“Are Wisconsin Public Employees Underpaid?”

by Andrew Gelman on February 22, 2011 · 7 comments

in Methodology,Political Economy

Amy Cohen points me to this blog by Jim Manzi, who writes:

Ezra Klein and a variety of other thoughtful liberal bloggers have been pointing to an Economic Policy Institute analysis that they claim demonstrates that Wisconsin’s public employees, even after adjusting for benefits and hours worked, face a ” compensation penalty of 5% for choosing to work in the public sector.” Unfortunately, when you get under the hood, the study shows no such thing. . . . reading the actual paper by Jeffrey H. Keefe is instructive. Keefe took a representative sample of Wisconsin workers, and built a regression model that relates “fundamental personal characteristics and labor market skills” to compensation, and then compared public to private sector employees, after “controlling” for these factors. As far as I can see, the factors adjusted for were: years of education; years of experience; gender; race; ethnicity; disability; size of organization where the employee works; and, hours worked per year. Stripped of jargon, what Keefe asserts is that, on average, any two individuals with identical scores on each of these listed characteristics “should” be paid the same amount. . . .

I’m having difficulty extracting the main points from Manzi’s blog without just pasting it all in, so let me say that Manzi’s key idea is that if private sector employees in Wisconsin are being paid on average 5% more per hour than comparable public sector employees there, it’s not at all clear that this is a “compensation penalty” rather than simply that the private sector workers are worth 5% more, perhaps because they’re doing something more valuable or perhaps because they’re more qualified in ways other than measured by Keefe’s control variables.

Manzi concludes:

The whole question – as is obvious even to untrained observers – is whether or not there are material systematic differences between the public and private employee that are not captured by the list of coefficients in his regression model. His statistical tests simply assume that there are not.

I don’t know if Wisconsin’s public employees are underpaid, overpaid, or paid just right. But this study sure doesn’t answer the question.

That sounds about right to me. But I don’t think this sort of study is completely useless either. (Just to be clear: I haven’t actually followed the link to read Keefe’s report, so in writing about this study, I’m really writing about this study as described by Manzi.)

From one perspective, sure, I agree that a statistical analysis of the sort described above based on observational data can never be a true direct comparison. (Not to mention the difficulty of classifying people like me who work in the quasi-public sector.) But if you take things from the other direction, this sort of study can be valuable.

What do I mean by “the other direction,” you might ask? I mean, suppose you start, as people do, with raw numbers: Salary plus benefits = X% of the state budget. The state has Y number of employees. Average income of all Wisconsinites is Z. Then you start adjusting for hours worked, ages of the employees, etc etc, and . . . you end up with Keefe’s analysis.

My point is, people are going to make some comparisons. Comparisons aren’t so dumb as long as you realize their limitations. And once you start to compare, it makes sense to try to compare comparable cases. Taking Manzi’s criticism too strongly would leave us in the position of allowing raw numbers, and allowing pure unblemished randomized experiments, but nothing in between.

In summary:

1. Manzi’s right to emphasize that a simplistic interpretation of regression results can be misleading.

2. Regressions of observational data can be a good way of going beyond raw comparisons and averages.

Some of this discussion reminds me of the literature on the wage premium for risk, where people run regressions on salaries for comparable jobs in order to estimate how much people need to be paid to risk death or injury.. Based on my reading is that these studies can’t be trusted: if you’re not careful, you can easily estimate the value of life to be negative—after all, the riskiest jobs (lumberjack, etc.) tend to pay poorly, while the best-paying jobs (being Bill Gates, etc.) are pretty safe gigs. With care, you can get those regressions to give reasonable coefficients in the range of $1 million per life, but I don’t really see these numbers as meaning anything at all; they’re just the results of fiddling with the models until something reasonable comes out. I’m not saying that the people who do these analyses are cheating, just that they want reasonable results but the models seem too open-ended to be a good measure of risk premiums.

P.S. Ezra Klein replies, agreeing with Manzi’s statistical critique but writing that “the burden of proof is on those who say Wisconsin’s public employees make too much money.” I’m sure people can disagree about where the burden of proof should fall, but I think Klein’s point is similar to mine, that if you want to claim that public employees are overpaid, that claim will start with a comparison of some sort, and then you have to go from there.

{ 7 comments }

Michael February 23, 2011 at 10:28 am

I agree that these studies cannot be trusted. I haven’t read much into the methodology because I don’t think you need to. It is clearly more beneficial to be in a union than to not be. My evidence for this is that unions in Wisconsin are upset at the Governor and not their union leaders.

To try to say they are underpaid relative to the private sector cannot be right, if it is then why are members paying union dues and why are they so upset at losing collective bargaining? Even if they are paid less it just means you are not monetizing something (job security, leisure time…productivity)

In the traditional measurements though, salary, benefits it dosen’t seem like Unions are vastly overpaid as some people like to claim.

