Estimating the Value of Public Sector Job Security

AEI economist Andrew Biggs and Heritage Foundation Policy Analyst Jason Richwine have co-authored a series of articles on private vs. public compensation, for example see their WSJ articles "The Public Worker Gravy Train" and "The Government Pay Bonus," and a longer more technical working paper "Comparing Federal and Private Sector Compensation."   

From the abstract of the working paper (emphasis added):

"Public sector compensation has come under increased scrutiny from politicians and the media, but comprehensive technical comparisons of federal and private compensation have been largely absent from the discussion. Drawing from the academic literature and using the most recent government data, this report measures the generosity of federal salaries, benefits, and job security. Compared to similar private sector workers, we estimate that federal workers receive a salary premium of 14 percent, a benefits premium of 63 percent, and extra job security worth 17 percent of pay. Together, these generate an overall federal compensation premium of approximately 61 percent."

In a post today on The Enterprise Blog, Andrew Biggs writes:

"In our work on public sector pay, Jason Richwine and I have attempted to put a dollar value on the greater job security enjoyed by government employees, which acts as a free insurance policy against losing your job. Estimating the value of job security from the data is tough, however, for technical reasons outlined in our working paper on federal pay. Instead, we use an economic model, calibrated with a variety of data, to arrive at an estimate. Our baseline result was that job security for federal government employees was equivalent to a 1.5% to 3% increase in pay."

Andrew then points to a recent CD post on the market for private job loss insurance, which allows him to estimate the "implicit value of public sector job security" based on differences in market-based insurance premiums by occupation:

"I compared salaries between public and private sector workers’ net of supplemental unemployment insurance premiums sufficient to protect against all loss of income during unemployment. The difference in salaries indicates the job security premium paid in the public sector. The answer I found was around 2.4 percent, which was right in line with our baseline results. Given that total compensation for a typical federal employee is well over $100,000, even this baseline 2.4 percent job security premium is worth several thousand dollars. When you add that it protects a job paying a wage and benefits premium, the value of public sector job security is far higher."

MP: It's interesting that the empirical evidence from market-based insurance premiums for unemployment supports the estimates from a more theoretic, economic model developed by Andrew Biggs and Jason Richwine.