How Does the Compensation of Federal Employees Compare with That of Workers in the Private Sector?

January 30, 2012

The federal government employs 2.3 million civilian workers, or 1.7 percent of the U.S. workforce, in over 700 occupations and spent about $200 billion in fiscal year 2011 to compensate them. Recently, concern about the federal budget and about equity between the public and private sectors has focused greater attention on the costs that the federal government incurs to compensate its employees.

Today CBO released a study—prepared at the request of the Ranking Member of the Senate Budget Committee—that addresses the question:  How does the compensation of federal employees compare with that of workers in the private sector?

CBO’s Key Findings

Differences between the average compensation of employees of the federal government and that of private-sector employees varied significantly by level of education. As shown in the table below:

  • Among people with a high school diploma or less education, or whose education culminated in a bachelor’s degree, the total cost of compensation, on average, was higher for federal workers than for similar workers in the private sector, after accounting for differences in demographic factors and in certain characteristics of their jobs. 
  • By contrast, among people with a professional degree or Ph.D., total compensation costs were lower for federal employees than for similar private-sector employees, on average.
  • Differences between the government and the private sector in the average costs of benefits were much greater than the differences in the average wages.

However, even within groups of workers who have similar characteristics, the average differences in compensation between federal and private-sector employees do not indicate whether particular federal employees would receive more or less compensation in the private sector.

Average Hourly Compensation of Federal Employees Relative to That of Private-Sector Employees, by Level of Educational Attainment

CBO’s Analysis

Answering the study’s main question was complicated: The federal and private-sector workforces differ in characteristics that can affect compensation, such as education, experience, and occupation. Federal workers tend to be older, more educated, and more concentrated in professional occupations than private-sector workers.

To account for such differences, CBO has used data from 2005 through 2010 reported by a sample of households and employers to estimate differences in the cost of wages and benefits for federal employees and private-sector employees with a similar set of observable characteristics. CBO sought to account for differences in individuals’ level of education, years of work experience, occupation, employer’s size, geographic location (region of the country and urban or rural location), and various demographic characteristics (age, sex, race, ethnicity, marital, status, immigration status, and citizenship).

There are other factors that may affect employees’ compensation but that are not available from surveys and thus were not considered. For example, even among workers with similar observable characteristics, employees of the federal government and the private sector may differ in characteristics such as motivation or effort that are not easily measured but which can matter a great deal for individuals’ compensation.

A key issue in compensation policy is the ability to recruit and retain a highly qualified workforce. An assessment of how changes in the way the government compensates its employees would affect its ability to recruit and retain the personnel it needs is beyond the scope of this analysis.

Characteristics of Federal Employees

The federal civilian workforce differs in some significant ways from the private-sector workforce. For example, thirty-three percent of federal employees work in professional occupations, such as the sciences or engineering, compared with only 18 percent of private-sector employees; in contrast, 26 percent of private-sector employees work in occupations such as retail sales, production, or construction, compared with only 7 percent of federal employees. Professional occupations generally require more formal training or experience than do the occupations more common in the private sector.

Partly because of that difference, the average age of federal employees is four years higher than that of private-sector employees (45 versus 41). The greater concentration of federal workers in professional occupations also means that they are more likely to have a bachelor’s degree: 51 percent of the federal workforce has at least that much education, compared with 31 percent of the private-sector workforce. Likewise, 21 percent of federal employees have a master’s, professional, or doctoral degree, compared with 9 percent of private-sector employees.

Wages

After accounting for the differences in job-related and demographic characteristics described above, workers whose highest level of education was a bachelor’s degree earned roughly the same hourly wages, on average, in both the federal government and the private sector. However, federal civilian workers with no more than a high school education earned about 21 percent more, on average, than similar workers in the private sector, whereas federal workers with a professional degree or doctorate earned about 23 percent less, on average, than their private-sector counterparts.

Overall, the federal government paid 2 percent more in total wages than it would have if average wages had been comparable with those in the private sector, after accounting for certain observable characteristics of workers.

The span between the wages of high- and low-paid workers was narrower in the federal government than in the private sector, even when employees’ education and other observable traits were accounted for. The narrower dispersion of wages in the federal sector may reflect the constraints of federal pay systems, which make it harder for managers to reward the best performers or to limit the pay of poor performers.

Benefits

The cost of providing benefits—including health insurance, retirement benefits, and paid vacation—for public and private-sector employees differed much more than wages.

Average benefits for federal employees were 72 percent higher for those with no more than a high school education and were 46 percent higher for those with just a bachelor’s degree. Among employees with a doctorate or professional degree, by contrast, average benefits were about the same in the two sectors.

On average for workers at all levels of education, the cost of hourly benefits was 48 percent higher for federal civilian employees than for private-sector employees with certain similar observable characteristics, CBO estimates.

The most important factor contributing to differences between the two sectors in the costs of benefits is the defined-benefit pension plan that is available to most federal employees. Such plans are becoming less common in the private sector. CBO’s estimates of the costs of benefits are much more uncertain than its estimates of wages, however, primarily because the cost of defined-benefit pensions that will be paid in the future is more difficult to quantify and because less-detailed data are available about benefits than about wages.

Total Compensation

Among employees with a high school diploma or less education, total compensation (wages and benefits) costs averaged 36 percent more in the federal sector. Among people whose education culminated in a bachelor’s degree, the cost of total compensation averaged 15 percent more for federal workers than for similar workers in the private sector. By contrast, among people with a professional degree or doctorate, total compensation costs were 18 percent lower for federal employees, than for similar private-sector employees, on average.

Overall, the federal government paid 16 percent more in total compensation than it would have if average compensation had been comparable with that in the private sector, after accounting for certain observable characteristics of workers.

More Information About CBO’s Analysis

CBO’s findings vary from the results of other recent studies of public- and private-sector wages. That variation is largely attributable to differences in analytic methods. More complete explanations of CBO’s methodology are presented in the following working papers, which are available on CBO’s Web site:

This study was prepared by Justin Falk of CBO’s Microeconomic Studies Division.