- Post-Covid Policy Advice from Ludwig von Mises for Developing Countries - March 2, 2021
- Socialism-in-Practice Was a Nightmare, Not Utopia - February 23, 2021
- The Case for Freedom in Ludwig von Mises, F.A. Hayek, and Ayn Rand - February 19, 2021
Where are you more likely to earn a better salaried income, in the private sector or working for the government? Well, it turns out that those employed by the federal government and having only high school diplomas or college bachelors’ degrees, are likely to be financially far better off.
The Congressional Budget Office (CBO) released in April 2017 a new study on, “Comparing the Compensation of Federal and Private-Sector Employees, 2011-2015.” The upshot of which is that in terms of pay and benefits, federal employment is where your standard of living will likely be greater.
High Schoolers and BA Degree Holders Earn More in Government
The federal government directly employs (not counting the military) around 2.2 million people. For those with no more than a high school diploma, the CBO estimated that federal employees between 2011 and 2015 made 34 percent more per hour than equivalent degree holders in the private sector. For comparable education and work, private employers pay, on average, $22.10 per hour, but the equivalent federal employee makes, on average, $29.60 per hour.
Those with a bachelor’s degree (who make up about a third of the federal government’s labor force), earn about 5 percent more than those comparably employed by private enterprise. The bachelor degree holder in the private market earns, on average, $37.60 per hour, but the similar federal employee makes, on average, $39.50.
They also estimated, interestingly, that those with doctorial or professional degrees earned 24 percent less, on average, than similar jobs in the private economy. In the private sector, the pay averaged around $68 per hour, while in the federal government it was $51.60, on average, per hour.
Better Fringe Benefits for Most Working for Government
The same divergence exists in the category of “benefits”: health insurance, retirement benefits, and paid leave. If you, again, have a high school diploma or less and work for the federal government, you received non-cash benefits equal to around $21.30 per hour, while in the private economy a similarly educated person received such benefits equal to $11.10 per hour, or 93 percent more from working for Uncle Sam.
For those with bachelors’ degrees, federal government employees earned benefits equal to $27.50 per hour, on average, compared to the similar person in the private sector who received benefits equal to, on average, $18.10 per hour, or 52 percent more if you worked for the federal government.
Only, again, for doctorial or advanced professional degrees was it reversed. In this category, non-cash employment benefits when working for the federal government was equal to $29.70 per hour, while in the private sector it was, on average, $30.70, or three percent less from government employment.
Much Higher Compensation Packages for Most in Government Jobs
Overall, a federal government employee with a high school diploma or less received in salary and benefits 53 percent more than the same person in the private sector. For those with bachelors’ degrees the total compensation was 39 percent more than in private enterprise. While for people with those professional or doctorial degrees the total compensation package from working for the federal government was about 18 percent less than in the private economy.
These differences in pay and benefits from federal government versus private sector employment have been growing. The CBO did a similar study covering the period 2005-2010, and found that for those with high school diplomas or less the total compensation packages of salary and benefits had increased by over 47 percent between these two periods, if you worked for Uncle Sam. For those with bachelors’ degrees the government employment gain in total compensation increased 40 percent between the two periods. It stayed the same for those with advanced professional or doctorial degrees.
Now, the Congressional Budget Office, in its explanatory notes to the study, makes clear that this is a very general or rough and ready comparison. Making these comparisons is far from scientifically precise, given differences in people’s age, education (i.e., what field has a bachelor’s degree been earned), work experience and seniority on the job (federal employees, on average, tend to be older than in comparable positions in the private sector).
But even admitting all this, plus related comparison problems, the differences in pay and benefits from being employed by the federal government rather than in a private sector enterprise are clearly stark and even dramatic for many.
Given these estimates, should it be presumed that those with high school or bachelors’ degrees are so much more productive and efficient in the government sector than in private enterprise that the salary and benefits discrepancy to their advantage reflects their net higher value to “society”? And should we presume that those employed by the federal government possessing those higher professional or doctorial degrees are really so much less valuable compared to those with similar education in the private sector?
In the Dark About the Real Value of Government Employees
Let me suggest that we really don’t know, and cannot fully know. On competitive markets, products are sold to willing consumers, and wages and benefits that may be offered to desired employees by private enterprises come from the successful earning of revenues from selling those goods to willing buyers. Government acquires its revenues to pay salaries from compulsory taxation; and government imposes its goods and services upon the citizenry from a generally monopoly position, with no way of knowing what the citizen recipients of what government provides may think those goods and services to be really worth.
In other words, government is a socialist enterprise that operates in an arena of surrounding private enterprises that are subject to the “laws” of the marketplace.
In the private sector, a businessman must speculate about what product or service potential consumers may wish to buy at some point in the future. If he is starting a new business, he must draw upon his own savings of the past (or other people’s savings that he borrows with the promise to pay it back with interest) to undertake a production process through time that at the end of which he will have a product to offer to the buying public. If his is an on-going business, then out of revenues earned in the past he must set aside sufficient funds to cover the expenses of his on-going production processes that will enable him to have products or services to sell at future moments in time to keep his business operating.
Private Enterprises and Economic Calculation
He must compete against other businessmen and enterprisers who are also undertaking production processes to produce various products that they, in turn, are hoping to bring to market and successfully sell to consumers. Our individual businessman has to decide what he can afford to offer to possible employees of various types, skills, education and experience to work cooperatively with his capital – machines, tools, and equipment – along with land, resources and raw materials he may have at his disposal with which he hopes to make that finished product.
