Are Nevada Local Government Employees Over-Compensated?
Should the Legislature Dismantle Public Employee Representation Rights?
By Jeffrey H. Keefe, Ph.D.
March 25, 2015
This paper investigates whether Nevada Local Government employees are overpaid at the expense of Nevada taxpayers. The research is timely. The Nevada legislature is considering bills that would greatly weaken employee rights to union representation and collective bargaining. Nevada is already an open shop or Right-to Work (RTW) state that greatly diminishes the power of unions. From research on the private sector we know that RTW legislation lowers union density by 8.8 percentage points (Hogler, Shulman, Weiler 2004) and reduces the earnings of all workers by 3.4% (Gould and Shierholz 2011). Research on the public sector indicates that there is an public employee earnings reduction between 5% to 7% attributable to RTW legislation (Keefe 2013). The results of my five-year research program indicates that public sector unions reduce earnings inequality and promote middle class jobs, while not raising public employee total compensation costs above that of similar workers in the private sector. They are one of a few remaining institutions that promote middle class jobs and earnings. Public employee unions are a necessity to give public employees a voice in our intensely competitive political system. They serve as a countervailing force to politicians who too often promise both reductions in taxes and improvements in public services. This short-term political perspective is most clearly reflected in the states' underfunding of public employee pensions and the draining of infrastructure trust funds. No doubt there is concern in Nevada about public employees being overcompensated and the Public Employee Retirement System being underfunded. The legislation being introduced to dismantle public employee collective bargaining and the Public Employee Retirement System is based on the assumption that local government employees are overcompensated.
The data, however, indicates that local government employees in Nevada are not overpaid. Comparisons controlling for education, experience, gender, race, ethnicity, citizenship, and disability reveal that employees of local governments in Nevada earn less than comparable private sector employees. On an annual basis, full-time local government employees in Nevada are undercompensated by 6% compared with otherwise similar private sector workers. This compensation disadvantage is smaller but still significant when hours worked are factored in. Full-time Local Government employees work fewer annual hours, particularly employees with bachelor's, master's, and professional degrees (because many are teachers ). When comparisons are made controlling for the difference in annual hours worked, full-time local government employees are under compensated by 5%, compared with otherwise similar private sector workers. To summarize, this study shows that Nevada Local Government employees earn 5% less in total compensation per hour than comparable full-time employees in Nevada's private sector.
These compensation comparisons account for important factors that affect earnings, the most important of which is the educational levels of Local Government employees. When comparing Local Government with Nevada private-sector workers, local government employees are on average more highly educated than private sector workers; 49% of full-time Nevada Local Government sector workers hold at least a four-year college degree, compared with 26% of full-time private sector workers. Nevada local governments pay college-educated employees 22% less in annual compensation, on average, than private employers. The compensation differential is greatest for professional employees, lawyers, and doctors. On the other hand, the Local Government sector appears to set a floor on compensation, which benefits less-educated workers. The 1.3% of local government workers without high school diplomas earn more than comparably educated workers in the private sector.
Local government employees also receive a higher portion of their compensation in the form of employer-provided nonwage benefits, and the mix of those benefits is different from those provided in the private sector. Local Government employers devote on average 28.6% of employee compensation expenses to nonwage benefits, whereas private employers devote between 19.2% and 21.8% to those benefits. Local Government employers devote a larger share of their compensation packages to health insurance and pension benefits than do private employers. Health insurance accounts for 11.1% of local government compensation compared with 6.5% to 9.4% of private sector compensation. Retirement benefits account for 12.5 % of local government compensation costs compared with 5% in the private sector. Local Government employers have opted out of the Social Security system whereas private employers contribute 6.2% annually into the Social Security system. Most Local Government employees also continue to participate in defined benefit plans managed by the state, while most private sector employers have switched to defined-contribution plans, particularly 401(k) plans. On the other hand, Local Government employees receive considerably less supplemental pay and vacation time, and Local Government employers contribute significantly less to legally other mandated benefits financed through payroll taxes.
Although some nonwage benefits are more generous in the Local Government sector, it is a serious error to imagine that comparability requires that each and every element of compensation should be the same. What is important is that considering both the cost of employer-provided nonwage benefits and direct wages, most Local Government workers in Nevada earn less in annual or hourly compensation than they would earn in the private sector.
