Why Federal Pay Always Outpaces Private-Sector Pay

August 16, 2006

Last weekend’s Washington Post features an excellent piece from economist Chris Edwards on rapid growth in federal employee pay in recent years, which has dramatically outpaced private-sector pay. From the piece:

We’ve often heard that civil servants forgo higher private-sector salaries in order to serve the nation selflessly. Many federal bureaucrats are indeed hardworking, but new statistics show that they are anything but underpaid.

The Bureau of Economic Analysis released data this month showing that the average compensation for the 1.8 million federal civilian workers in 2005 was $106,579 — exactly twice the average compensation paid in the U.S. private sector: $53,289. If you consider wages without benefits, the average federal civilian worker earned $71,114, 62 percent more than the average private-sector worker, who made $43,917.

The high level of federal pay is problematic in and of itself, but so is its rapid growth. Since 1990 average compensation for federal workers has increased by 129 percent, the BEA data show, compared with 74 percent for private-sector workers. (Full piece here.)

This story about the growing pay of federal employees compared to private sector workers is an old one. The Tax Foundation began publishing studies telling a similar story in the late 1960s. Here are two charts from our comprehensive 1969 examination of growing federal payrolls.

The first table compares growth in the number of federal employees, and average pay per employee, compared to private industry. Federal employment outpaced the private sector by both measures between 1960 and 1967:

The second table compares the staggering growth in federal employee pay to salary growth in other industries. While federal pay skyrocketed by 74.9 percent in the decade preceding 1967, factory workers’ pay rose 39.5 percent, while the Consumer Price Index rose just 18.9 percent:

As every economist knows, wages always rise fastest in rapidly growing industries. That’s because in expanding industries, workers quickly become scarce, and their wages get bid up in the marketplace. And that’s exactly what we’ve seen with the rapid expansion of federal government programs during the Vietnam War and Great Society era of the 1960s, and during the rapid expansion of homeland security efforts and the Iraq War since 9/11.

Whenever the scope of federal programs expands, having to bid away talent from the private sector means skyrocketing federal pay will always be an inevitable consequence. In general, doubling the size of federal programs will much more than double their cost to society—not counting the economic costs of rising tax burdens that must accompany spending hikes in the long-run.

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