My feeling though is that unionized public sector employees cost taxpayers more than private non-unionized workers cost their businesses.

ST February 23, 2011 at 8:33 pm

I haven’t read much into the methodology because I don’t think you need to.

Rarely a good start to analysis.

My evidence for this is that unions in Wisconsin are upset at the Governor and not their union leaders.

?

To try to say they are underpaid relative to the private sector cannot be right, if it is then why are members paying union dues and why are they so upset at losing collective bargaining?

Because you could argue that they would be paid even less, and have fewer benefits, without their collective bargaining power.

There are practical and political limits on how much public workers can be paid. I would argue that collective bargaining pushes compensation towards this theoretical limit.

My feeling though is that unionized public sector employees cost taxpayers more than private non-unionized workers cost their businesses.

Cost them more for what? Businesses exist to churn out products and make a profit. Government provides public goods, often in areas in which there is market failure or which would not be profitable. I don’t see how you can make an apples to apples comparison in the cost/benefit of a public worker vs. a private worker.

I suppose there are public and private sector lawyers. The former do valuable work for the justice system at a fraction of what their private sector colleagues can make for representing wealthier clients. How would this work in your comparison?

There are also public and private school teachers, but comparing their “output” is fraught with peril.

Wakefield Tolbert February 24, 2011 at 12:50 am

I don’t know if it’s so much a matter of many critics claiming public sector WI employees make “too much money”, as it is, rather, they make a fairly good wage compared to private compensation that that is rated by the market as generally commensurate with experience, hours, education, risk, et al.

Further, the main argument I’m seeing in the pundisphere is that it matters less about the exact amount than the fact that in an age of state budgetary shortfalls all over, it makes no sense–a la the Eurosocialist formula–to mulishly proclaim that all wages/benefits are off-limits.

In South Carolina there are government workers who pull in 75K a year for work that many would say is less than exotic, difficult, mundane, and is primarily done by people whose only connection to higher education, for example, is rooting for the Carolina Gamecocks.

We should also look at some overall trending here. Certainly at the Federal level, we see that when you combine wages PLUS benefits to see the full expense of compensation, you see that Fed workers are on average making the rough equivalent of about 76% more than comparable work in most of the private sector. Just a stab in the dark here, but something tells me that the plaintive wails you’re hearing that public sector employees at the state level are malnourished little naifs and starvelings out of some Dickens tale, with rats nipping at their children’s toes in some run-down tenement housing on the crappy side of town—is a wee bit exaggeration.

What? February 24, 2011 at 9:08 am

I don’t know if it’s so much a matter of many critics claiming public sector WI employees make “too much money”,

That’s exactly what’s been claimed. From coast to coast, public workers have been under fire for their supposedly outrageous salaries and “gold plated” benefits packages. They are currently public scapegoat #1 for conservative pundits and media.

it makes no sense–a la the Eurosocialist formula–to mulishly proclaim that all wages/benefits are off-limits.

And who said they were? The WI unions ALREADY agreed to wage and benefit cuts. The President froze the salaries of federal workers for 2 years. Unions all over the country are grappling with pay reductions, benefit adjustments, and layoffs as a result of budget shortfalls.

Just a stab in the dark here, but something tells me that the plaintive wails you’re hearing that public sector employees at the state level are malnourished little naifs and starvelings out of some Dickens tale, with rats nipping at their children’s toes in some run-down tenement housing on the crappy side of town—is a wee bit exaggeration.

Where did you here this claim? I’ve heard nothing of the sort.

To the contrary, in many states (including WI) public workers have already agreed to wage and benefit cuts because of the state budget shortfalls. What they refuse to agree to is the end of their collective bargaining rights.

The “wailing” is coming from the right, and its about the “lazy, good for nothing, overpaid public worker”. The rebuttal to that is that these workers are paid relatively well in an overall sense but are not overpaid based on their skills, education and experience levels. I think the evidence points to that as a general conclusion.

Wakefield Tolbert February 24, 2011 at 3:41 pm

Mr./Ms…whomever:

At a time when state budgets are cracking–and in the case of WI the former gov raided a compensation fund (speaking of ‘for the people’ type moments)–and at a time when many people are experience something less (like, say..the ever disappointing 0.00/hour wage about 10% of us are undergoing) than the WI average of 50K+ a year in addition to rather delicious benefits not generally available in the private sector, it is probably not much to ask of these hard core warriors of the Educracy, where in WI the average 8th grader has the reading proficiency of an ill-trained chimp, to make some very minor tweaks and adjustments.

The wailing is coming from those tired of policy and rank being pulled—including by the AWOL 14 now hiding out in something a little better than Motel 6, whose actions, if challenged, would probably be shown as ILLEGAL (imagine the Repubs at Federal level in the House pulling this kind of stunt regarding the ObamaCare vote last year!?!? Holy Sh**!) —rather than common sense approaches to budgets, where entire states are sinking.

