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Private versus Public Sector Employment and Compensation



Executive Summary


Estimating private sector productivity is easier than estimating government productivity. In the private sector, productivity is the sum of all goods and services (as measured by Gross Domestic Product) divided by the number of workers. In the public sector, however, there is no reliable measure on the value of “goods and services” received because prices are not set on a voluntary basis. Rather, elected legislatures determine taxes that citizens pay to fund government.


Unfortunately, citizens have no direct way to judge whether they are getting their “bang for the buck” for the goods and services the public sector provides. The data and analysis shown below provides an indirect way to better understand the productivity of the public sector by examining government employment and compensation levels and ratios over time and across the 50 states.


The basis of comparison is the examination of the ratio of government jobs and compensation relative to the private sector. For any given state the ratios are compared to the national average. There is nothing magical about the national average; however, since it represents an amalgam of 50 states, one can reasonably assume that being above the national average indicates “low productivity” among the state government’s workforce and vice-versa.


The first productivity metric to examine is employment levels. In 2016, state and local government employed 15.7 people for every 100 people employed by the private sector—hereafter referred to as the “employment ratio.” The states with the highest employment ratio were Wyoming (29.6), New Mexico (25.1), and Alaska (24.5) while the states with the lowest employment ratio were Nevada (11.7), Pennsylvania (12.1), and Massachusetts (12.4).


The second productivity metric to examine is compensation levels. In 2016, state and local government compensation was $73,081 per job while private sector compensation was $64,362 per job. As a result, the average state and local government job paid 13.5 percent higher than the average private sector job—hereafter referred to as the “compensation ratio.” The state with the highest compensation ratio was Nevada (54 percent), Alaska (39 percent), and Rhode Island (34 percent) while the states with the lowest compensation ratio were Kansas (-6 percent), Colorado (-5 percent), and North Dakota (-4 percent).


More specifically, compensation is comprised of two components. The first part is the wage or salary paid to the employee for services rendered. In 2016, state and local wages and salaries paid were $49,683 per job while private sector wages and salaries were $54,062 per job. As a result, the average state and local government job paid wages and salaries that were -8 percent lower than the average private sector job—hereafter referred to as the “wages and salaries ratio.” The states with the highest wages and salaries ratio were Rhode Island (13 percent), Nevada (12 percent), and Hawaii (11 percent) while the state with the lowest wages and salaries ratio was Georgia (-21 percent), New Hampshire (-18 percent), and Kansas (-18 percent).


The second part is benefits, such as health insurance and retirement, which are paid in addition to a wage or salary. In 2016, state and local government benefits were $23,398 per job while private sector benefits were $10,299 per job. As a result, the average state and local government job paid benefits that were 127 percent higher than the average private sector job—hereafter referred to as the “benefits ratio.” The state with the highest benefit ratio was Nevada (286 percent), New York (247 percent), and California (210 percent) while the states with the lowest benefit ratio were Colorado (40 percent), Indiana (45 percent), and West Virginia (46 percent).


The State and Local Government Workforce Productivity Index is created by taking the percentage point difference in the employment ratio and compensation ratio relative to the national average and then summing them the two together. According to the index, the least productive states are Nevada (36 points), Alaska (34.4 points), and Wyoming (24.9 points) while the most productive states are Indiana (-17.7 points), Colorado (-16.9 points), and Kansas (-15.3 points).


Overall, while circumstances vary by state, state and local government workers are generally not overpaid when it comes to wages and salaries. Benefits, however, are a very significant concern. In the long run, taxpayers would appear to be better off paying workers higher wages and salaries in exchange for benefit reform--such as moving away from the current defined benefit system toward a 401(k)-style defined contribution system--since government pension systems are woefully underfunded (pdf).


Finally, policymakers and taxpayers should be aware that another way to solve these challenges is to grow the private sector boosting both income and employment. Policymakers must pursue pro-growth economic policies—such as fewer regulations, lower taxes, and secure property rights—that will promote economic development allowing private sector businesses to better compensate and hire additional employees. Such policies are a win-win for both the private and public sectors.


