Economics

The Value of Public Sector Job Security

In our work on public sector pay, Jason Richwine and I have attempted to put a dollar value on the greater job security enjoyed by government employees, which acts as a free insurance policy against losing your job. Estimating the value of job security from the data is tough, however, for technical reasons outlined in our working paper on federal pay. Instead, we use an economic model, calibrated with a variety of data, to arrive at an estimate.

Our baseline result was that job security for federal government employees was equivalent to a 1.5 percent to 3 percent increase in pay. (There is some recent academic work cited in our paper showing that this may be an underestimate—a German survey found that individuals stated they would accept a more than 10 percent pay cut to receive public sector levels of job security.) Importantly, though, our baseline result assumes that federal employees who lost their jobs would, after a period of job-searching, find new employment at similar pay. However, our working paper also showed that federal workers receive a significant salary and benefits premium over similar private sector employees. This is where job security becomes particularly valuable, because it protects not only against lost income during unemployment but also against being forced into a lower paying job afterward. When this factor is accounted for, the value of job security rises to around 17 percent of pay.

As noted above, there isn’t much data to confirm or deny these results. One piece of evidence, which we cited in our paper, is that congressional employees—who do not enjoy the job protections of other federal workers—receive higher pensions in explicit compensation for their lesser job security.

But thanks to my AEI colleague Mark Perry, we have another interesting data point. In a recent post, Mark highlights the cost of private supplemental unemployment insurance for workers in different job categories. This unemployment insurance, offered by a company called Income Assure, will top up any government payments you receive so that your total income in unemployment equals half your working income. These payments last for 24 weeks, about as long as government unemployment insurance.

Significantly, supplemental unemployment insurance costs a lot more for private sector workers than it does for individuals working in “public administration,” which denotes certain classes of government employees. For instance, individuals working in “professional and business services” pay premiums 2.6 times higher than public employees for the same level of protection.

Based on these different prices, it is possible to back out the implicit value of public sector job security. I compared salaries between public and private sector workers’ net of supplemental unemployment insurance premiums sufficient to protect against all loss of income during unemployment. The difference in salaries indicates the job security premium paid in the public sector. The answer I found was around 2.4 percent, which was a right in line with our baseline results. Given that total compensation for a typical federal employee is well over $100,000, even this baseline 2.4 percent job security premium is worth several thousand dollars. When you add that it protects a job paying a wage and benefits premium, the value of public sector job security is far higher.

It would be nice to have more data, such as whether supplemental unemployment insurance premiums differ for federal employees versus those in state or local governments, and I will look into this more closely. But for now, these data confirm what we already know: better job security in public sector employment has a real value.

11 thoughts on “The Value of Public Sector Job Security

  1. We already know that they have jobs for life and that there is a better chance of them dying in the job than getting fired. BUT, the debate we are having now is not about the value of public sector employees. It’s about how many of them, how ridiculously expensive they are and how their retirement and medical benefits can not be sustained as they are not coupled to any rational metric.

    For example, here in my state (very blue and with the highest taxes nationally in a number of areas) state employee retirement and medical benefits are (as of a year ago) 18 BILLION dollars underfunded and heading upward at a accelerating rate. There simply is not enough tax revenue to make up the difference and there will not be.

    THAT is the value of government employees and the value is negative.

  2. My thoughts on the subject … primarily with respect the the HUGE public Sector Pension advantage:

    So let’s cut to the chase …….

    Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

    More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
    2% per year of service w/o COLA – 29%
    2% per year of service with COLA – 39%
    3% per year of service w/o COLA – 44%
    3% per year of service with COLA – 58%

    Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

    This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

    TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

    Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

    Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

    It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

    • that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay.

      Check your numbers at Calpers. Employer contributions have typically run from 0 to 18% and for the last 42 years have averaged more like 15 to 18%.

      Those figures also come off of about 480 of my monthly pay stubs.

      • Two reasons why CalPERS #s are lower than mine: (1) Calpers is reporting the (lees than adequate) amount it ACTUALLY collects as employer (i.e., Taxpayer) contributions, not what it SHOULD BE collecting using proper assumptions, and (2) the %s in my comment are (as stated) for those who retire at age 55 after 30 years. Plan costs are lower (even as a level % of pay) for those who have shorter careers, and CalPERS figures incorporate these.

        As for your (i.e., employee) contributions….. IT would be a VERY RARE Public Sector DB Plan where the employee’s contributions (together with all the investment earnings on those contributions) to pay for more than 10-20% of the Pension’s cost. That’s the problem … the granting of extremely generous pensions, 80-90% of which are pay for by taxpayers (NOT the employes) who in most cases don’t even get half as generous retirements for themselves.

  3. Public sector jobs are not looking all that secure lately. So many gov’t types are getting laid off that it’s ratcheting up our national unemployment rate. Who knows? Maybe there will even be federal layoffs as a result of the debt ceiling debate in Congress. Certainly, if Congress whacks Medicaid spending that will require cutting lots of jobs at the state level. Coming defense cuts will also eliminate many public sector jobs. Have you guys ever taken a look at the military pension scheme? That’s a pretty sweet arrangement. As I recall the military pensions have a Zero Percent funded ratio, I think it’s all paid out of current revenues. (You all may have more knowledge about this than I do.)

    In light of current events it seems that this job security premium is somewhat diminished.

    • I would guess that all Federal pensions effectively have a 0% funded rate, since the only likely investment (if any) is Treasuries, which like Social Security’s assets, are meaningless, because redeeming those Treasuries to raise & pay out real cash MUST (1) raise taxes, (2) lower expenses via lowering services, or (3) increase the national debt. The Feds can get away with this as long as there is ink to print more bonds, and fools to buy them.

      Not true for States, Cities, etc. They’ve kicked the can right into the end zone …. early retirement packages first, layoffs next, then goes retiree healthcare, then reductions in pension accruals for future service, then reversal of retroactively approved increases, then haircuts for actives and retirees. Nobody is coming to the rescue. Plan accordingly.

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