government wage differentials revisited

Government Wage Differentials Revisited

W I L L I A M J. M O O R E

Louisiana State University, Baton Rouge, L A 70803

J O H N RAISIAN*

Hoover Institution, Stanford, CA 94305

This paper updates studies done in the mid-1970s concerning the measurement o f government wage differentials in the United States. Based on an analysis o f two large micro data sets, we reached the following conclusions. First, as a group, government employees earned a small wage premium of approximately 2 to 3 percent during the 1970s and early 1980s. Second, the government wage premium was substantially higher for federal employees and for women employees. These findings are consistent with earlier studies.

I. Introduction

This paper updates and expands the earlier work of Smith (1976a, 1976b, and 1977b) and Kiefer and Smith (1977), much of which is summarized in Smith (1977a), concerning the measurement of government wage differentials in the United States. By examining data from the late 1970s and early 1980s, we attempt to answer the following questions: Are government workers currently overpaid? Has the government wage premium declined or increased over time? Which government workers are overpaid? Why are government workers overpaid?

In order to compare our results with Smith's, which were based on data from the late 1960s and early 1970s, we use similar estimating techniques and model specifications throughout most of our analysis. Our data, however, enable us to improve on Smith's measurements of government wage differentials in several important ways. Through the use of pooled, cross-sectional, micro data, we are able to consider the influence of cyclical fluctuations on the estimated wage premiums and to identify trends in these wage premiums. We also provide fixed effects estimations to better control for unobserved skill differences between public and private sector employees. Finally, we are able to control for the influence of the size of the firm/establishment on the estimated wage premiums. Each of these extensions of Smith's research improves our understanding of the nature and causes of government wage differentials.

*We thank Eanswythe Leicester and Ken Emery for their research assistance and Diane Kurtz for her clerical assistance.

JOURNAL OF LABOR RESEARCH Volume Xl l , Number 1 Winter 1991

14 JOURNAL OF LABOR RESEARCH

After adjusting for differences in human capital variables, personal characteristics, and locational factors, we have found that government workers as a whole did not earn a significant wage premium from 1970 to 1979. During the early 1980s, according to our estimates, government workers were paid a mod- est wage premium. Our results suggest that the government wage differential varies substantially between groups of workers and over time. It appears that only federal employees earned a significant wage premium over the entire time period, and their premium seems to have declined during recent years. In order to estimate " t r u e " government wage differentials, we have made every attempt to control for the influence of other factors on public/private relative wage rates during the period examined.

II. Major Hypotheses Concerning Government Wage Differentials

Five major hypotheses have been proposed to explain the likelihood of positive government wage differentials in the United States.

Hypothesis 1. The Theory of Compensating Wage Differentials. This theory asserts that workers receive compensating wage differentials when they accept jobs with undesirable nonwage characteristics, holding the worker 's characteristics constant. ~ Data with respect to nonpecuniary aspects of employment in the public and private sectors are sparse, but evidence suggests that nonwage benefits and conditions of employment have been superior in the public sector for some period of time.2

In this study, we include some new variables to proxy the influence of nonpecuniary aspects of employment that were not available to Smith. We use the long-term average unemployment rate in an industry to capture the influence of relative job security. We also include the size of firm/establishment as another measure of nonwage aspects of employment.

Hypothesis 2: Wage Premiums Attributable to Skill Differentials. Long-run wage differences between occupations should be "equal izing." That is, skilled jobs should pay more than unskilled jobs by an amount necessary to cover the costs involved in acquiring skill - - training costs and income foregone w plus a surplus allowing for a return on investment in skills equal to the return attainable on alternative investments. ' Like Smith (1977a), we will attempt to control for quality differences through the use of human capital variables in our wage equations. In addition, we estimate a fixed effects model that attempts to control for unobserved skill differences between individuals.

Hypothesis 3: Wage Premiums and Short-Run Market Disequilibrium. Interindustry wage differentials for a given grade of labor may be created due to the inelasticities of labor supply? We attempt to test this hypothesis by including a cyclical proxy variable based on industry unemployment rates.

Hypothesis 4: Unionism and Government Wage Differentials. The close cor- relation between the growth of collective bargaining and relative pay in the public

WILLIAM J. MOORE and JOHN RAISIAN 15

sector during the late 1960s and early 1970s gave rise to a union-based theory of government wage differentials. There are actually two separate, but related components to this theory. Public sector unions, like private sector unions, have the potential to control the labor supply in such a way that a wage level is obtained above the competitive level. 5 Wellington and Winter (1971) contended that public sector unions may have greater ability than private sector unions to raise their relative wage rates because of the relatively low elasticity of demand for labor in the public sector. 6 This argument has been challenged by Mitchell (1979) and Lewin (1977), who observed that certain institutional characteristics of public sector unions may cause their relative wage effects to be smaller than the wage effects of private sector unions. The empirical evidence accumulated so far suggests that public sector unions have attained smaller relative wage gains for their members than have private sector unions. 7

