The Divide Between the Public Sector and the Private Sector

By John Eberhard

The recent confrontation between the Wisconsin Governor and GOP, and the public employee unions has highlighted the huge divide between the public sector and the private sector.

First let’s talk about the yawning gap between the average pay of public and private sector employees. USA Today reported in March 2010 that federal workers earned an average salary of $67,691 for occupations that exist in both the public and private sector. This compares to an average of $60,046 in the private sector. It’s higher in the public sector, but not that much higher (12.7% higher).

But now let’s talk about total compensation, which also includes benefits. Public sector employees received health, pension and other benefits totaling $40,785 per federal employee per year in 2008, compared to $9,882 for private sector employees, according to the Bureau of Economic Analysis.

That makes the average total compensation for public sector employees $108,476, versus $69,928 for the private sector. That means the average public sector employee receives 55.1% higher compensation than in the private sector.

This begs two questions: Why is it that way? And should it be that way?

Should It Be That Way?

Let’s answer the second question first. It should definitely NOT be that way. There is no way that working for the government should be a gravy train with sweet deals that are significantly more than the private sector can afford to pay.

For one thing, these salaries are paid for with yours and my tax dollars. Do you want your tax dollars to pay for someone’s compensation at an average level of 55% more than what you make?

For another thing, there is the issue of fairness, a topic often overused and abused by the liberals. It is inherently unfair for a government employee to be earning 55% more compensation than a person in the private sector, and paid for with our tax dollars to boot. This is especially true during a recessionary period, but it is true regardless of economic conditions.

Why Is It That Way?

I’ve seen several commentators in recent days saying that the reason why public sectors employees have this ridiculously high compensation comes down to 1) the fact that they are heavily unionized, and 2) the people the unions negotiate with on the other side of the table have no real incentive to hold back on the gifts.

Charles Krauthammer in the Washington Post wrote “In the private sector, the capitalist knows that when he negotiates with the union, if he gives away the store, he loses his shirt. In the public sector, the politicians who approve any deal have none of their own money at stake. On the contrary, the more favorably they dispose of union demands, the more likely they are to be the beneficiary of union largess in the next election. It's the perfect cozy setup.”

Working in the Private Sector

But even beyond the fact that the (mostly Democratic) politicians have an incestuous relationship with the unions, there is another factor at work here. It is simply the fact that most people who have worked only in the public sector and never in the private, don’t understand how money is made, and they have none of the incentives that cause private sector companies to keep expenses down.

I had the good fortune of working for several companies over the last 20 years, in the capacity of being on the committees that did financial planning for the company. These committees would meet once a week, and review the amount of money made by the company that week, and all the bills and purchase orders that were submitted. We had to figure out how to pay all the bills, make payroll, and decide which purchase orders to approve. And of course, with a finite amount of money to work with, we had to decide to which purchase orders to say “No.”

And sometimes, when income was low, we had to figure out how to intelligently promote the company’s products or services in such a way as to get the income back up. And sometimes we had to figure out how to tighten the belt, even identify “deadwood” employees and fire them (something that is almost unheard of in the public sector).

And at those private sector companies, there is no such thing as an automatic cost of living raise or larger budget for your division next year. If everyone wants raises, everyone has to work hard and get the income up into a higher range, so that there is some money to use for raises. And there were incentives there to figure out how to do things better or faster or more intelligently or with more innovations than your competitors. Because if you didn’t do all that, you weren’t going to get any raises, your company wasn’t going to expand, or quite possibly your competitor was going to eat your lunch. You could even go out of business.

Now I own my own marketing consulting company and so I do all this and more on my own behalf.

But what about people who have never had the good fortune of this type of experience? Many of them who have worked only in the public sector have no clue how all this works. They don’t even recognize that during an economic downturn, everybody has to tighten the belt.

While millions of jobs have been lost in the private sector during the last several years, public sector employment numbers have gone up. How is that sensible or even right?

What About Wisconsin?

Charles Krauthammer further stated “Wisconsin is the epicenter. It began with economic issues. When Gov. Scott Walker proposed that state workers contribute more to their pension and health-care benefits, he started a revolution. Teachers called in sick. Schools closed. Demonstrators massed at the capitol. Democratic senators fled the state to paralyze the Legislature.”