Introduction: The challenge to Local Government employee compensation
The Nevada Policy Institute alleges local government employees are over-compensated requiring a dismantling of collective representation rights including the termination of meaningful collective bargaining, elimination of dues deduction, regular recertification elections, elimination of exclusive representation, voter approval of collective bargaining agreements, termination of release time for union-management business, and eliminate binding arbitration as the final step in dispute resolution for public safety employees. These are drastic measures that are inconsistent with 80 years of legal practices in the United States. Such measures will reduce compensation of local government employees, make jobs less attractive, and increase turnover, particularly when coupled with a conversion of a defined benefit plan to a defined contribution pension. To warrant such drastic measures, are local government employees in Nevada overcompensated? Does a balanced, systematic evaluation show that local government employees are overpaid to the detriment of Nevada taxpayers? This research seeks to methodically and deliberately answer that question.
Making a comparison: Are Nevada Local Government employees overpaid?
To assess whether Nevada Local Government employees are overpaid, we need to ask two simple and related questions: compared with whom and compared to what?
When determining the groups to be compared, the standard of comparison for Local Government employees is usually similar private sector workers with similar levels of education and experience and similar hours of work. However, this standard, based on comparing similar workers, is inadequate to the task.
While we ideally would compare Local Government sector workers with private sector workers performing similar work, it is not possible to find private sector matches for the entire spectrum of Local Government employees. Too many critical occupations in the Local Government sector—for example, police, fire, and corrections— lack private sector analogues. Even Local Government and private teaching differ significantly. Local Government schools accept all students, while private schools are sometimes highly selective and may exclude or remove poor performing, special needs, or disruptive students.
Consequently, comparing workers of similar "human capital" (fundamental personal characteristics and labor market skills) is considered the best alternative. Analyses based on comparisons of personal characteristics and labor market skills capture what comparable work studies have shown to be the most important and salient attributes affecting compensation.
Prior research reveals that education level is the single most important earnings predictor. Education helps foster work-relevant skills. People invest heavily in their own and their children's education, by paying for housing in communities with good schools and funding attendance at schools, colleges, and universities.
Empirically, experience follows education in advancing earnings. People learn by doing and by handling a variety of job tasks as they advance within occupations. Most occupations reward experience, since on-the-job learning delivers more competent and complex performance.
Gender, race, ethnicity, and disability are also widely found to affect compensation. Here, an intermingling of productivity-related human capital differences and labor market disadvantages stemming from historical patterns of discrimination affect compensation. We control for all these factors in our study.
When analyzing hours of work, most studies exclude part-time workers; because their hours vary, they earn considerably less than comparable full-time workers, are more weakly attached to the labor force, and often lack benefit coverage. This study follows standard practice by focusing on full-time employees, who represent more than 80% of Nevada's labor force (King et. al 2009), and by controlling for hours worked per year. The study includes only year-round workers who have worked a minimum of 1,100 hours, which is often the minimum threshold to qualify for full employer-provided benefits.
We are fortunate to have access to the most comprehensive sample data from the Integrated Public Use Microdata Series of the (IPUMS-USA), an annual U.S. household census survey The American Community Survey (ACS, which is a 1% sample of all US households) conducted by the U.S. Census Bureau (a more detailed description of the IPUMS-USA ACS data is provided in the Data Appendix). In summary, our study compares workers with similar "human capital" and controls for personal characteristics found to affect compensation as well as hours worked.
In addition to defining who will be compared, we must also define what should be compared. This is a more complex issue than it initially appears. Comparing wages is insufficient because employee compensation increasingly includes employer-provided nonwage benefits. Regardless of how employees are paid—whether in wages or benefits—the essential issue in making a comparison is what it costs a private or Local Government entity to employ an individual. Employer costs may include not only wages but paid time off for holidays, vacations, and personal and sick days; supplemental pay including overtime and bonuses; insurances, particularly health insurance but also life and disability insurance; retirement plan contributions, defined benefits or defined contributions, including 401(k) plans; and legally mandated benefit contributions such as unemployment insurance, Social Security, Medicare, disability insurance, and workers' compensation. These costs, rather than just wages, must be considered when computing the costs of employing an individual worker.
However, the complexities don't end there. The more difficult issue is finding the appropriate data to make the comparison.