Under normal conditions, one might expect that government wage differentials created by the superior bargaining power of public sector unions would tend to decline over time. The existence of government wage premiums would produce the following results: a relatively low quit rate for public employees, 8 the formation of queues of applicants seeking public sector jobs, 9 and competitive rent-seeking behavior by applicants for public sector jobs. ~° Under these conditions, cost-minimizing public employers, like profit-maximizing private employers, would select the highest skilled applicants from the queue in order to minimize costs. 1~ The net result of these activities would be a relative increase in the quality of the public sector work force, a decline in union relative wage premiums in the public sector, and a decline in the associated government wage premium. Krueger (1988) has recently shown that the number of job applica- tions per worker and the average quality of applicants for federal jobs are positively related to the ratio of federal to private sector earnings. Institutional characteristics unique to the public sector may cause this process to develop gradually. 12

Public sector unions also may create government wage differentials through political action rather than through collective bargaining. According to public choice theory, if voters have imperfect information regarding the benefits and costs of government programs and if there is not a proportional relationship between the taxes an individual pays and the benefits received, then the door is open for special interest groups both within and outside the public sector to form and to lobby for policies and programs that directly benefit themselves. ~3

The ability of public sector unions to maintain government wage premiums would appear to be limited by the "voice" and "exi t" behavior of taxpayers. 1, Over time, taxpayers are likely to become aware of such premiums and to respond by putting political pressure on elected officials or by leaving the government jurisdiction. It is expected that such limits to government wage differentials will be stronger at the local and state levels than at the federal level. State and local governments are unable to run deficit budgets, so public employee wage gains are more directly translated into tax increases. Also, it is less costly to relocate to a


new municipal jurisdiction or a new state than to leave the country. In our empirical analysis, we shall pay close attention to the role of unions in explaining government wage premiums both over time and between levels of government.

Hypothesis 5: Relative Discrimination and Government Wage Differen- tials. In addition to pressure from public unions, government employers have been under considerable pressure from civil rights and women's liberation groups to end wage and employment discrimination on the basis of race and sex. Legis- lative and personnel policies further limit discrimination in the government sector.'~ The existing empirical evidence shows that blacks and women earn less than white men in the public sector, but that the penalty is smaller in the public than in the private sector.16

If government employers follow a policy of paying white males their market wage and paying blacks and females wages above what they could earn in the private sector, the result will be an overall government wage differential, ceteris paribus. 17 In response to such premiums, minority workers will be attracted to the public sector. J s Because public employers are also under pressure to expand the size of their minority work force, it is likely that minority employment in the public sector will increase under these conditions.

Ironically, as the percentage of minority workers in the public sector rises in response to government wage premiums, the gross government wage differential tends to decline. While black and female workers are being paid a wage above their apparent opportunity wage in the private sector, they are still being paid a wage below that earned by white males in both sectors. Consequently, as the percentage of black and female employment rises in the public sector relative to the private sector, the average level of wages in the public sector relative to that in the private sector declines; i.e., the gross wage differential declines.

III. The Data

To empirically examine government wage differentials, we utilize two data bases: The Panel Study of Income Dynamics (PSID) for 1970-1979, '9 and the Current Population Survey (CPS) for 1979 and 1983 (May versions). For our analytical purposes, each source has its strengths and weaknesses.

The Panel Study of Income Dynamics is a panel data base containing several thousand households surveyed annually over an extended time period. We limited our time period to 1970-1979 because information on industry of work was not available prior to that time. Our PSID sample includes all heads of household, between the ages of 16 and 64, earning positive labor income over a calendar year. Public employees are those individuals who reported their industry of employment to be government, which we infer to be public administration. Finally, individuals with less than 12 months of job experience were omitted from the sample.

WILLIAM J. MOORE and JOHN RA1SIAN 17

The May versions of the 1979 and 1983 CPS contain information on worker tenure within a firm, the size of the firm and establishment, and whether a public administration worker is employed by the federal, state, or local government. Our CPS sample consists of all employed individuals between the ages of 16 and 65. Public employees are those who reported public administration as their industry of employment. Using the CPS data, we can estimate the government wage premium by level of government as well as examine the influence of firm and establishment size on such wage premiums.

IV. The Models and the Empirical Results

In our empirical analysis o f government wa~ ~ differentials, we employ three types of models. The first two models are similar ~o those used by Smith (1977a and 1977b), and we estimate a fixed effects model based on our panel data.

Model I: Basic Human Capital Earnings Equation. To estimate the average government wage premium for 1970-1979 based on PSID data and 1979-1983 based on CPS data, we use the following human capital earnings model, s°

ln(W/P),, = 7o + 7~HC.?, + 7~PC,, + 73LOC,, + 7,GOE, + 7sUN,, + 7~UIND, + 77AVUINDi + 7sT + e,, (1)

where ln(W/P), is the natural logarithm of the ith individual's real hourly wage where P represents the national CPI and t refers to the year the observation was taken; HC is a vector of human capital characteristics possessed by the individual; PC is a vector of personal characteristics; LOC is a vector of locational variables associated with the individual; GOV is a dummy variable having the value of one if the individual is a public employee and zero if not; UNis a dummy variable having the value of one if the individual belongs to a union in the PSID sample or is covered by a collective bargaining contract in the CPS sample and zero if not; UIND is the industry unemployment rate corresponding to the individual (I-digit level); A VUIND indicates the long-term average industry unemployment rate for the period 1970-1979 corresponding to the individual; T is a simple trend variable; and e,, is a random disturbance term.