Introduction


According to the U.S. Department of Commerce’s Bureau of Economic Analysis, in 2016, state and local governments employed 19,480,487 people (full and part time), or 15.6 percent of all private employment. Of the total, state government employed 5,300,855 people and local governments employed 14,179,632 people. In the aggregate, they were paid $1,423,647,395,000 in total compensation, or 15.3 percent of private earnings (wages and salaries plus benefits).

 

However, aggregate statistics are not very useful when it comes to informing public policy. Rather, policymakers need relative metrics to judge whether or not a particular state has too many government employees or if they are paid too much, i.e., by their level of productivity. As such, this study explores various private versus public sector ratios, namely employment and compensation ratios, over time and across states.

 

State and Local Government Employment Ratio

 

The state and local employment ratio is derived by dividing state government employment by private employment. In 2016 the average U.S. state and local government employment ratio was 15.7 meaning 15.7 people worked for state and local government for every 100 people employed by the private sector.

 

Chart 1 shows that Wyoming has the highest state and local government employment ratio at 29.6 people for every 100 people employed by the private sector--followed by New Mexico (25.1), Alaska (24.5), Mississippi (23.9), and Oklahoma (22.1). On the flip side, Nevada had the lowest state and local government employment ratio at 11.7 for every 100 people employed by the private sector--followed by Pennsylvania (12.1), Massachusetts (12.4), Florida (12.6), and Rhode Island (12.6).

   Chart 1 State and Local Government Employees per 100 Private Sector Employees Rank 2016.JPG


State and Local Government Compensation Ratio

 

The state and local compensation ratio is derived by dividing state and local government compensation per job by private sector compensation per job. In 2016, state and local government compensation was $73,081 per job while private sector compensation was $64,362 per job. As a result, public sector compensation was 14 percent higher than private sector compensation.

 

 

Chart 2 shows that Nevada has the highest state and local government compensation ratio at 54 percent--followed by Alaska (39 percent), Rhode Island (34 percent), California (32 percent), and Hawaii (30 percent). On the flip side, Kansas has the lowest state and local government compensation ratio at -6 percent--followed by Colorado (-5 percent), North Dakota (-4 percent), Indiana(-3 percent), and Georgia(-1 percent).

   Chart 2 State and Local Government Compensation as a Percent of the Private Sector Rank 2016.JPG


State and Local Government Wages and Salaries Ratio

 

The state and local wages and salaries ratio is derived by dividing state and local government wages and salaries per job by private sector wages and salaries per job. In 2016, state and local government wages and salaries were $49,683 per job while private sector wages and salaries were $54,062 per job. As a result, public sector wages and salaries were -8 percent lower than private sector wages and salaries.

 

Chart 3 shows that Rhode Island has the highest state and local government wages and salaries ratio at 13 percent--followed by Nevada (12 percent), Hawaii (11 percent), Alaska (5 percent), and Oregon (4 percent). On the flip side, Georgia has the lowest state and local government wages and salaries ratio at -21 percent--followed by New Hampshire (-18 percent), Kansas (-18 percent), North Dakota (-17 percent), and Virginia (-17 percent).

  Chart 3 State and Local Government Wages and Salaries as a Percent of the Private Sector Rank 2016.JPG


State and Local Government Benefits Ratio

 

The state and local benefits ratio is derived by dividing state and local government benefits per job by private sector benefits per job. In 2016, state and local government benefits were $23,398 per job while private sector benefits were $10,299 per job. As a result, public sector benefits were 127 percent higher than private sector benefits.

 

Chart 4 shows that Nevada has the highest state and local government benefit ratio at a whopping 286 percent--followed by New York (247 percent), California (210 percent), Alaska (188 percent), and Pennsylvania (150 percent). On the flip side, Colorado has the lowest state and local government benefit ratio at 40 percent--followed by Indiana (45 percent), West Virginia(46 percent), Kansas (51 percent), and Minnesota (56 percent).