To obtain wage and demographic data, this study uses the IPUMS-USA, The American Community Survey (ACS, which is a 1% sample of all US households)) is the source of earnings data widely used by social scientists (King et al. 2009). For the purpose of comparability, the Nevada data excludes self-employed, part-time, agricultural, and domestic workers. We enhance the reliability of the sample by expanding the number of observations by four years of data, covering 2010 through 2013, providing a sample of 18,504 full-time employees in Nevada.
There is only one reliable source of benefit information in the United States: Employer Costs for Employee Compensation (ECEC) survey, which is collected by the Bureau of Labor Statistics. The ECEC includes data from both private industry and local government on the costs of providing employees benefits. This study will use disaggregated unpublished data obtained from the U.S. Bureau of Labor Statistics.
The most important factor in earnings: education level
Local Government employees in the state of Nevada are substantially more educated than their private sector counterparts. Approximately 49% of full-time Nevada Local Government employees hold a bachelor's degree compared with 26% of full-time employees in the private sector. Higher educational levels are strongly associated with higher earnings in the labor market. In Nevada, a high school graduate, all else equal, earns on average 8% more than someone without a high school diploma. The education premium jumps to 17% on average if the worker attended some college, and increases to 27% if the worker holds an associate's degree. Completing college with a bachelor's degree yields a 55% premium. Obtaining a master's degree yields an average 73% pay premium and a doctorate produces a 100% return, while earning a professional degree in law or medicine increases average earnings by 118% over failing to complete high school.
The Local Government sector employs more highly educated workers. While private sector organizations rely substantially more on educated labor as they become larger, smaller private sector organizations employ more workers who lack more than a high school education than larger private employers or local government.
The returns to education, however, are not equally distributed between the Local Government and private sectors in Nevada. Table 1 provides computations of the annual earnings of full-time workers in Nevada by educational attainment, comparing private sector and local government employee wages and compensation. These comparisons do not adjust for the many factors accounted for in more refined analyses presented later (such as experience, annual hours worked, race, gender, etc.). These comparisons do reflect the floor on earnings established in the Local Government sector, which allows individuals with less than high school education (1.3% of local government workers) to earn more than their private sector counterparts (Asher and DeFina 1999).
Table 1: Comparison of Local Government and Private-Sector Employees' Annual Salaries and Total Compensation by Education Completion in Nevada
Notwithstanding the comparative benefits of Local Government sector employment for those without a high school diploma, college educated Local Government sector employees earn considerably less than similarly educated private sector employees. On average, annual wages of the very few full-time worker without a high school education are 0.74% less in local government ($32,656) then in the private sector ($32,899). However, average annual total compensation for a full-time worker without a high school education is 5.67% greater in local government ($44,152) than in the private sector ($41,782). High school graduates approach earnings and compensation equivalency between the private and Local Government sector. Average annual wages for high school graduates working for local government are 13% lower ($33,540) than for those working for private employers ($38,453), while total compensation for employees with a high school degree is 7% lower in local government ($48,836) than in the private sector ($45,562). But average wages for workers with some college are 6% lower and associate's degree 12% lower, respectively, in local government than in the private sector, while total compensation for those workers in local government is 1% higher and 6% lower, respectively, than in the private sector.
This earnings gap between Local Government and private sector employees becomes more significant as workers gain more education. On average, the private sector pays workers with four-year college degrees and advanced degrees substantially more in the form of higher wages and compensation than does the Local Government sector. Local Government workers with a bachelor's degree make 26% less in salary and 22% less in total compensation while those with a professional degree make 38% less in salary and 36% less in total compensation. In local government, workers with a master's degree earn on average 29% less in salary and 26% less in total compensation, while those with a doctorate earn 6% less in salary and 4% less in total compensation. (As noted later, fewer average work hours and a higher percent female in Local Government than the private sector reduce these large private sector wage premiums for college educated labor.)
The growing role of nonwage benefits in employee compensation costs
Nonwage benefits, once referred to as fringe benefits, account for an increasing portion of employee compensation costs. Nonwage benefit growth is partially fueled by the tax deductibility of health insurance payments and pension contributions, allowing employers to compensate employees without either the employer or employee paying income tax at the time of compensation. Sometimes referred to as "tax efficient" compensation, the federal government foregoes $300 billion annually in income tax revenue to subsidize these benefits (U.S. Congress, Joint Committee on Taxation 2006). Health insurance and pension benefits are particularly attractive to middle- and upper-income employees, who face higher marginal income tax rates.