The specific variables used to control for the effect o f human capital on wages include education, current job tenure, current job tenure squared, total work experience (i.e., age minus education minus six), total work experience squared, and part-time versus full-time work status. As a control for personal characteristics, we include dummy variables for race, sex, veteran status, education, and blue-collar jobs. For the locational characteristics vector, we include regional dummy variables and a dummy variable (FARAWAY) that has a value o f one if the individual resides more than 30 miles f rom the nearest city. These variables are standard in the literature. ~l

Under this specification, the estimated value o f 7, provides an indication of the effect of public employment status on relative wages. Specifically, the percentage government wage differential, G, is defined as G = exp(~/0 - 1. When we


estimated equation (1) using a PSID sample for 1970-1979, we found that government workers as a group earned a statistically insignificant 1.54 percent wage premium. 22 In contrast, when we estimated equation (1) by OLS using a CPS sample for two years pooled together, 1979 and 1983, we found that government workers received a statistically significant 3.7 percent wage premium. 23 Because of the differences in the PSID and CPS samples and model specifications, these results should not be interpreted to imply that the wage premium for government workers has increased significantly between these two periods. We estimated separate wage equations for 1979 and 1983 based on CPS data and found no significant appreciation in the estimated union wage premium for these years.

Mode l II: Decomposi t ion Analysis . The dummy variable approach used to estimate the government wage differential in equation (1) is fairly restrictive. It assumes that the coefficients for the human capital, personal characteristic, and locational variables are the same for public and private workers and that the effect of sector of employment on lnW is simply additive. Using a technique developed in the discrimination literature, we can decompose the gross wage differential between groups into a component that is due to difference in the mean values of the independent variables and a component that reflects differences in the coefficients (either slope and intercept) attaching to these variables. 2'

The first step in this technique is to estimate equation (1) for separate samples of government (g) and private sector (p) groups of employees. For simplicity, we can write equation (1) in the following general form:

In W, = ~ B , X , + ec (2)

lnW~ = EB,,X; + eo, (3)

where subscripts g and p denote government and private sectors; lnW~ is the natural log of observed wages; X is a vector of attributes that determine earnings; B is a vector of estimated parameters which indicate how the attributes are rewarded; and e is an error term assumed to have the usual properties.

The difference in observed mean earnings between the public and private sectors is then decomposed as follows:

lnW~ - lnW~ = ~B,, (X~ - X , ) + ~(BR - B,,) Xe, (4)

where X, and X~ are mean values of the explanatory variables. The interpretation of equation (4) is straightforward. The wage gap contains two components: an endowment part that comes from differences in average values of back- ground attributes, EB,,(X, - X A , and a coefficient (i.e., rent) part that reflects differences in pay structures, ~(B, - B,)..Y,. As written in equation (4), the coefficient or rent portion is the difference between the mean wages of public employees if they were paid according to the pay structure of the private sector but retained their own characteristics, ZB,,.Y,, and the observed mean wage of public sector workers, EB, X,. 25

Table 1 presents a summary of our decomposition analysis of the gross wage differential between government and private workers based on the PSID for the

W I L L I A M J . M O O R E a n d J O H N R A I S I A N 19

1970-1979 period and the CPS for the 1979 and 1983 period. 2" The magnitudes in Table 1 are easily interpreted. Positive numbers indicate relatively higher wages for public employees, and negative numbers indicate the opposite. Any number multiplied by 100 gives the percentage effect of that variable on the relative wage of public employees. For example, the first number of the table, .0625, indicates that the superior human capital endowments of public administration workers cause them to have 6.25 percent higher wages than private sector workers, ceteris paribus. The estimated government wage differential for any group of workers is indicated by the value of G reported in the second row from the bottom of the table. In essence, the government wage differential (G) is simply the residual difference in gross wages after accounting for differences in endowments.

According to the decomposition results in Table 1, the estimated government wage differential for 1970-1979 is 3.99 percent. This is somewhat larger than the single equation dummy variable estimate of 1.54 percent reported above. As shown in Table 1, the decomposition estimate of the government wage differential for 1979-1983 is 2.63 percent. This is somewhat lower than the single equation dummy variable estimate of 3.7 percent noted earlier. Again,

Table 1

Decomposition of Government Wage Differentials

P S I D Es t ima te s E P S Es t ima te s

(1970-1979) (1979 & 1983)

