The Divide Between the Public Sector and the Private Sector

02/27/11

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.

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