. Here are the conclusions on disparity of benefits noting the differential based on the relative education of employees:

  • Average benefits were 52 percent higher for federal employees whose highest level of education was a bachelor’s degree than for similar private-sector employees.
  • Average benefits were 93 percent higher for federal employees with no more than a high school education than for their private-sector counterparts.
  • Among employees with a doctorate or professional degree, by contrast, average benefits were about the same in the two sectors.

On average, federal benefits are 52 percent higher for federal employees than private sector employees according to the CBO.

Overall Conclusion of the CBO

After accounting for workforce differences, such as education, on average federal employees are paid about 17 percent more in total compensation than similar employees in the private sector. As with salary differential, the benefits package value was much higher compared to the private sector than for federal employees with lower education levels.

  • Among workers whose education culminated in a bachelor’s degree, the cost of total compensation averaged 21 percent more for federal workers than for similar workers in the private sector.
  • Among workers with a high school diploma or less education, total compensation costs averaged 53 percent more for federal employees than for their private-sector counterparts.
  • Total compensation costs among workers with a professional degree or doctorate, by contrast, were 18 percent lower for federal employees than for similar private-sector employees, on average.

CBO Report on Federal vs. Private Sector Pay 2011-2015

© 2019 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47

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