E n d o w m e n t C o e f f i c i e n t E n d o w m e n t C o e f f i c i e n t

Var i ab le s E f f e c t E f f ec t E f f e c t E f f e c t

H u m a n C a p i t a l a .0625 .1286 .1830 .1022

UIND 0 .0275 - - - -

V e t e r a n .0033 .0055 .0093 .0024

B l u e - C o l l a r .0437 .0049 - .0011 - .0039

R a c e - B l a c k - .0084 .0029 - .0022 .0089

F e m a l e - .0028 .0210 .0155 .0367

L o c a t i o n b - .0068 .0528 .0040 .0093

U n i o n C o v e r a g e - . 0 0 5 7 - . 0 0 6 4 .0261 - . 0 5 9 2

T ime c .0008 - .0433 - .0014 .0110

O t h e r Var i ab le s d - . 0 0 2 1 - . 0 0 5 7

Sh i f t C o e f f i c i e n t - - .1479 - - - .0724

S u b t o t a l s E = .0845 G = .0399 E = .2355 G = .0263

To ta l s ( E + G ) ( E + G ) = .1244 ( E + G ) = .2613

aHuman capital variables include Education, Tenure, Tenure Squared, Total Experience, Total Experience Squared, and Part-time.

bLocation variables include South and West.

CTime in the PSID model is a simple trend variable having the value of one in 1970 and ten in 1979. Time in the CPS model is a zero-one dummy variable whose value is one for 1983 respondents and zero for 1979 respondents.

dOther variables in the PSID sample include A VUIND, Race-Other, and Faraway. For the CPS sample, other variables include Race-Other and Rural.


due to the differences in the PSID and CPS models and variable specifications, we are hesitant to make any statements concerning the changes in the estimated government wage premiums between the two periods. In general, however, our empirical results suggest that the overall government wage differential for both periods falls in the 2 to 3 percent range.

The decomposition model allows us to evaluate the significance of the hypotheses presented above in explaining both the gross wage differentials (E+ G) and the government wage premiums (G) reported in Table 1. Let us first consider the role of unions in explaining the observed differentials.

(1) The Union Hypothesis. The union coefficient effect reported for 1970- 1979 in Table 1 has a value of - .0064. This small value reflects the fact that there is no significant difference between the union variable coefficient in the public and private sector wage equations. The union coefficient effect for 1979 and 1983 reported in Table 1 has a value of - .0592, which reflects the fact that the union variable coefficient is greater in the private sector wage equation than in the public sector wage equation. These results cast serious doubts on the hypothesis that the superior strength of public sector unions is a primary cause of government wage premiums during the 1970s and early 1980s. ~7

The union endowment effect for 1970-1979 is - .0057. This reflects the fact that the extent of unionism in the public and private sectors during this period was about equal. During the late 1970s and early 1980s the extent of unionism in the public sector rose relative to that in the private sector. As a result, the union endowment effect is .0261 for the early 1980s. The increase in the relative degree of unionism in the public sector has caused the gross wage differential favoring public employees to rise, even though the union coefficient effect is essentially equal to zero. The positive and rising value for the union endowment coefficient could be interpreted as support for the "Union Hypotheses," with respect to gross wage differentials.

(2) The Market Forces Hypothesis. This hypothesis suggests that rapid increases in an industry's relative employment could lead to a temporary wage premium for that industry because of short-run inelasticities of labor supply. For 1970-1979, we proxied labor market conditions by deviations in the industry unemployment rate, UIND. As shown in Table 1, the coefficient effect for this variable has a value of .0275 for this period. It would appear that market forces tended to increase the government wage premium by approximately 3 percent during the 1970s. 28

(3) The Skill Differential Hypothesis. The market forces hypothesis further suggested that skill wage premiums may be positively related to short-run changes in employment. We did not explicitly test this hypothesis, but it is worth noting that significant wage premiums are associated with the human capital variables in our model. In Table 1, the coefficient effect for the human capital variables collectively is estimated to have a value o f . 1286 for 1970-1979 and. 1022 for the


early 1980s. The existence of skill wage premiums for public employees is consistent with the market forces hypothesis.

The presence of skill wage premiums could be expected to attract an excess of applicants for public sector jobs. Faced with an excess supply of applicants, it would be rational for public employers to use civil service exams and human capital measures to screen potential employees in order to minimize costs. In this case, it is likely that the average level of education for public employees relative to private employees would rise. Furthermore, we should expect to see a significant decline in government employee quit rates and an increase in job tenure relative to the private sector, ceterisparibus. In fact, the average level of education and job tenure in the public sector relative to the private sector did increase between 1970 and 1983. This is shown by the human capital endowment effects reported in Table 1. For 1970-1979 the human capital endowment effect is .0625. For 1979-1983 it rose to .1830. In terms of human capital characteristics, the public sector has become relatively more skilled over recent years. Dif- ferences in human capital characteristics explain a large proport ion of the gross wage differential that exists between the two sectors.

(4) The Relative Discrimination Hypothesis. We find considerable support for this hypothesis for women but not for black workers. The coefficient effect for the female variable has a value of .0210 for the 1970-1979 period and .0367 for the early 1980s. The positive value of these coefficients reflects the fact that in our samples government employers tended to pay relatively higher wages to women than do private sector employers. In contrast, the coefficient effect for the black variable was approximately zero for both periods. These findings are consistent with the hypothesis that government wage premiums are caused by the fact that government employers discriminate against women to a lesser extent than do private employers.

