Saturday, April 27, 2013

Overpaid or underpaid?

I don't know the literature on public vs. private pay and I'm hesitant to say one way or another because the story is complicated. Public sector work is more secure, after all - which means that you don't just need to look at point in time pay differences but consider the question of wages over the life-cycle (high starting wage but slow growth, for example). I don't find the overpaid public worker thesis implausible by any means, but I think it's not a simple story and it probably is pretty different across the skill distribution (high skill workers are likely underpaid, potentially as a result of compensating differentials for a sense of mission in public service).

Anyway - to all those caveats let me add another one. Bryan Caplan discussed this recently and reported:
"The literature on wage differentials between public and private sector employees spans roughly four decades, originating with Smith's [1976a, 1976b, 1977] seminal series of papers. The core of her analysis is the estimation of conventional human capital earnings functions. For example, in Smith [1976b] she uses 1973 Current Population Survey (CPS) data to estimate for each gender a regression of the logarithm of the wage on various worker characteristics such as years of schooling and race, including a series of dichotomous variables indicating whether each individual worked in the federal, state, or local government sectors (the private sector is the omitted category). For males, she finds wage differentials relative to the private sector of 19 percent in federal government and -4.9 percent in local government. The coefficient on the state government variable is statistically insignificant. The differentials for female workers are 31 percent in federal government, 12 percent in state government, and 3.6 percent in local government."
So the exercise and the assessment of differentials is fine (although he goes on to talk about more refinements). We ought to ask whether the research is really finding comparable work in the private sector or not (in a lot of cases, likely not), but what I want to question is how we want to interpret this.

It's 1973, after all.

If we find a 31 percent wage differential in the federal government does that mean:

1. Government overpays workers because it isn't exposed to market discipline, or
2. Private sector underpays women

I'm guessing it's a mix of both and it's hard to know what to do with this without knowing how it splits out between the two. We often use market prices as benchmarks. There can be good reason for doing that, but I'm not sure I would for an analysis of women in 1973.


  1. Exactly m,y response to that particular finding. (I will note that similar findings made back then--I was in grad school about then--at least mentioned the possibility of discrimination, although at this remove I can't provide specific references.)

  2. Well, in 1973 those wage differences between men and women in comparable jobs made sense to managers and personnel departments, although things were starting to change.

    The point is, IN THE 1950'S there was widespread belief that most women in the workforce were there for only a short period. The general assumption was that they were single and would retire from work once they got married -- which of course all of them would do -- and that afterwards they would remain at home and raise their children. The better wages went of course to men, the "breadwinners" who had the responsibility for paying the mortgages on those homes and buying the groceries and saving for retirement. Because of course all men were married, or would soon become married. And as a rule, men already married recieved better pay than single men.

    This may not have accorded with the job and wage pay rules on the books at most companies, but those pay rules had generally been laid down in the 1940 and were obviously out of date with respect to contemporary reality...

    Granted, in the wild and wooly 1960s a handful of single women sometimes wandered from the steno pools into genuine white collar enclaves of maleness, such as engineering and accounting, but they were unusual. No one expected them to stick around, and mostly they didn't. Still, there were enough that murmurs about changing pay policy began to arise. It wasn't legal anymore to pay differently based on skin color, and some of the unmarried white men in the office and jobsites were getting kind a long in the tooth also, and maybe it would be a good idea to start equalizing pay based on the job rather than marital status... employees were starting to grumble about pay being unfair, and it was showing up in turnover statistics, and nobody could predict what those insane people in the Justice Department might decide to do some day, and ...

    But what really changed things was that in the 1970's house prices rose sufficiently that single-income families couldn't afford to buy a home, and a lot of couples decided that the missus should forego being a mom for a while and go back to work for a few years, or better yet, stay at work. Oddly enough, this coincided with the appearance of more and more well educated women (who started attending college in numbers comparable to men in the the late 1960's). Call it "fiscal feminism." Or "civil rights for working women." Whatever. It changed the way companies operated, and it changed pay scales.

    It's not a great surprise that changes in women incomes showed up first in the Federal Civil Service, or that they seemed especially prominent in the mid 1970's.

    But this is sociology, not economics. Your textbooks wouldn't have mentioned it.

  3. Daniel, can't you look at some kind of measure of how many applicants there are per job opening? Or what the waiting list is, for cops versus private sector jobs?

  4. Or as Karl Smith puts it, the question is whether we have the workforce we want. Do we want the lowest bidder or the most competent? We seem to get plenty of the former for elective office.


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