Why the Public Sector Employee Bubble Has Got to Pop

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The “Occupy” movement got a lot press for representing the interests of the “99%” versus the “1%.”

Even President Obama’s comment that “the private sector is doing fine” echoes this misplaced sentiment.

Yet, I believe that Obama has it exactly backward.

It’s the “public sector” that’s doing fine. In fact, I’d argue that it’s the 22 million public sectors workers in the United States — the “15%” — that are part of the economic “elite” who have benefitted disproportionately from government largesse.

And that’s part of a process that started long before the financial crisis of 2008.

Today, the “15%” get paid more; their benefits are better; and they have spent the last 30 years voting themselves big pay increases, while a big chunk of the private sector has been slipping down the ladder of economic opportunity.

Here’s another way to think about the European debt crisis. The equivalent of the “15%” in the United States is closer to “40%” in places like Greece and Italy.

And we all know where that road takes us.

As the examples of Greece — and California — clearly show, the public sector employee bubble needs to pop.

The Public Sector Rip-off

While times are tough for everybody, it’s hard not to feel that public sector workers are ripping us off.

And it’s not just stories like the one in the The Wall Street Journal that famously reported that California prison guards are paid more over a lifetime than an average Harvard grad. Or that some lifeguards in Orange County, Calif., are earning more than $200,000 a year.

Here’s why…

First, the public sector is a growth industry like few others. Despite the layoffs during the past two years, the public sector still has 7% more workers than it had at the beginning of 2000. The private sector, on the other hand, has about 1% fewer jobs.

Second, public sector workers make more money. According to a recent study, the average salary in the private sector is $47,164, while in the public sector it is $73,060. And that’s not counting generous benefits. According to the Congressional Budget Office, the average benefits package for federal workers, including health and retirement benefits, costs taxpayers a whopping 48% more on average than what private sector workers get in comparable jobs.

Third, the unemployment rate in the public sector is 4.2%. That’s half the private sector levels of 8.2%. As Andrew Biggs of the American Enterprise Institute points out, the public sector unemployment rate “is the lowest of any industry or class of worker, even including the growing energy industry.”

Fourth, public sector workers have more job security. A USA Today analysis of the federal “job for life” issue in July 2011 found that in 2010, federal workers enjoyed a 99.43% job security rate. You were six times more likely to get fired working in the private sector than if you collect your paycheck from the federal government. In many government agencies, you were more likely to die of natural causes than lose your job.

Fifth, public sector workers get more raises. State and local government compensation has increased by about 40% since 1980, compared to about a 20% increase in the private sector. Even after the freeze of federal employees’ wages in 2010, most employees were getting automatic wage increases based on seniority.

Sixth, many public sector workers get to retire early with full pensions, embarking on lucrative second careers. One dean at Stanford University told me that some Stanford cops — usually a retired state police officer with a state pension that pays nearly the same salary as a full-time employee — takes home more than the some of the university’s top professors doing Nobel Prize caliber research in the middle of Silicon Valley.

And seventh, while public sector workers get paid a lot, they, ahem, aren’t always society’s “best and brightest.” And I don’t just mean the nice lady at your local post office. This is about folks who are supposed to have more upstairs.

Stanford economics professors Carolyn Hoxby and Andrew Leigh found that the share of smart teachers, as measured by SAT scores, has declined over time from about 5% of teachers in 1963 to only 1% in 2000. Public sector teachers not only get paid more than they used to. They’ve also, on average, become a lot dumber.

A Return to Normalcy?

In fact, with all of the non-salary related benefits, and increased job security, you’d think public sector workers would accept lower pay than their private sector counterparts. After all, what could the private sector offer you that’s better? Maybe that’s why public sector workers are only about one-third as likely to leave their jobs voluntarily as private sector workers.

In fact, I’d argue that public sector workers should be paid 10% less than their private sector counterparts. Once you throw in the job security and better benefits, they would probably still be better off than a private sector worker who can be fired at her boss’ whim.

Although this is politically unfeasible, it’s worth going through the math, purely as an intellectual exercise.

One expert calculated that a 5% wage reduction for all public employees in California would cut state spending by $1.33 billion, reducing California’s 2011 state budget deficit by nearly 15%.

So, imagine if instead of making an average of $73,060 per year, an average public sector worker would make, say $42,447 — 10% less than the $47,164 that she would earn in the private sector. A back of the envelope calculation shows that California’s budget deficit would disappear in one fell swoop.

Note that this exercise sound unreasonable only because it implies a drop of more than 40% from currently ludicrous levels.

After all, “everyone knows” that the kind of austerity that would drop the salaries of those Orange County lifeguards to $120,000 from $200,000 violates the norms of human decency.

The serious point is this…

Whether it is the recent Wisconsin vote that defeated an attempt to recall the state’s budget-cutting governor in the United States or the growing frustration with the European debt crisis, taxpayers across the globe have had enough.

The game is up, and it is time for the public sector workers to get with the program.

The public sector employee bubble has got to pop.


Nicholas A. Vardy
Editor, The Global Guru

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