(5) Compensating Wage Hypothesis. We included the long-term unemployment rate in an industry (A VUIND) as a proxy for relative job security in our estimated private sector wage equation. This variable had a positive but insignificant coefficient, so we cannot conclude that job security is negatively related with the level of wages in the private sector. Unfortunately, we could not estimate the effect of the average level of unemployment on wages in the public sector to compare with the private sector estimates. We have no variability in the long-term unemployment rate among government workers and, therefore, it is constant and perfectly colinear with the constant term. While government workers experienced a long-term unemployment rate during 1970-1979 of 3 percent compared to 5.7 percent for private workers, we do not expect government wages to be appreciably lower as a result, given the insignificant relationship between wages and long-term unemployment observed in the private sector.

Thus far, we have ignored the effect of firm/establishment size on the relative wage of public and private sector employees despite the fact that Mellow (1982) has shown that employees in large firms or large plants tend to earn higher


wages than other workers, ceterisparibus. If the distribution of employment by establishment size differs between the public and private sectors, the omission of establishment size could bias the estimated relative wage premiums. Fortu- nately, establishment size data are available in our CPS sample. Examination of these data reveal that federal employment tends to be concentrated in establishments larger than those in the private sector, while local employment tends to be concentrated in establishments smaller than those in the private sector. State employment and private employment tend to be equally distributed by establishment size.

The results from adding firm and plant size control variables to our human capital model on the estimated government wage premiums are shown in Table 2. 29 The estimated coefficient for federal employees declines from .1347 (see column 4) to .0965 (column 5) after the size variables are added to the model. In contrast, the estimated LOCAL government employee coefficient changes from - . 0 4 3 5 (column 4) to - .0253 (column 5) when the size variables are added to the model. The inclusion of these control variables does not appear to influence the estimated STATE government employee wage coefficient.

According to Mellow (1982), one explanation for the observed positive relationship between wage rates and firm/plant size is that the latter serves as a proxy for undesirable working conditions. If this holds true for the public sector as well and if federal employees are concentrated in larger establishments, then estimates of the federal wage premium that do not control for this factor (such as those shown in columns 3 and 4 of Table 2 and in Smith (1977a)), are biased upwards. Similarly, estimates of the local wage premium that ignore the size variable are likely to be biased downward. It should be noted that the firm/ establishment control variables may proxy factors besides working conditions, such as specific human capital. The fact remains that federal and local government employees are distributed in different size establishments than private sector employees, and controlling for this effect has a significant influence on the estimated government wage differentials.

(6) Explaining the Negative Trend in Government Wage Differentials. As shown in Table 1, the coefficient effect on the time-trend variable during the 1970s has a value of - .0433. This value reflects the relative size of the time variable coefficient in the government ( - .005) and private (.002) wage equations (see Table 1). Taken literally, this finding indicates that wages declined in the public sector relative to the private sector by roughly 7 percent during the 1970s, ceteris paribus. How are we to account for this trend?

In most time-series wage equations, the trend variable is interpreted as reflecting the secular tendency for real wages to rise due to such factors as tech- nical progress. The small positive value for the time coefficient in the private wage equation is consistent with this interpretation. The negative time coefficient in the public sector wage equation may represent increased taxpayer opposition to budget and tax increases during this period.

W I L L I A M J. M O O R E and J O H N R A I S I A N 23

T a b l e 2

Wage Equation Regression Results for Firm and Plant Size Variables and the Government Wage Premium

by Level of Government Based on CPS Sample

Pooled Sample: 1979 and 1983 1979 1983

Variable Mean Coefficients Coefficients

(1) (2) (3) (4) (5) (6) (7)

FIRM 25-99 .119

FIRM 100-499 .121

FIRM 500-999 .049

FIRM 1000 + .335

PLANT 25-99 .229

PLANT 500-999 .058

PLANT 1000+ .111

GOVERNMENT .061 .0363 (.0081)

POSTAL .004

FEDERAL .021

STATE .015

LOCAL .021

EDUCATIONAL .096 - . 1123 (.0069)

INTERCEPT - .0477 (.0133)

R-SQUARE .452

STANDARD ERROR .396

SAMPLE SIZE 44,881

.0208 .0062 .0350 (.0074) (.0102) (.0106)

.0538 .0506 .0571 (.0072) (.0100) (.0103)

.0405 .0447 .0373 (.0100) (.0140) (.0141)

.0866 .0763 .0956 (.0061) (.0083) (.0087)

.0244 .0179 .0697 (.0064) (.0084) (.0087)

.1056 .0648 .1417 (.0094) (.0131) (.0134)

.1056 .0648 .1417 (.0094) (.0131) (.0134)

.0485 .0482 .0663 (.0288) (.0284) (.0278)

.1347 0965 .1187 .0759 (.0132) (.0131) (.0182) (.0187)

.0068 .0022 .0319 -.0223 (.0158) (.0156) (.0241) (.0205)

-.0435 -.0253 -.0609 .0094 (.0132) (.0130) (.0177) (.0189)

-.1122 -.1019 -.0815 -.1212 (.0069) (.0069) (.0096) (.0100)

- . 0 4 2 4 -.0348 .0125 -.2298 (.0133) (.0145) (.0180) (.0194)

.454 .458 .470 .471

.396 .395 .377 .401

44,881 44,881 21,910 22,971


Between 1955 and 1975, state and local expenditures relative to GNP and payrolls relative to GNP increased continuously. The increase was most pro- nounced during the early 1970s. This caused growing concern over the fiscal condition of these governments, which led to the passage of expenditure and tax limitation legislation during the late 1970s. 3° As a consequence, state and local expenditures and payrolls declined relative to GNP between 1975 and 1979. It seems reasonable to attribute part of the secular decline in the government wage premium during the 1970s to the growing opposition of taxpayers.