Local Government sector employees received more of their compensation in the form of nonwage benefits than private sector workers. The Employer Costs for Employee Compensation survey provides the only valid and reliable estimate in the United States of nonwage benefit costs incurred by employers. It is conducted quarterly by the Bureau of Labor Statistics. The ECEC includes data from both private industry and local government and provides data for private employers by firm size. Our study uses these ECEC sample estimates to calculate relative nonwage benefit costs for private and Local Government employees in Nevada. (A more detailed description is provided in the Data Appendix.) Nonwage benefits costs range from 19.2% of total compensation for employees of small private companies (less than 50 employees) to 22.1% for employees of private companies with 500 or more employees, compared with 24.5% for local government employees. The compensation data reveal considerable variation within the private sector by organization size and between the private sector and local government. However, large private sector employers most closely resemble Local Government employers in the proportion of compensation devoted to benefits.
Compared with private sector employees, Local Government employees not only receive somewhat more of their compensation in benefits, but also a different proportion of benefits spread among paid leave, supplemental pay, insurances, retirement security, and legally mandated benefits. Employees in private organizations with 100 more employees receive more paid leave than similar, local government employees, particularly more vacation pay. Local Government employees also receive less supplement pay, less than 1% of compensation whereas private sector employees in large organizations (500 or more employees) gain 2.9% of their earnings from supplemental pay, particularly bonuses.
On the other hand, Local Government employees receive considerably more of their compensation from employer provided health insurance. Health insurance accounts for 12.5% of local government employee compensation costs but only 6.8% of private-sector compensation costs in organizations employing 100 employees or more. Retirement benefits also account for a substantially greater share of Local Government employee compensation costs: 12.5% (offset by saving 6.2% spent on Social Security, making local governments' net contribution of 6.3%) compared with 5.1% in private sector organizations with more than 500 employees. As with all benefits, the differences between private and Local Government employees' compensation costs shrink as the private organization in comparison increases in size. Legally required benefits account for a greater share of small employers' compensation costs; as organizational size increases, these benefit costs decrease in relative degree. In local and government employment, legally required benefits represent a substantially smaller share of benefit costs for several reasons. Since Local Government employees do not participate in Social Security, which partially explains their higher pension costs.2 These employees are not eligible for Social Security benefit payments at retirement unless they chose to work in another job that is covered by Social Security. Second, local governments do not participate in the federal unemployment system. Third, since local governments offer more stable employment than the private sector, they contribute proportionally less to the state unemployment insurance trust fund (an employer's unemployment insurance contribution rate is partially based on the extent to which the employer taps the fund).
In summary, local government workers receive more of their compensation in employer-provided benefits. Specifically, Local Government employers provide a greater share of employee compensation in the form of health insurance and retirement benefits. Local Government employees receive a lesser share of their wages in the form of supplemental pay and consume less in costs for legally required benefits (financed through payroll taxes, such as worker compensation, unemployment insurance) than private sector employees. Thus, to determine whether Local Government employees are overpaid, this analysis asks whether higher benefit costs more than offset the lower wages paid to employees in Nevada. That is the question we turn to next.
Assessing private and Local Government relative pay and benefits
To assess relative Local Government and private employment costs, we will use the microdata from the IPUMS-USA, which provides a sample of Nevada employees broken down by demographic characteristics such as full-time status, education level, years of experience, age, gender, race, disability, citizenship, employer organizational size, and industry. Compared with Nevada private sector employees, Nevada local government employees on average are more experienced (33.8 years compared with 30.9 years), more likely to be female (54% versus 41%), and work slightly fewer weekly hours (44.6 versus 43.4). Local government employees are also more likely to be black (2.6% versus 2.1%), and less likely to be Hispanic (2.3% versus 5.6%), or Asian (1% versus 1.3%); are more likely to be citizens (98.7% versus 97.2%); are more likely to be married (74.4% versus 66.5%); and are slightly more likely to have a disability (5.8% versus 4.6%) than private sector employees (King et al. 2009). Unionization differs by sector. Private sector unions density is 13% versus 38% for public employees (Hirsch and MacPherson 2014). Private sector employees are more likely to be managers (14.4% versus 12.1% ) but less likely to be professionals (14.1% versus 41.6%) than local government employees.
