Do State and Local Governments Offer Competitive Compensation?

• In Event: Determinants of State and Local Fiscal Policy

Abstract

We examine the relative compensation of state and local government workers compared to their private sector counterparts. Augmenting standard data sources on worker compensation with information on worker benefit provision derived from unpublished Bureau of Labor Statistics data and asset-based methodologies for valuing non-wage benefits, we document a significant erosion in the public sector compensation premium over the past fifteen years. While state and local workers received approximately 15 percent higher total compensation than comparable private sector workers in 2010, our evidence indicates this differential had been eliminated by 2024. This convergence stems from multiple factors: public sector wages have fallen steeply relative to private sector wages since the Great Recession, public sector retiree health care benefits have diminished, and the historically greater job stability in government employment has eroded. We also document that the use of cash accounting for defined benefit pensions, as opposed to accrual accounting, significantly skews upward the trend in relative public sector compensation in the Employment Cost Index—a principal source of information on compensation trends in the U.S. These findings have significant implications for public sector recruitment, retention capabilities, and ultimately, for the administrative capacity of state and local governments to effectively implement policies and deliver essential services.

Authors

• Byron Lutz, Federal Reserve Board

• David Ratner, Federal Reserve

• Louise Sheiner, Brookings Institution