The maximum that he can afford to pay workers and other resource providers is determined by the price at which he may be able to sell the finished product and the quantity that he believes he may be able to successfully market at that anticipated price. That is, what total costs he could afford to incur to bring his product to market is determined in his mind by the total revenues he speculatively anticipates might be his at the end of the production process.
How much he may actually have to offer for labor or any of the other useable factors of production is determined by the “opportunity costs” of workers and other input providers as captured in the wages and prices other employers may be willing to offer them to be employed in their enterprises rather than that of our particular businessman.
Given his anticipation of the finished good’s selling price, these input prices (including workers’ wages), enable him to decide whether he would make a profit or a loss if he made this product. And if a profit seems possible, what combination of the inputs (labor, capital, resources), would minimize his expenses to try to maximize his possible net revenues, that is, his profit margin, given the market prices he finds it necessary to offer them in competition with his supply-side rivals for their hire?
What I have very briefly attempted to explain and summarize here is the process of “economic calculation,” the importance of which was emphasized by the Austrian economist, Ludwig von Mises, in his famous critique of socialist central planning almost a century ago. On its basis there results for the market as a whole a cumulative value-efficient allocation of the scarce resources in society for the manufacture and offering-for-sale those products that private enterprisers, in the pursuit of profit, think are those most desired by the consuming public, given the prices those consumers are believed to be willing to pay for them.
Through this competitive market process, each worker’s worth in determined and reflected in the wage he may be able to earn from being employed in different enterprises interested in hiring his productive services in alternative lines of production. Which one he accepts reflects his options for gainful employment and which one offers the most attractive wage plus fringe benefits plus non-pecuniary attractions (preferred location, pleasant work environment, interesting or enjoyable work). The latter non-pecuniary attractions sometimes result in a willingness to trade-off a higher wage and benefits he might have earned from taking a different available job.
Taxation and Coerced Customers Equals Economic Irrationality
Government operates in a significantly different institutional setting than private enterprisers in open, competitive markets. As was already pointed out, government normally neither sells its goods or services to willing buyers nor gains available revenues from their sales. Instead, what government supplies is determined politically through either autocratic decision or by special interest politicking in the democratic process. Revenues are acquired from compulsory taxation that tells little or nothing about whether the citizens who are given or required to accept what government supplies really want it and at what value and price, if any.
In other words, there is none of the same rational economic calculability in government enterprise as there is in competitive market private enterprise. It is true that as long as labor is relatively freely offered and hired on a market, government must pay certain minimum wages to successfully attract various types of workers away from potential private employers, if certain tasks are to be performed within the bureaucratic halls of the state.
But what the maximum salaries may be that are offered and paid to those employed by the government has no restraint similar to private enterprisers in the competitive market. Whether or not American taxpaying parents want to pay for people to be employed in the Department of Education implementing “No Child Left Behind”; or whether or not American taxpaying businessmen and consumers want Environmental Protection Agency bureaucrats to be hired to micro-manage land-use throughout the country; or whether or not American taxpaying cannabis users or supporters of decriminalization want federal lawyers and enforcement agents hired and working to arrest and imprison people for a “victimless crime,” they will be forced to pay the salaries of those doing these things in the federal government through the government’s taxing power.
What can be said is that the salaries paid and benefits provided for those employed within the government’s bureaus, agencies, and departments are determined and fixed by the interactions of politician’s allocating taxpayer’s money (and additional sums borrowed by Uncle Sam in excess of taxes collected), the heads of government departments lobbying for maintaining or expanding their respective bureaucracies, and the labor unions representing various segments of the federal government’s work force.
Thus, the salary and benefits scales for government employees exist as semi-socialist islands of political decision-making that lack the same reasonableness, rationality or economic calculable efficiency as in the competitive private market process.
Government Jobs for Social Engineers and Non-Marketable Professionals
But what about those working for the federal government who have doctorial or professionally advanced degrees? Why would they be working for the government rather than the private sector where their pay and fringe benefits are likely to be higher than with a government job? There are always some non-pecuniary motives behind the employment choices we make. Some might forego a higher salary in the private sector because they sincerely believe that they want to do “good” for society by having the regulatory authority to make people act in ways they would not, if left free to peacefully choose. In other words, there is the pleasure from socially engineering and controlling other people’s lives through the government’s police power.
Others, to speak bluntly, may have advanced degrees – and the CBO study points out that the federal government proportionally hires more scientists and engineers than does the private sector – but they may not have what it takes to make it in the arena of private enterprise, or they have professional degrees and expertise not best suited for profit-making businesses. Thus, there may be no non-governmental next best alternative from which to secure employment without a significant reduction in salary and benefits.
Government employment, to be even more blunt, can sometimes draw the corrupt or corruptible and the deceitful, given the often-perverse incentive structures in existing bureaucracies, including the difficulty of being fired for incompetence or subterfuge. One of the most notorious instances of this, of course, to which the media has drawn attention, is the Veterans Administration – an American monument to the depths to which socialized medicine can fall at the tragic expense of those assigned into its care.
There is no “fix” for these wage, benefit and employment irrationalities and misallocations other than to radically reduce what the federal government does and the number of employees needed to do those more narrowly defined duties and responsibilities. Returning those currently employed by the federal government to the private sector will enable to soon find out what their labor services are really worth by their participating in the production of those market-based goods and services actually wanted by the consuming public.
[Originally Published at the Future for Freedom Foundation]