Model III: Fixed Effects Analysis. In model I and II a problem is caused by the effect of unobserved quality differentials among workers across the sectors. Because we observe multiple observations on every individual, quality differentials that are person-specific and do not vary over time can be netted out of the public sector wage premium calculation through the use of a f'ixed effects model.3 In essence, this type of model measures the change in wage rates when a person switches from private to public sector employment and vice versa. Thus, to control for person-specific quality differentials, the sample must exhibit some move- ment into and out of the sector in order to identify a government premium.

In our 1970-1979 PSID sample, 2,064 individuals were never government workers (during the sample period), 109 were always government workers, and 132 spent time in both the public and private sectors. Based on these sector changers, we estimate the fixed effect government wage premium to be 2.14 percent, which is similar to the estimate obtained from the other models. The close- ness of the fixed effect estimate with the others suggests there are very few quality differences between government and private sector workers that are not cap- tured by the control variables included in our models. Because Freeman (1984) has shown that the cross-section and longitudinal estimates of wage premiums bound the true value, it would appear that the average government wage differential during the 1970s ranged from 1.53 to 2.14 percent) 2

V. Government Wage Premiums by Level o f Government

The CPS data allow us to estimate the government wage premium by level of government. Therefore, we re-estimated the human capital and decomposition models using pooled CPS data for 1979 and 1983. The human capital equation results are presented in Table 2. As shown in column 4, we estimate the average wage differential for the three levels of government to be federal employees, 14.4 percent; state employees, 0.7 percent; and local employees, - 4 . 4 percent. 33 These estimates are directly comparable to Smith's (1977a, p. 68), who used a similar model specification and earlier CPS data. With respect to federal government workers, Smith estimated a wage premium of 16 to 18 percent for 1960 and 1970 and 20 percent for 1975. Our estimate of 14.4 percent for the early 1980s suggests that the federal wage differential has declined over recent years.

Smith reported separate wage premium estimates for male and female state government employees for 1973 and 1975. After adjusting her estimates to reflect


the sex composition of state government during that period, we obtain an overall estimate of the state wage premium to be about 3 percent in 1973 and - 2 percent in 1975. Our estimate of 0.7 percent during the early 1980s suggests that the state government wage differential may have increased slightly over recent years.

Adjusting Smith's wage premium estimates for male and female local government employees to reflect the sex composition of local government, we obtain an overall estimated local wage differential of - 2 percent in 1973 and - 4 percent in 1975. Our estimate of - 4 . 4 percent suggests that the local government wage differential has not changed in recent years.

Our decomposition model estimates of the government wage differential for the three levels of government are presented in Table 3. 34 Because the decomposition results based on government and private sector weights are similar, we have chosen to report only the government-weighted decomposition results. According to the decomposition results presented in Table 3, the estimated government wage differential at the federal level is 9.73 percent during the early 1980s. The state government wage differential is -3 .28 percent, and the local government wage differential is estimated at -2 .74 percent. Our decomposition government wage differential estimates are similar to the govern-

Table 3

Decomposition of Government Wage Differentials by Level, 1979 and 1983

Shi f t C o e f f i c i e n t F e d e r a l S t a t e L o c a l

Var i ab le s E n d o w m e n t C o e f f i c i e n t E n d o w m e n t C o e f f i c i e n t E n d o w m e n t C o e f f i c i e n t

E f f e c t E f f ec t E f f e c t E f f e c t E f f e c t E f f e c t

( l ) (2) (3) (4) (5) (6) (7)

H u m a n C a p i t a l a .2607 .1487 .2104 .0678 ,1044 - .1504

V e t e r a n .0134 .0010 .0047 .0021 - .0018 - .0155

B l u e - C o l l a r .0091 - .0156 .0264 - .0324 .0182 - .0261

R a c e - B l a c k - .0057 .0008 .0000 .0098 .0004 .0084

F e m a l e .0096 .0207 .0000 .0628 .0185 .0223

L o c a t i o n b .0143 .0133 .0057 - .0109 .0075 - .0187

U n i o n - .0011 - .0373 .0031 - .0300 .0054 - .0277

T i m e - .0003 .0094 - .0101 - .0093 .0003 - .0519

O t h e r Va r i ab l e s c .0097 .0044 - . 0 0 0 8 .0712 .0035 - . 0 2 8 1

Sh i f t C o e f f i c i e n t - . 0 4 8 1 - . 1 6 3 9 .1565

S u b t o t a l E = . 3 0 9 7 C = . 0 9 7 3 E=.2394 C= -.0328 E=.1558 C = - . 0 2 7 4

T o t a l s ( E + C) E + C = .4072 E + C = .2066 E + C = .1284

aHuman capital variables include Education, Tenure, Tenure Square, Total Experience, Total Experience Squared, and Part-time.

bLocation variables are South and West.

cOther variables include Race-Other and Rural.


ment dummy variable estimates reported in Table 2. Both estimates tell the same story: Among government employees, only federal employees appear to be earning significant wage premiums relative to private sector employees during the 1980s.

