Is There a Federal Pay System?
Articles on federal pay and the federal pay system are often the most popular articles on FedSmith. That is not a surprise. Our readers are all members of the federal community, and articles on pay (and benefits) have a direct economic impact on them.
The federal pay system is complex. Unlike the annual cost-of-living adjustment (COLA), which is a straightforward calculation, the annual pay raise is a political football.
The president is always involved in the decision and issues an executive order for any annual pay raise granted in December. Congress can get involved at any point by passing legislation or inserting language (often hard to find and interpret) hidden deep within an authorization bill.
On top of that, the locality pay system is a monstrosity that now consists of 58 locality pay areas. FedSmith receives queries each year along the lines of, “How can the locality pay in my geographic area be lower than (pick a city) in another locality pay area?” For that, one needs to understand how the locality pay system works, as well as the roles of the Federal Salary Council and the President’s Pay Agent, which is beyond the scope of this article.
Are your eyes glazing over? Very few people have more than a cursory understanding of this process. Perhaps that is by design. More likely, it is the result of numerous committees with good intentions coming up with a variety of solutions that, in the end, create a system that very few will ever understand.
What is the ECI?
The Employment Cost Index (ECI) is a quarterly economic indicator produced by the U.S. Bureau of Labor Statistics that measures changes in the hourly cost of labor to employers over time.
The ECI covers both wages and salaries and the cost of benefits, using a fixed “basket” of jobs so the index reflects pure cost changes rather than shifts in the mix of occupations or industries.
Is It Fair to Compare ECI to the Federal Pay Raise?
It is not a fair comparison—but it’s the system Congress chose in the Federal Employees Pay Comparability Act of 1990 (FEPCA).
The Federal Salary Council routinely issues press releases showing how much federal employees are underpaid. The data are accurate, but the conclusion is deliberately misleading and does not present a full picture.
Federal employees work in a political system. That is often how politics works, with interest groups picking and choosing points to justify a favorable conclusion.
Here is how the ECI works in practice.
The annual GS pay raise:
- Adjusts base salary only
- Does not automatically account for:
- Rising FEHB premiums
- Increased employee retirement contributions
- Changes in TSP matching costs
- Any other benefit cost growth
The ECI captures employer cost increases, even when employees see no increase in take-home pay. It also accounts for benefit-cost growth that may be invisible—or even negative—to federal employees.
That creates a built-in distortion. That is how the system works. This article describes the results and is not intended to defend the system.
When Congress tied federal pay to the ECI, the goal was labor-market comparability, not take-home-pay protection. The assumption was that benefits are part of total compensation and should be counted. Congress stacked the deck:
- Used total compensation, not wages
- Subtracted 0.5 percentage points by statute
- Allowed presidents to reduce raises further with “alternative pay letter” that all presidents have used since the passage of FEPCA.
The result is a formula that systematically understates salary growth compared to private-sector wages.
Comparing ECI to Federal Pay Growth
- Yes, the ECI includes benefits.
- No, it is not an apples-to-apples comparison with federal salary raises.
- Yes, the mismatch consistently works against federal employees.
- And no, that’s not an accident—it is how the law is written.
Comparing the ECI to the GS Pay Raise Over a Decade
| Year | ECI Annual % Change | GS Base Raise % | Avg Locality % | Total GS Raise % | CPI-U Inflation % |
| 2014 | 2.2% | 1.0 | 0.0 | 1.0 | 1.6 |
| 2015 | 2.0% | 1.0 | 0.0 | 1.0 | 0.1 |
| 2016 | 2.2% | 1.0 | 0.3 | 1.3 | 1.3 |
| 2017 | 2.6% | 1.0 | 1.1 | 2.1 | 2.1 |
| 2018 | 2.9% | 1.4 | 0.5 | 1.9 | 2.4 |
| 2019 | 2.7% | 1.4 | 0.5 | 1.9 | 1.8 |
| 2020 | 2.5% | 2.6 | 0.5 | 3.1 | 1.2 |
| 2021 | 4.0% | 1.0 | 0.0 | 1.0 | 4.7 |
| 2022 | 5.1% | 2.2 | 0.5 | 2.7 | 8.0 |
| 2023 | 4.2% | 4.1 | 0.5 | 4.6 | 4.1 |
| 2024 | 3.8% | 4.7 | 0.5 | 5.2 | 2.9 |
| 34.20% | 21.4 | 4.4 | 25.8 | 30.2 |
Notes:
- ECI annual figures are approximated using BLS releases and common published year-end percent changes; precise annual ECI for some years is not published in a single annual table for 2014–2023 but can be reasonably proxied by year-end or third-quarter indexes.
