Jacqueline Simon, Public Policy Director at the American Federation of Government Employees, has written a detailed rebuke of the recent Congressional Budget Office study comparing the compensation of federal and private-sector employees. It’s a must-read.

American Federation of Government Employees, AFL-CIO

CBO Study of Federal vs. Private Sector Pay Compensation –

Many Flaws in Analysis and Irrelevant for Setting Policy

The Congressional Budget Office recently published a report with an extremely misleading title. “Comparing the Compensation of Federal and Private Sector Employees” does not tell us whether federal salaries are too high or too low. It answers the highly peculiar question: If the current federal workforce were replaced with a new one with the same demographic profile as the current one, and the new one were paid average private sector rates for this group’s demographic profile, how much would it cost?

From this question came an answer that was a foregone conclusion. If taken one at a time and categorized by race, gender, education, and other “demographic traits,” of course some of them will appear “overpaid” compared to private sector averages. Why? Because the private sector wage data show large variations by “demographic trait” and for the most part, federal pay systems avoid this kind of discrimination.

The CBO study used what’s called a “human capital model;” basically a “capital asset pricing model” that applies the logic of finance to human beings. Wages, salaries, and benefits are the “price” and the worker is the “asset.” The “asset” has attributes upon which the market places a value, either negative or positive. In such a model, being white, male, highly educated are positive sources of value, while the absence of these attributes means a relatively lower value.

When CBO assessed the accuracy of the “capital asset pricing” of the conglomeration of human capital known as the federal workforce, it was clear that they would find the price too high. This is because, on average, the private sector pays men more than women, whites more than blacks, old more than young, and higher rates in big cities than in rural areas. But the federal government does not reproduce all of these differentials, because in its pay systems, demographic traits are irrelevant. Federal pay is an attribute of the job, not of the demographic traits of the individual holding the job. As a result, men and women with the same federal job are paid roughly the same amount. The demographic traits that comprise a human capital model’s independent variables are completely irrelevant to the salary and benefit package the federal government applies to any given federal job.

Had CBO used the proper method for making the comparison, the one used by the Federal Salary Council, its conclusions would have lined up with the Council’s findings, that federal employees are underpaid whether they are top professionals like doctors or lawyers, technical experts like engineers and scientists, health care providers like VA nursing assistants and dieticians, or administrative workers who handle claims for Social Security or Veterans’ benefits.

The Federal Salary Council is required by law to measure the gap between federal salaries and salaries in the private sector as well as state and local government, together referred to as the “non-federal sector.” On average, the Council’s method finds the nationwide gap between federal and non-federal pay remains about 26 percent in favor of the non-federal sector, but varies by locality. This is largely because the job comparison methodology used by the Council requires finding comparable positions before making pay comparisons, and many jobs found in the federal government are uniquely governmental. Useful pay comparability measures require data from job matches. The Federal Salary Council/BLS/OPM approach actually matches jobs and level of work.

The CBO study is flawed not only because it relies so heavily on “demographic traits”, but also because it uses broad occupational categories and industrial categories as proxies for job matches. And that error compounds the noxious comparison by race, gender, and age. Indeed, the headlines describing the findings of the CBO study emphasized pay differences by education, and the most attention was given to the claim that the federal government allegedly overpays those whose highest level of education is a high school diploma. But consider some of the numerous federal jobs that have similar educational requirements, and are in similar broad industrial categories as those in the private sector, but which do not have nearly the same level of responsibility, or day to day duties or risks.

  • A federal Correctional Officer might be compared with someone who works in the broadly defined, private sector “security services industry”: But a “mall cop” does not perform the same function as an officer guarding convicted felons/dangerous inmates in our federal prisons. Same industry, same education, different job.
  • A VA Nursing Assistant caring for a wounded warrior suffering a head wound from an IED might be compared with someone who works in a doctor’s office, calling patients to remind them of their appointments. Same industry, same education, different job.
  • An electrician working at an Army Depot who builds and repairs sophisticated electronic weaponry might be compared with an apprentice learning how to run wires at a construction site. Same industry, same education, different job.

CBO called its own benefits comparisons “uncertain.” That was an understatement, because not only are their data shaky, as they acknowledge, but their human capital methodology is spectacularly inappropriate for assessing health and retirement benefits. The federal government provides health insurance and retirement benefits to all its employees on the same terms – regardless of education, race, pay system, occupation, or tenure. And a huge part of the alleged benefits gap the CBO calculated derives from the employer cost for the defined benefit pension. As is well known, many of America’s largest and most profitable corporations (such as Wal-Mart) do not provide defined benefit pensions at all. It was inappropriate for CBO to include data from such corporations, as they are not the standard to which the government should be compared. If CBO had restricted its comparison to federal and private sector workers performing similar jobs (e.g. aerospace engineers at NASA compared to aerospace engineers at Boeing), they would have found no gap.

The CBO study on federal pay does a great disservice to those who seek objective analysis on questions related to federal pay and benefits. Except for a brief footnote buried in the middle of the report, the study neglected the work of the Federal Salary Council, which provides an accurate measure of difference between federal and non-federal pay using BLS data and adjusting for the specific characteristics of federal jobs, including the level of work required by the jobs federal employees actually perform. The demographic traits of the federal workforce are irrelevant to the adequacy of their pay, and irrelevant to any measure of pay comparability.

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