What factors account for this phenomenon? An examination of Table 3 indicates that differences in human capital again explain most of the estimated government wage differentials. The federal human capital coefficient effect is • 1487 compared to .0678 for state employees and - . 1504 for local employees• This pattern of skill wage differentials does not appear to be the result of market forces. Between 1975 and 1983, federal civilian employment decreased by 0.5 percent while state employment increased by 13.6 percent and local employment increased by 5.6 percent.

More likely the estimated federal skill wage differentials reflect internal promotion patterns existing within the federal government. Freeman (1985) reported that actual federal pay increased faster than legislative increases between 1972 and 1982. For this to occur, the average GS level of federal employees must have risen. Freeman explained such increases could represent a "true" increase in skill level or a "creep" up in response to market conditions• If early promo- tions in grade level are made on the basis of human capital characteristics, or criteria correlated with such characteristics, the result will be larger measured skill wage premiums•

In this regard, Corazzini (1972), Long (1976), and Smith (1977a, chap. 11) have suggested that discrimination in the form of slow upgrading may explain why the degree of wage discrimination against females and blacks in the federal sector rises with the level of work experience or age. This hypothesis is consistent with the results reported in Table 3. ,The black and female coefficient effects, although positive, are smaller in the federal sector than in the state and local sectors. This suggests that the federal government wage discriminates against blacks and females less than the private sector but more than state and local governments. The relatively large positive female coefficient effect (.0628) for state employees indicates that female state employees may be earning a positive wage premium during the early 1980s just as they did during the 1970s. The "Relative Discrimination Hypothesis" is supported by the positive race and female coefficient effects reported in Table 3 for all three levels of government•

The "Union Hypotheses" with respect to government wage differentials is not supported by the negative union coefficient effects reported in Table 3. We had anticipated a small union effect on wages at the federal level, since most federal employees, wages are set by the Civil Service rather than through collective bargaining. Furthermore, if unions lobby successfully to obtain wage increases, these wage gains are shared equally by union and nonunion employees in the same classification unit. This implies that the union coefficient in the federal wage equation should be very small. In fact, it had a statistically nonsignificant value of - .0149•


The negative union coefficient effects for state and local employees are caused by the very large union relative wage premiums reported for the private sector during this period. The union coefficient in the state and local wage equations are not statistically significant. For reasons discussed earlier, we are reluc- tant to conclude that public sector unions have little or no effect on the relative wages of their members. The small positive union endowment effects for state and local employees reported in Table 3 reflect the fact that the increase in public sector unionism relative to that in the private sector has an effect on the gross wage differential between public and private employees.

VI. Summary and Conclusions

We have examined the nature of and the changes in government wage differentials for the period 1970 to 1983 and we have found that as a group government employees may have earned a small wage premium of approximately 2 to 3 percent during the 1970s and early 1980s. Due to data limitations, we are unable to determine if this wage premium changed significantly during this period.

Our analysis shows that estimated government wage premiums vary substantially by level of government. During the early 1980s, only federal employees earned significant wage premiums. This result is consistent with the public choice argument that taxpayers' reaction to such differentials is likely to be strongest at the local level and weakest at the federal level. It should be added, however, that our analysis indicates that the federal government wage premium has been declining over recent years? 6

Where observed, we have found evidence that government wage premiums are related to skill wage premiums and unusually high relative wages paid to women. In fact, it appears that women employees in state government may be earning significant wage premiums, whereas women employees in the federal and local level of government are not.

To date, we have found no support for the argument that the superior bargaining and political power of public sector unions have played an appreciable role in the creation of government wage premiums. Finally, we have shown that introducing control variables for establishment size tends to reduce the estimated net federal wage differential and to increase the estimated net local government wage differential. This is caused by the fact that federal government is more concentrated in larger establishments than in private employment, while local government employment tends to be more concentrated in smaller establishments than is private sector employment. It has become an established fact that wages and plant/firm size are positively correlated in the private sector. Although it is not known whether establishment size is a proxy for undesirable working conditions, specific human capital, or some other factor, proper estimation of government wage differentials would seem to require the inclusion of control variables for establishment size.

28 J O U R N A L O F L A B O R R E S E A R C H

N O T E S

~For an excellent review of the literature on compensating wage differentials, see Brown (1980).

~For example, see Mitchell (1979), Smith (1977a), Bloch and Smith (1979), Quinn (1979), and Bellante and Long (1981).

3See Becker (1975) and Mincer (1974).