Chart 4 State and Local Government Benefits as a Percent of the Private Sector Rank 2016.JPG


 

State Government Ratios


In 2016, the average state government employment ratio was 4.3 state government workers for 100 private sector workers. Hawaii had the highest state government employment ratio at 14--followed by Alaska (9.6), West Virginia (9.3), New Mexico (9.1), and Delaware (8.4). On the other hand, Illinois had the lowest state government employment ratio at 2.8--followed by Florida (2.8), Oregon (2.9), New York (2.9), and Nevada (3.1).


In 2016, the average state government compensation ratio was 19 percent higher than the private sector. Alaska had the highest state government compensation ratio at 55 percent--followed by Nevada (51 percent), Vermont (48 percent), California (41 percent), Iowa (36 percent). On the other hand, Georgia had the lowest state government compensation ratio at -0.4 percent--followed by Indiana (1 percent), Missouri (1 percent), New Hampshire (3 percent), and Colorado (3 percent).


In 2016, the average state government wages and salaries ratio was -4 percent lower than the private sector. Vermont had the highest state government wages and salaries ratio at 25 percent--followed by Alaska (16 percent), Iowa (15 percent), Nebraska (14 percent), and New Mexico (13 percent). On the other hand, Georgia had the lowest state government wages and salaries ratio at -21 percent--followed by New Hampshire (-19 percent), Missouri (-18 percent), Virginia (-14 percent), and Pennsylvania (-13 percent).


In 2016, the average state government benefits ratio was 137 percent higher than the private sector. Nevada had the highest state government benefits ratio at 294 percent--followed by New York (276 percent), California (234 percent), Alaska (225 percent), and New Jersey (167 percent). On the other hand, West Virginia had the lowest state government benefits ratio at 54 percent--followed by Colorado (55 percent), Indiana (61 percent), Minnesota (70 percent), and Arkansas (72 percent).


Local Government Ratios


In 2016, the average local government employment ratio was 11.4 local government workers for 100 private sector workers. Wyoming had the highest local government employment ratio at 22.1--followed by Mississippi (16.7), New Mexico (16), Oklahoma (15.8), and Kansas (15.3). On the other hand, Hawaii had the lowest local government employment ratio at 3.6--followed by Delaware (6.9), Rhode Island (7.6), Massachusetts (8.5), and Pennsylvania (8.5).


In 2016, the average local government compensation ratio was 12 percent higher than the private sector. Hawaii had the highest local government compensation ratio at 58 percent--followed by Nevada (55 percent), Rhode Island (39 percent), Alaska(29 percent), and California (29 percent). On the other hand, Kansas had the lowest local government compensation ratio at -12 percent--followed by Colorado (-8 percent), North Dakota (-8 percent), Utah (-8 percent), and Indiana (-4 percent).


In 2016, the average local government wages and salaries ratio was -10 percent lower than the private sector. Hawaii the highest local government wages and salaries ratio at 38 percent--followed by Rhode Island (19 percent), Nevada (14 percent), Florida (4 percent), and Oregon (4 percent). On the other hand, Utah had the lowest local government wages and salaries ratio at -24 percent--followed by Kansas (-23 percent), Georgia(-21 percent), North Dakota (-21 percent), and Texas (-19 percent).


In 2016, the average local government benefits ratio was 123 percent higher than the private sector. Nevada had the highest local government benefits ratio at 283 percent--followed by New York (241 percent), California (203 percent), Alaska (164 percent), and Pennsylvania (148 percent). On the other hand, Colorado had the lowest local government benefits ratio at 34 percent--followed by Indiana (38 percent), West Virginia (39 percent), Kansas(42 percent), and North Dakota (50 percent).


Additionally, within states these metrics can vary widely by county.


