NCPA - National Center for Policy Analysis

Government Pay Is Inflated

January 18, 2012

In a new report, James Sherk, a senior policy analyst in labor economics at the Heritage Foundation, explores federal compensation by comparing it to market rates, and considering its policy concerns and economic effects.

How Does Federal Compensation Compare to Market Rates?

  • The average federal employee earns 57 percent greater cash pay and 85 percent greater total compensation (which includes benefits) than the average private-sector worker.
  • Controlling for observable skills and characteristics, the federal pay system gives the average federal employee hourly cash earnings 22 percent above the average private worker's.  Including benefits raises the average compensation disparity to between 30 and 40 percent.
  • Despite these average pay differences, many federal employees are not overpaid.  The General Schedule does not connect pay with performance.  Many of the hardest-working and most highly skilled federal employees receive at- or below-market compensation.
  • Federal employees demonstrate with their actions that they receive better compensation in the public sector than in the private sector: They quit their jobs at one-third the rate of private employees.

Policy Concerns

  • Many federal employees retire in their late 50s, collect their pension and retiree health benefits, and then take a second job in the private sector, leaving taxpayers to subsidize this double-dipping.
  • It would be better to scrap the General Schedule, under which workers automatically receive step and grade increases in pay, and move to a performance pay system with federal pay tied to market rates and market signals of labor demand.

Economic Effects

  • Reducing federal pay to market rates would save taxpayers approximately $47 billion per year.
  • This reduces the deficit without reducing public services.
  • This also frees up more resources for private businesses to save and invest, expanding the economy and creating more jobs.

Source: James Sherk, "Federal Compensation: Why Government Pay Is Inflated," Heritage Foundation,
January 12, 2012.

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