~Reder (1962, p. 295). In this regard, Ehrenberg (1973), Ehrenberg and Goldstein (1975), and Ashenfelter (1977) provided theoretical arguments and empirical evidence indicating that the supply curve of labor to particular public service occupations is upward sloping.

SFor example, see Ashenfelter (1971), Ehrenberg (1973), Schmenner (1973), Ehrenberg and Gold- stein (1975), and Ichniowski 0980).

~Empirical studies by Ehrenberg (1973), Ashenfelter and Ehrenberg (1975), and Ashenfelter (1977) indicate that the demand curve for most categories of public employees is inelastic.

'See the survey articles by Lewin (1977) and Mitchell (1979). It should be noted that more recent papers by Ichniowski (1980), Moore and Raisian (1981 and 1987), and Baugh and Stone (1982) indicated that public sector union wage premiums have been rising in recent years.

8Long (1982) showed that government employment reduced the probability of job quitting during the late 1960s when government wage premiums were present.

9We have only limited information on queues in the public sector. See Smith (1977a) and Adie (1977, p. 64).

~°Krueger (1974), Tullock (1975), and Bellante and Long (1981).

HSee Carlson and Robinson (1969), Carlson et al. (1971), Hirsch and Rufolo (1975), and Abowd and Farber (1982).

~2See Hirsch and Rufolo (1975).

~3Downs (1957a, 1957b), Becker (1958), Buchanan and Tullock (1962), and Reder (1975).

~4For a discussion of the potential and limitations on public employees' political power, see Gramlich (1976), Courant et al. (1979), Reder (1975), and Annable (1974).

~sSee Smith (1977a, pp. 106-108).

~6In the discrimination literature, it has become common to attribute all unmeasured wage differentials to discrimination rather than unobserved quality differences. We do not agree with this practice. See Corazzini (1972), Long (1975 and 1976), Smith (1977a, pp. 106-120), and Johnson (1981).

~TThis practice has touched off a controversy in the literature regarding the definition of wage comparability in the public and private sectors. See Asher and Popkin (1984) and Perloff and Wachter (1984).

~SBlank (1985) has shown that workers' personal characteristics are rewarded differently in the public and private sector and that such characteristics do influence the probability of a worker's choice of employment sector. Long (1975, 1976) earlier reported that employment probabilities are generally higher in the public than in the private sector for both blacks and females.

9The PSID is collected and processed by the Survey Research Center of the University of Michigan. We present and analyze estimates only for the random portion of this sample, increasing the likelihood that economy-wide generalizations are reasonable.

2°This model is widely used in the literature today. For a complete discussion of this type of model, see Mincer (1974).

2~The precise definitions of the variables used are presented in Appendix A.

W I L L I A M J. M O O R E and J O H N RAISIAN 29

22Parameter estimates for individual years between 1970 and 1979 varied substantially.

z3Complete regressions for these two periods may be obtained from Professor Moore on request.

2"For a discussion of this technique, see Blinder (1973). It should be noted that Smith (1977a, 1977b) uses a variation of this technique in her analysis of government wage differentials.

2SAn index number problem is present in the decomposition method. In calculating the coefficient or rent portion, either the regression weights of the government equation or the private equation can be used. The choice of weights can influence the measured government wage premium. We presented the decomposition results using only private sector weights for four reasons: (1) to conserve space; (2) the population size for the private sector is much larger and, therefore, a single set of coefficients in a new general equilibrium would look more like the private sector than the government sector coeffficients; (3) the sample size for the private sector is much larger, so the private coefficient estimates are more precise; and (4) the qualitative results using both weights are similar. Decomposi- tion results based on government sector weights can be obtained from Professor Moore on request.

2~Tbe separate wage equations for public and private sector workers and the mean values for the relevant variables underlying the decomposition results can be obtained from Professor Moore on request.

2~The usual caveats are in order with respect to this conclusion. It is possible that public sector unions may have a greater effect on fringe benefits than private sector unions. See Freeman (1981) and Bellante and Long 0981). Also, it is possible that union "threat effects" or "spillover" benefits are larger in the public sector causing a downward bias on estimated wage premiums. Significant public sector union spillover effects have been reported by Ehrenberg and Goldstein (1975) and Victor (1979).

2*We did not include the UIND variable for the CPS sample because one cannot discuss trend and cyclical effects when there are only two time periods.

29The complete regressions for this model can be obtained from Professor Moore on request.

3°For a discussion of these attempts, see "Proceedings of a Conference on Tax and Expenditure Limitations," National Tax Journal (June 1979).

3'For a discussion of this type of model, see Brown 0980) and Raisian (1983).

3~Freemen (1984) showed that fixed effects model estimates are not necessarily more accurate than estimates based on cross-section models, because they are still subject to bias resulting from measurement error and selectivity, despite their correction for unobserved quality differentials.

~3Recail that the percentage government wage differential, G, is defined as G = exp(~/4) - 1.

3"The separate wage equations for the public and private sectors underlying the results reported in Table 3 can be obtained from Professor Moore on request.

~Smith (1977a).

36Smith (1982) suggested that the failure to follow the practices of the comparability process for federal pay-setting in recent years may explain the phenomenon.

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government wage differentials revisited

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