---

Yes, They’re Overpaid
...The standard approach to comparing the salaries of different groups is to employ the “human capital model,” which assumes that workers are paid according to their skills and personal characteristics. If any group differences in wages remain after controlling for age, education, experience, race, gender, marital status, immigration status, state of residence, and so on, then one group is said to enjoy a wage premium over the others. Economists using this approach find that federal workers generally earn wages 10 percent to 20 percent higher than comparable private sector workers. When we ran a similar analysis with 2009 wage data from the Current Population Survey (CPS), the result was a 12 percent premium. James Sherk of the Heritage Foundation found that the federal premium today could be as much as 22 percent, depending on the specific control variables employed. In general, the federal pay premium is very large for lower and middle-skilled employees and shrinks for the best-qualified federal workers....

...In the late 1990s, the Postal Service surveyed all new hires, asking them how much they were paid in their previous job. Overall, new postal hires received salaries over 28 percent higher than what they had been paid in the private sector, which University of Pennsylvania law professor Michael Wachter and his co-authors called “enormous wage increases over their previous wages in full-time private sector jobs.” ...

...Federal workers quit their jobs at less than one-third the rate of private workers, which suggests federal employees don’t feel they can get a better combination of salary, benefits, and job perks in the private sector. Just as fixed effects naturally accounts for many hard-to-measure skill differences, quit rate analysis automatically encompasses the full range of compensation in each sector.

For years, defenders of federal pay have attributed low quit rates to the fact that federal employees receive traditional defined benefit pensions, which reward long job tenure and discourage midcareer employees from leaving. Richard Ippolito, the author of a 1987 study that made this claim, suggested what he called a “litmus test” for his theory: Switch federal employees from traditional defined benefit to 401(k)-type defined contribution plans, then see if quit rates change. “If federal workers are paid too much relative to their quality level,” Ippolito wrote, “the quit rate will not change much; if their pay is too low, the quit rate will increase markedly.”

As it happens, history has provided this test: While federal employees hired before 1984 have only defined benefit pensions, those hired after 1984 have a smaller defined benefit pension coupled with a defined contribution plan. If the pension job lock theory were correct, quit rates today should be much higher than in 1984. In fact, precisely the opposite is the case: Quit rates among federal workers hired after 1984 are actually around 30 percent lower than for similar workers in 1984. ...