The Employer Cost of Employee Compensation data allow us to use the statistics on the benefit share of compensation by employer size to calculate total employer compensation costs for each employee in the sample. Table 2 reports the results of 12 equations estimating Nevada local government employee earnings compared with similar Nevada private sector employees. The top half of the table provides estimates for the comparison of employee wages. Column one shows that annual wage earnings of Nevada Local Government employees (local government employees) are a statistically significant 14.1% lower than those of comparable private sector employees. An augmented estimate, that includes demographic characteristics reveals that annual wage for local government employees are 11.6% lower than for private sector employees. Column two shows that hourly wages of Nevada Local Government employees are 12.3% lower than those of comparable private sector employees, and the augmented annual estimate is 10.7% lower and the hourly estimate is 11.7% less.
Table 2: Comparisons of Nevada's Private and Local Government Employees Wages and Total Compensation
In summary, these estimates show that Nevada local government employees earn significantly less in total hourly compensation than comparable Nevada private sector workers. Given the relatively large sample size and the statistical power it permits, this analysis concludes that Nevada Local Government employees are 11.7% undercompensated in relation to comparable private sector employees.
Conclusion: Nevada Local Government employees are not overpaid, and further restricting employee rights to representation and collective bargaining is unnecessary in Nevada
The earnings equation estimates indicate that local government employees in Nevada are not overpaid. Rather, Local Government employees are undercompensated. When we make comparisons controlling for education, experience, hours of work, gender, race, ethnicity, citizenship, and disability, both Local Government employees earn lower wages and receive less in compensation (including all benefits) than comparable private sector employees.
The data analysis also reveals substantially different approaches to staffing and compensation between the private and Local Government sectors, reflecting the different occupational categories within each sector. On average, Nevada Local Government sector workers are more highly educated than private sector workers; 49% of full-time Nevada Local Government sector workers hold at least four-year college degrees compared with 26% of full-time private sector workers. For college educated labor, Nevada local governments pay significantly less than private employers. The earnings differential is greatest for professional employees, lawyers, and doctors. These earnings differences may create opportunities for cutting costs by reviewing professional outsourcing contracts to examine what work might be performed by lower-cost Local Government employees. Local government employees are three times more likely to be professionals as private-sector employees. On the other hand, the Local Government appears to pay more for least educated workers by setting a floor on compensation, which particularly improves the earnings of workers without high school educations when compared with similarly educated workers in the private sector, where the earnings floor has collapsed (Lee 1999).
Benefits are allocated differently in the Local Government and private sectors in Nevada. local government employees receive a higher portion of their compensation in the form of employer-provided benefits, and the mix of benefits is different from the private sector. Local Government employers allot 34% of employee compensation costs to benefits, whereas private employers devote 28% of compensation to benefits. Local Government employers provide more of their compensation in health insurance and pension benefits. Health insurance accounts for 12.5% of local government compensation costs but only 6.8% of private sector compensation. Retirement benefits also account for a substantially greater share of Local Government employee compensation costs — 12.5% but after adjusting for the non-contributions to Social Security it is 6.3% compared with 5.1% in the private sector. Local Government employees also continue to participate in defined benefit plans managed by the state (which have been inadequately funded for more than a decade), while private sector employers have switched to defined-contribution plans, particularly 401(k) plans.
On the other hand, Local Government employees receive considerably less supplemental pay and vacation time, and Local Government employers contribute significantly less to legally mandated benefits.
A standard earnings equation produces what some may consider a surprising result: full-time local government employees earn an hourly wage of 11.7% less than their private counter-parts . A total compensation equation controlling for work hours of full-time employees demonstrates that Nevada Local Government employees earn 6.0% less than comparable private sector workers working comparable annual hours.
Focusing on one or another component of compensation for comparison misses the essential point that different employee groups have different preferences and respond differently to various mixes of compensation. For example, young people have a greater preference for cash, while older workers prefer retirement benefits. What citizens need to focus on in this debate is the cost of comparable levels of total compensation, controlling for education, experience, hours of work, and other characteristics that influence employee productivity. When we look at overall compensation we learn that Nevada Local Government employees pay for their better benefits through lower wages and salaries than comparable private sector employees.