- Base and locality pay figures come from FederalPay historical tables and CRS reports; locality pay varied significantly by area, so we use average locality pay where documented or typical values (≈0.5% from about 2018–2024, lower or zero earlier).
- CPI-U data are from the BLS annual averages.
- GS Base Raise % — the across-the-board General Schedule pay adjustment effective January of the following year.
- Avg Locality % — rough average locality pay component included in overall civilian pay raises; from historical CRS descriptions and locality patterns (early years had little to no locality on average; mid/late years ~0.5%).
- Total GS Raise % — sum of base raise + avg locality; roughly reflects typical Federal civilian experience.
- CPI-U Inflation % — annual Consumer Price Index for All Urban Consumers, year-over-year percent change.
What do these numbers depict? We have calculated these data for the number geeks who like to dig into statistics. For normal people, here is a summary of what this means.
The Numbers Tell the Story
Between 2014 and 2024, the ECI rose at an annual rate of 2% to 5%, spiking during the post-pandemic inflation surge. Federal GS raises—base pay plus average locality adjustments—often fell short.
A simplified look at the decade shows:
- 2014–2016:
ECI hovered around 2–2.2%, while GS raises were 1–1.3%. Federal pay clearly lagged both labor costs and inflation. - 2017–2019:
ECI climbed toward 2.6–2.9%. GS raises improved but still trailed, averaging just under 2% when locality pay is included. - 2020–2021:
The gap widened again. In 2021, ECI jumped to roughly 4%, while the total GS raise was just 1%—a sharp divergence at the worst possible time. - 2022–2023 (Inflation Shock):
ECI surged to 5.1% in 2022. Inflation (CPI-U) hit 8%. Federal employees received a 2.7% raise for 2022 and 4.6% for 2023—better, but still behind both ECI and inflation. - 2024 (An Exception):
For once, federal pay slightly outpaced the ECI. With ECI around 3.8%, the average total GS raise reached about 5.2% (including locality). This was the rare year when federal employees didn’t lose ground.
The Role of Locality Pay
Locality pay narrows the gap—but does not eliminate it.
On average, locality pay added about 0.5 percentage points annually in recent years. That helps employees in high-cost labor markets, but it also masks disparities:
- Employees in high-pay localities may approach private-sector comparability.
- Employees in “Rest of U.S.” often fall further behind both ECI and inflation.
Even with locality pay included, most years still show federal compensation growth below ECI.
Inflation Makes the Gap Worse
Comparing pay raises to inflation highlights the real impact on purchasing power.
From 2021 through 2023, CPI inflation consistently exceeded federal pay raises. That means federal employees effectively took a pay cut, even in years with historically large nominal raises.
The cumulative effect matters more than any single year. A decade of sub-ECI has raised the level of meaningful erosion in relative pay.
Why This Keeps Happening
Three factors drive the persistent gap:
- Statutory reductions
The ECI minus 0.5% formula ensures that federal raises start below the labor-market benchmark. - Presidential alternative pay authority
Nearly every president has used it, often citing budget constraints. - Political optics
Federal pay raises remain an easy target during deficit debates—even when they lag inflation.
Bottom Line
Over the past decade, federal pay has usually failed to keep pace with the Employment Cost Index, and often with inflation as well. Locality pay helps, but it does not close the gap for most employees.
The 2024 raise was an outlier—not evidence of a new trend. Unless Congress or future administrations rethink how the ECI is applied, the data suggest federal employees will continue to trail the broader labor market over time.
In short: the system is designed to lag—and it does exactly that.
On the other hand, as this article notes, federal employees have sometimes taken advantage of a complex system to artificially raise their salaries. In an investigation of one agency, the investigative report found that 80% of the 25 remote employees identified in a study had an incorrect duty station and were being paid a higher amount of locality pay.
A Commerce Department report found that, in some instances, employees took nearly a year to update their duty station, which determines their locality pay, resulting in $42,985 in overpayments; 23% of the sampled employees were overpaid.
The last average federal salary reported by OPM in FedScope was for September 2024. At that time, it was $106,874. In Washington, DC, it was $144,529.