Why? Losing revenue, so we are told over and over. Part truth—at best. The true part is that when businesses knuckle under or scale back, then taxes are thinner. True enough. What’s the other part of the ledger? Spending–the part that is hard as hell to stanch, despite all the jibber-jabber about freezes to the budget (so called) at a time when all this means is that the freeze for what will be a very small time period is based on a higher baseline for state and federal budgets than at any time in history.

These babies were asked to shunt aside—not lose—but shunt aside a small percentage of their wages to a retirement fund (and at a rate that is UNDER what many financial planner suggest, hombre) and pay for PART of their health insurance to the point where, on average, they are STILL paying over 100 smackers a month LESS than the average private sector employee.

For sole proprietorships, you pay for your own g*******d health insurance—should you even be able to afford. And so there poor chaps still playing hooky as we speak and shanghaiing kiddies to their Norma Rae encounters at the WI Statehouse need to really get a grip on the economic realities elsewhere. Like, for example, if two people are pulling in 50K a year and one can afford to have his wife squeeze out three pups on the state (about 10K a piece, give or take) and gets fully reimbursed or paid up front in some cases by health insurance, that is QUITE different from the dude who has no such resources, or a health insurance plan that squawks about the bill. Uncommon from my experience working in a union environment. The benefits cannot be beat. Unless, say, your pull down several hundred grand a year in some high-level, brass ring operation in a large corporation. But by then you can handle health and other retirement issues yourself and hire brokers, CPAs, and legions of others to do your bidding.

Rather uncommon.

Whatever the case—and the permutations are endless, I’m sure—it’s horribly dishonest to say that “in kind” wage, also called “benefits”, should not be part of the compensation consideration. Given this, it takes the rather generous taxpayers of WI, on average, about 105K per teacher employee. Much more than that for the administrators, who even in backwater zones like Georgia and South Carolina are known to pull down 250K a year. I work in the relocation appraisal industry, and with the exception of the top dog at corporations, or maybe no.2 in charge, I’d say the most spoiled, babyish, obnoxious, petty, pedantic, impudent, and otherwise grating people I know almost always hail from the “public sector”, and enjoy tossing rank around as well as some rather comfortable social weight.

As to the claim that these warriors of the public interest have had their wages “frozen”, I’ll leave that laughable moment to stew in its’ own absurdity.

Welcome to the Age of Bloat—both Federal and local, where the increasing paunch and power and influence of the “public sector” is the new overclass.

An age when the private sector is basically turned into a milk cow, to be poked and squeezed and prodded, to in turn serve this ever-growing overclass.

It is not accidental that we’re told that the average guy’s downturn is not supposed to connect to the so-called public servant’s UPTURN. In fact, it aids it.

http://www2.macleans.ca/2010/03/18/your-%E2%80%98downturn%E2%80%99-their-%E2%80%98upturn%E2%80%99/

Wakefield February 24, 2011 at 3:50 pm

PS–

The gripe in WI is very MUCH over the shunting aside of a fraction of pay towards retirement, and the not-quite-so-horrible request to have these “teachers” pay part of their own frikkin health insurance.

Neither of these Age of Darkness scenarios unknown to the rest of the working world. Just saying’

As to collective bargaining, the law as written would nix that only on the issue of the above benefits. Wages would be negotiable in bargaining if they fell in line with CPI requirements.

That’s not unreasonable at a time when for all manner of reasons, things are looking sour for state budgets–which in the case of WI, are quite high already.

Here’s to hoping that WI does not follow the California path of utter oblivion. Granted, Cally is different, and billions on the dole for everything from anchor babies to gender change operations put a strain on even the richest states.

But still…lessons abound. Time to learn them

We can’t pay for it all, and will get lost in the very attempt.

Lorenzo from Oz March 2, 2011 at 12:58 am

Having read Keefe’s study, it is of extremely limited value. Security of employment is a major benefit of public employment and is apparently not considered at all. If you added a fairly standard 15% surcharge for employment security, his results flip dramatically for public sector employees with high school and associate degrees.

Revealed preference is pretty powerful here. If the gaps in compensation were as large as Keefe suggests, you would think that it would be hard to get public sector workers. Clearly, there is not any such recruitment problem.

Indeed, that public sector unionism is much higher than private sector unionism suggests that public sector employees think they are getting something for their union fees. It is much easier to do standard agreements in the public sector, which militates in favour of unionism. But it also points to the problem of productivity and the measurement thereof (since all public sector employees doing that same job are thus treated as if they are equally productive).

The really fraught issue is the one of what taxpayers are getting for what they pay. Someone who is paid $1m a year but produces $10m in value is not overpaid. Someone who is paid $50k a year but produces $20k in value is.

Having been a public servant (indeed, a local workplace delegate) and now part-owner of a small business (I made much more money as a public servant) I am aware of the complexities involved. Too bad Keefe does not appear to be.

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