Union status was omitted from this study on earnings comparisons. This means that, in essence, we are statistically comparing unionized Local Government sector workers with all private sector workers—both union and nonunion—rather than with their union counterparts. Unionized private sector workers have both better pay and higher benefits, of course, so our standard of comparison is very conservative. It is alleged that Local Government employee unions and collective bargaining have produced an overcompensated workforce. The research finding presented in this study has been replicated nationally by two studies (Schmitt 2010; Bender and Heywood 2010).
Rather than a cause of excessive compensation, unionization is a counterbalance to downward pressures on compensation. It is well known that taxpayers oppose higher taxes and thus exert considerable pressure on elected representatives to resist increases in compensation, creating a formidable incentive and opportunity to hold government pay below market. Unionization represents a viable legal response to employer labor market power.
Additionally, the pattern of Nevada Local Government employee unionization is consistent with broader global patterns of unionization, as shown, for example, by a study of 27 developed countries (Blanchflower 2006). The study reports that union density is found to be negatively correlated with level of education in the private sector and positively correlated in the Local Government sector, as we observe in Nevada. Possibly, a more important question for policymakers, rather than why highly educated Local Government employees are unionized, is why relatively less educated and low-paid private sector employees are inadequately represented by unions.
Local Government sector workers' compensation is neither the cause, nor can it be the solution to, the state's pension problems. Only economic growth and holding the actuaries and the employers accountable to their obligations can begin to plug the hole in the state's pension plan..
Dismantling the current collective bargaining system will eventually weaken local governments by making it difficult for them to recruit and retain a high quality work force by increasing the under compensation problem that local government employees will experience.
—Jeffrey H. Keefe is associate professor of labor and employment relations at the School of Management and Labor Relations, Rutgers University, where he conducts research on labor markets, human resources, and labor-management relations to inform government, business, and labor policy. He teaches courses on collective bargaining, negotiations, financial analysis, benefits and social insurance, labor economics, and research methods. He earned his Ph.D. at Cornell University. He has published over 70 peer reviewed articles and policy papers.
This study uses the Integrated Public Use Microdata Series (IPUMS) of the American Community Survey. The ACS is a monthly U.S. household survey conducted jointly by the U.S. Census Bureau and the Bureau of Labor Statistics. The American Community is the most comprehensive source for earnings used by social scientists. We are using the ACS database created by the Minnesota Population Center (King et al. 2009). The analysis sample is restricted to Nevada's private sector and local government employees and excludes state and federal employees, the self-employed, and part-time, agricultural, and domestic workers. The IPUMS-USA identifies an employee's full-time status, education level, experience level as a function of age minus years of education plus five, gender, and race; and an employer's industry.
The Employer Cost of Employee Compensation (ECEC) data, part of the National Compensation Survey, was used to calculate total compensation costs as a markup on wages. While we would have preferred to analyze compensation costs by each state, because the survey's method of data collection is expensive, the sample is not sufficiently large enough to provide reliable estimates of state-level benefit costs. The Bureau of Labor Statistics did share their unpublished sample estimates for 10 major occupations by organizational sizes for private employers and local government in the Mountain Census division. This study uses these ECEC sample estimates to calculate relative benefit costs for each private and Local Government employee in the sample; it calculates the relative benefit markup for each private sector employee based on the size of the employing organization and the employee's occupation. local government employees' wages were similarly marked up by an occupational benefit weight calculated using the ECEC data. It is assumed that when employees share information about their earnings they do not distinguish paid time off from time worked in salary data. Therefore paid time off is not included in the markup. ACS wages also include supplemental pay. Specifically, this is a markup of total compensation relative to W-2 wages.
The IPUMS-USA sample for 2010 to 2013 was used for the estimates, which are the most recent samples available. The sample size was 18,460 total observations with 2,283 Local Government employee observations.
A standard earnings equation using CPS data for full-time workers in Nevada was estimated to produce the estimates of the returns to education.
The Social Security Act of 1935 excluded local workers from mandatory coverage. Legislation in the 1950s allowed states to elect voluntary coverage for their employees (Munnell and Soto 2007).
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