In 2016, the counties with the highest local government employment ratios included:

  • Sioux County, North Dakota (858)
  • Issaquena County, Mississippi (438)
  • King County, Texas (303)
  • Todd County, South Dakota (296)
  • Buffalo County, South Dakota (258)

 

In 2016, the counties with the lowest government employment ratios included:

  • Carson City, Nevada (1.6)
  • Butte County, Idaho (2.0)
  • Honolulu County, Hawaii (3.3)
  • Maui + Kalawao County, Hawaii (4.1)
  • Suffolk County, Massachusetts (4.4)

 

In 2016 the counties with the highest local government compensation ratios included:

  • Nemaha County, Nebraska (490 percent)
  • Carson City, Nevada (258 percent)
  • Daniels County, Montana (145 percent)
  • Caroline County, Maryland (126 percent)
  • Putnam County, New York (124 percent)


In 2016 the counties with the lowest local government compensation ratios included:

  • Clark County, Idaho (-73 percent)
  • Loving County, Texas (-73 percent)
  • Los Alamos County, New Mexico (-68 percent)
  • Butte County, Idaho (-65 percent)
  • Moore County, Tennessee (-58 percent)

 

Notes

 

This data must be used with caution when trying to estimate budget savings from effort to right-size a state's government workforce. For comparability purposes, this data includes all government workers regardless of funding source--whether it is from the General Fund, Dedicated Funds (such as the gas tax), or Federal Funds (such as unemployment insurance).


Tribal governments are classified as local governments. As a result, counties with significant tribal employment, such as casinos, will have very large local government to private sector ratios. This result is compounded in low population counties.


Due to restricted data availability, local government employment and earnings data for some counties and years had to be either interpolated or extrapolated (especially, though not exclusively, for smaller counties). While we strive to make the best estimates possible, please contact us if you have any questions on the results of a specific county(ies).


Methodology


The employment and compensation data used in this study are from the Bureau of Economic Analysis’ Regional Economic Accounts. All calculations were performed by the authors. The data exclude farm and proprietorship income as well as dividends, interest, and rents, and personal current transfer receipts. The data were adjusted for inflation using the GDP deflator.


Calculating State and Local Government Compensation Ratios


All data are from the Bureau of Economic Analysis, Regional Economic Accounts, “State Annual Personal Income” interactive database, which is available at http://www.bea.gov/regional/spi/


1. To derive total supplemental benefits for any industry, find the industry line in Table SA05N (Personal Income by Major Source and Earnings by NAICS Industry) and subtract the same industry line from Table SA07N (“Wage and Salary Disbursements by NAICS Industry”).


2. Average private sector compensation is derived by adding “private wage and salary disbursements” (see table SA07N) and “supplements to wages and salaries” (see table SA05N), then dividing by private sector employment. Total supplemental income for private sector employees can also be derived by taking “private earnings” (see table SA05N) and subtracting “private wage and salary disbursements” (see table SA07N) and “nonfarm proprietors income” (see table SA05N).


3. Private sector employment comes from Table SA25N (“total full-time and part-time employment by NAICS industry”), and equals “private employment” minus “nonfarm proprietors employment”. 


4. Total state and local government employee compensation is “wage and salary disbursements” (see table SA07) plus “supplemental income," which is equal to “personal income” (see table SA05N) minus “wage and salary disbursements”.


5. State and local government employment is from Table SA25.


6. Number of state and local government jobs per 100 was calculated by dividing total state and local government employment by total private employment.


7. Compensation ratios are created by dividing the average state and local government compensation by job by the average private sector compensation per job.


8. Wage and salary ratios are created by first dividing wage and salary disbursements for state and local government workers (see table SA07N) by state and local government employment to derive an average state and local government wage and salary per job. Next, the same is done with private sector jobs (see table SA07N) to obtain an average private sector salary. Finally, the average state and local government salary per job was divided by the average private sector salary.


9. Benefit ratios for state and local government employees are created by first subtracting state and local “wage and salary disbursements by NAICS industry” (see table SA07N) from “personal income by major source and earnings by NAICS industry” (see table SA05N) to derive total supplemental benefits for state and local personnel. Next, this remainder is divided by total state and local government employment to obtain average public sector benefits. The same is done with private sector employees (see table SA05N), to obtain average private sector benefits. Finally, public sector benefits are divided by private sector benefits to obtain a public sector employee benefit ratio.


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