Are Arizona Public Employees Over Compensated?

April 2, 2012

Are Arizona Public Employees Over Compensated?

Jeffrey H. Keefe, Ph.D.
Fellow, Grand Canyon Institute
Dave Wells, Ph.D.
Fellow, Grand Canyon Institute

Executive Summary  

The research in this paper investigates whether Arizona public employees are overpaid at the expense of Arizona taxpayers.  The Arizona legislature is considering four bills including one that would ban state and local governmental entities from recognizing public sector unions, prohibit collective bargaining, and meeting and conferring with union representatives.   According to the bill’s proponents, taxpayers are unfairly burdened by public workers’ contracts negotiated by unions.  Senator Rick Murphy, R-Peoria, who introduced Senate Bill 1485 prohibiting meetings with union representatives, declares that it is inappropriate when employees “take on the mantle of a public servant, then group up together and use leverage on the people they claim to serve.” He adds, “There needs to be a better balance”  His statement suggests that state and local public employees in Arizona are excessively compensated.

Likewise, GPublicEmployeesOverCompensatedFeaturedovernor Jan Brewer’s proposal to shift significant numbers of state employees to at will status, while couched in the context of more flexible pay, will reduce the attractiveness of state employment. If the state doesn’t meet market rates, the state will be increasingly challenged in hiring and retaining the best employees.


Figure 1Arizona State and Local Government Employee CompensationRelative to Private Sector
 Public Employees Figure 1 Arizona State and Local Government Employee Compensation Relative to Private Sector
Source: 2001-2011 CPS PUMS, December 2010 ECEC.  Total observations 10,762 with 1,406 state and local public employees.

The data analysis presented in Figure 1 indicates that Arizona public employees, both state and local government employees, are not overpaid. Comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, citizenship, and disability reveal that public employees in both state and local governments earn less than comparable private sector employees. On an annual basis, full-time Arizona state and local employees are under-compensated by 7.8 percent in comparison to otherwise similar private sector workers. When comparisons are made for difference in annual hours worked, full-time Arizona state and local employees are under-compensated by a smaller 6.0 percent.

These results sharply contrast with the analysis presented by the Goldwater Institute in their January 24 2012 policy report, which suggests that public unions caused Arizona state and local government worker compensation to be $560 million above market rate.  Their analysis is inaccurate due to poor methodology.

Unlike the Goldwater analysis, our data set includes a random sample of 10,000 demographically detailed Arizona workers in both the public and private sector.  The Goldwater Institute relied on statewide averages, so Arizona was but one point among all the states.  In addition, Goldwater inexplicably failed to control sufficiently for other factors that economists routinely use, namely experience and education, as public sector workers tend to have more experience and higher levels of education than the private sector.   Throughout the Goldwater report, public and private sector workers are compared as if they were demographically identical.  Such analysis is similar to someone presenting a chart comparing high school educated workers with college educated workers and decrying that college educated workers earn more.

Workers with higher education levels typically earn more than those with less formal education.  Hence, when comparing public and private sector pay it is essential to take into account that the occupational and educational mix of these sectors are very different, with the public sector employing occupations which require much higher levels of education.  On average, Arizona public-sector workers are more highly educated than private-sector workers; 43 percent of full-time Arizona public-sector workers hold at least a four-year college degree compared to 27 percent of full-time Arizona private-sector workers. Arizona state and local governments pay college-educated employees 28 percent 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 public sector appears to set a floor on compensation. The 20 percent of workers in state and local governments with only high school diplomas earn more than comparably educated workers in the private sector.

The mix of wages and non-wage benefits in the total compensation package also differs between private and public-sector full-time workers in Arizona. State and local government employees receive a higher portion of their compensation in the form of employer-provided non-wage benefits, and the mix of those benefits is different from the private sector.

Public employers like large private employers contribute a bigger portion of employee compensation to non-wage benefits.  Retirement benefits are notably better in the public sector.  Most public 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.

When employee characteristics and employer size are properly controlled for, Arizona full-time state and local employees are underpaid by 16.7 percent and undercompensated by 7.8 percent compared to equivalent private sector workers. Full-time public employees, however, work fewer annual hours, particularly employees with bachelors, masters, and professional degrees (because many are teachers or university professors). A re-estimated total compensation equation controlling for work hours of full-time employees demonstrates that Arizona public employees earn wages 14.3 percent less and 6 percent less in total compensation per hour than comparable full-time Arizona private-sector employees.

State employees are paid and compensated less than local government employees with state employees  underpaid and under compensated  20.2 percent compared to 14.6 percent for local government employees, and the two groups are under compensated by 10.4 percent and 3.4 percent, respectively (see Figure 1).