Columnist Rachel Alexander stated “Governor Walker targeted pensions since their costs are rising at much more unsustainable levels than wage increases. His budget also increases public employees’ healthcare premiums to 12%, and requires them to start contributing 5.8% of their pay to pensions. Wisconsin state employees have one of the most generous benefits packages in the nation. Currently they are not required to contribute anything towards their pensions, and only 6% of their salaries goes towards healthcare premiums. Private employees pay much more on average into equivalent plans; Governor Walker’s budget would merely reduce the generous subsidies given to public employees. This would save the state nearly $300 million over the next two fiscal years.”

A Facebook friend the other day posted something saying that unions were being denied the right to organize. How distorted and naïve could you possibly get?

What’s going on in Wisconsin today is extremely important. The government employee gravy train has to come to an end. The public employee unions have gotten way too powerful, and they are bankrupting multiple state governments right now. Besides which, it is just wrong for public employees to make 55% more than those of us in the private sector. But the more people know about this and recognize the situation, the better. Hopefully there are enough of us now to turn the tide.

Comments

[Bill Czappa]

The main problem I have with this essay is you entered the picture to late on the chain. You are comparing government jobs with private sector jobs but leaving out the fact that those private sector jobs have been decimated over the last 20 years by the republican party and their cohorts the democrats who in their infinite allegiance to the richest people in the country past trade agreements which forced the middle class into lower paying jobs or who have eliminated them entirely by shipping them out of the country.
No one denies that the middle class has not kept up with the rich class in this country and the gap continues to widen. So if they had kept up, then comparing their wages to those government workers would have revealed a whole new picture. It is only because the middle class has lost so much ground that $50,000.00 a year seems like a lot of money.
How about comparing it to the head of the school board here in LA where the new chairman just hired is making $350,000.00 a year, more then the president of the USA. The school board voted to give him some $80,000.00 more then the guy they fired. How come he doesn’t have to tighten his belt? Or for that matter the governor of Wisconsin, what does he make? Will he be cutting his wages and benefits?
No it is always the rest of us who have to tighten our belts. After we bailed out the banking industry they now are back to their million dollar bounces. Where is their belt tightening? How about the insurance industry, the head of Etna making $25,000,000.00 a year. How many claims do you have to deny and people you have to murder to pull in that kind of an income?
And how about the senate and congress of the USA, are they tightening their belts? They get their full wage and very special insurance for the rest of their lives having served us, and I use the word serve here loosely.
And where were the rich when continuing George Bushes tax cuts was being debated? I didn’t hear them scampering to tighten their belts and go back to paying their share. But rather it was, Lets make them permanent and of course it is always let’s get rid of the capital gains tax. Most of us make our money working and paying income tax, but if you have lots of money you can just make more by investing it. But they don’t want to pay taxes on that kind of ”making money.” So once again just make the poor and middle class take up the slake. You pay taxes but we don’t have to.
It is always a dangerous thing when you hear people arguing that people make less money. The backbone of our economy and its greatest asset was people making a disposable income. Once you destroy that you end up with the economy of Mexico. And of course that is what the rich are really after. Every thing they are for leads to more money for them and less money for everyone else. And we know now that it does not ever trickle down.
Below is another comment from a friend of mine regarding this essay. I completely agree with it.
B C

I love it when the Republicans say that “everyone” has to tighten their belt. Everyone except the millionaires and billionaires who get to keep their massive Bush era tax cuts.
What the Republicans actually want is for more people to join the peasant class. I think it is actually a reactive mind dramatization of the feudal system. Shame on those public workers for actually being able to buy a house, go on vacations, send their kids to college, etc. They should be poor like everyone else. You can analyze just about any of the Republican agenda to see if it concentrates more wealth in the top 5% and eliminates more of the middle class. Despite anything they say or the “reasons” they give for their positions, this is the practical effect of all their policies.

I’m not kidding. Like Casey Stengel said, “You could look it up”.
E. A.