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I've noticed how government jobs in the US are known to have generous pensions, healthcare plans, vacation time, etc. as compared to the corresponding job in the private sector. (I haven't actually done any comparisons specifically, but it's something that many people say, so I am assuming that this belief is true.) Why is this the case?

Someone may answer with, "This is because government workers have unions, which push for better benefits." But why can't the industry employees form unions as well, and thus receive equivalent benefits?

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  • $\begingroup$ Civil service management has less incentive to push back against granting additional benefits to their employees. $\endgroup$ – Ask About Monica Dec 14 '15 at 19:38
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I'll describe in turn five potential explainations:

  1. Risk aversion interacting with the tax code
  2. Is this true when we control for worker attributes?
  3. Lack of incentives for cost control
  4. Solving turnover, training and other HR problems
  5. Political economy: unions and politicians

Risk aversion interacting with the tax code

I've heard it argued (but not empirically substantiated) that because government positions generally offer very low risk of job loss they attract risk adverse people.

All other things equal, relatively risk adverse people like relatively generous insurance and have a greater precautionary savings motive against negative shocks. Because retirement savings, health insurance, and to a lesser extent, life insurance have tax advantages when purchased through the employer, this risk aversion would interact with the tax advantage to induce a high level of retirement savings, health, and life insurance. Disability insurance is not tax advantaged, but employer-run plans do help solve some of the adverse selection problems associated with stand alone disability plans and so they too have an incentive to be employer provided and more generous in government positions for similar reasons.

Is this true when we control for worker attributes?

That all said, I'll echo @rocinante's point that among some sub-populations of workers, it isn't clear that government benefits are particularly extensive. My reading of the Are government employees overpaid? literature is that highly educated or skilled government workers do not typically appear overpaid (in a Mincer regression residual sense) relative to their private sector counterparts, and this includes measures of income and benefits. And elite financial and IT firms are often famous for their lavish benefits of meals, profit sharing, and low cost health care. However, part of the story there is that wages are higher in those fields and benefits are generally increasing in wages (if only because so are the tax advantages). It may be surprising to hear this but the average education and age of a public sector worker is substantially higher than in the private sector, explaining some of the higher wages and higher benefits.

Lack of incentives for cost control

So while it may well be true that, as @kbelder says, public sector employers have less of an incentive to hold down benefits, they have less of an incentive to hold down wages too, at least in conventional wisdom government employee benefits are more different from private sector benefits than the wages are, so that leaves us with a remaining puzzle beyond poor cost containment incentives.

Solving turnover, training and other HR problems

@rocinante's point about turnover is also a good one. We can think of the employee-employer relation as a sort of investment that pays returns while employment persists. Any situation where the initial employer investment (e.g., in training, background checks, customized equipment) is large relative to the immediate payout is one in which the employer is going to want to incentivise the employee to stick around until that investment is repaid. Pensions, which back-load compensation have a powerful incentivizing effect towards retaining staff under these circumstances.

Similarly, when positions require idiosyncratic human capital (extensive expertise and training not useful for other employers), this makes the employee strongly value continuing the employee relationship, and if government employers particularly require this sort of expertise (say maintaining ICBMs) then employment protection benefits may be another efficient way to attract staff without paying higher wages.

Political economy: unions and politicians

Finally, two more reasons from a political economy angle. First, unions may not just get better benefits because they have more power and influence but also because the people who run unions wish greater power and influence. To those ends, higher wages give them less than retirement and benefits programs which require wealth and staffing to be run by the union. Second, benefits, particularly defined benefit pensions, can be opaque in their true costs. Since politicians have to answer in elections to the public, HR strategies that please government employees (like high defined benefit pensions) but appear to be low cost to the public (again like high defined benefit pensions) therefore are relatively attractive to the politicians that administer the government.

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  • $\begingroup$ Sorry, but the misleading claim that 53.6%% of public sector workers have a bachelor's degree whereas only 34.9% of private sector workers have a bachelor's degree and higher completely ignores the fact that the two sectors can't be compared. The government does not need as many burger flippers as the private sector. Just like the private sector does not need as many health inspectors and top of the line medical researchers as the government who is tasked to create food safety and drug safety standards. $\endgroup$ – rocinante Jan 14 '16 at 1:38
  • $\begingroup$ I reach just the opposite conclusion. It is exactly because the responsibilities and functions of government work are so different from typical private sector work that we should be careful that we only compare government workers to the sub-population of private sector workers that are comparable. Government cafeteria workers to private ones and government research scientists to private sector research scientists. Age and education are crude ways to proxy for these differences but hint at the important differences in composition in private and public workers. $\endgroup$ – BKay Jan 14 '16 at 1:57
  • $\begingroup$ You reach the opposite conclusion because you conveniently ignore the composition of the private sector labor force versus the public sector labor force. Ceteris paribus, a cafeteria worker working for the government at a dining hall gets paid far more than a cafeteria worker in the private sector, yet their education level and language skills are the same. $\endgroup$ – rocinante Jan 14 '16 at 3:45
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Some industry employees have benefits on par with those provided in the civil service.

The civil service has an incentive to have "better" benefits because civil servants deal with a lot of sensitive information and high employee turnover is not a desirable thing in that environment.

There is no similar incentive for private sector firms.

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  • $\begingroup$ I don't agree with your argument. Workers in insurance, banking, liberal professions and many other areas deal with sensitive information, yet they aren't rewarded by extra benefits. Actually, Audit firms have one of the highest staff turnover, yet they might be the firms that get to handle the largest amount of sensible information. $\endgroup$ – Hector Jan 11 '16 at 19:55
  • $\begingroup$ @Hector. Unlike the government, private firms (especially the non-unionized workplaces, like audit/accounting firms) have the luxury of individually drafting employee contracts, and therefore tailoring the contracts to the degree of worker responsibility/access to proprietary information. And while "high" staff turnover may exist anyway, the threat of expensive litigation in the employee contract protects the firm's information assets so that they are not aren't leaked to a competitor. 1/2 $\endgroup$ – rocinante Jan 14 '16 at 1:29
  • $\begingroup$ The government has no similar leverage, as all it can prosecute are things that are actually against the law. Leaking information may not fall under the illegal umbrella, as Hillary Clinton's email scandal showed. And for what it's worth, from my experience, audit/financial firms have the highest turnover for the lowest-level employees only, i.e. people still trying to get their professional designations and who feel they don't have enough studying time from their bosses. $\endgroup$ – rocinante Jan 14 '16 at 1:32
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Public sector has different features than private sector. In particular, private sector is very much focused on limiting costs, because it is supposed to generate profits and is held accountable for this by the shareholders who have means to exercise direct pressure.

A government isn't really accountable to anybody. Politically speaking, it is accountable to the citizen of course, but national accounting and public budgets are such complex things that citizen do not exercise a high pressure on the government. Moreover, the government doesn't seek profit maximization but utility maximization, sometimes with moderate focus on the costs. Running a deficit can even be seen as a positive argument by the electorate.

Finally, one of the most prominent factor is historical: public sector employees have long had high benefits, sometimes to limit bribery, by cronyism or just because they were in a position to grant themselves such benefits (refer to the wages of the Greek MPs). And it is a very difficult task to take back this benefits without strong reticence, strikes and other forms of protests.

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Private companies are usually too small to promise the kind of long term pension systems that the government offwrs.

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