In my previous post I commented on the excessive growth of senior Queensland public service positions over the last few years. Let us consider the hypothesis that this growth was related to public servants having significant influence over their own employment conditions, and being insulated from the market forces that keep private sector earnings broadly related to productivity. As the Newman government discovered at the 2015 election, public servants are a major voting bloc and have considerable political power. Hence, public servants could end up being overpaid relative to their private sector peers. Certainly, average earnings are higher in the public sector than in the private sector (chart below).

Of course, we need to compare like with like, and take account of the differing nature of jobs and worker characteristics between the sectors. The public service workforce contains a higher proportion of professionals, so you would expect higher average earnings in the public sector than in the private sector. Nonetheless, rigorous empirical studies, which adjust for differences in job and employee characteristics, show there still exists a public sector wage premium, by which public servants earn significantly more than comparable private sector workers. This phenomenon has been observed in many empirical studies across the world.

In a 2017 study Public-private sector wage differentials in Australia, published in Australia’s leading economics journal the Economic Record, eminent labour economist Sue Richardson and colleagues from Flinders University reported:

After controlling for observed characteristics and individual fixed effects, we show that on average workers in the public sector earn about 5.1 per cent more in hourly wages than those in the private sector. The wage premium is slightly higher for females than males. Using a panel data quantile regression model with fixed effects, we show that the positive wage effects of public sector employment are heterogeneous, with comparatively larger impact at the lower end of the wage distribution than at other parts.

That is, the study finds it is ordinary public servants who benefit most from the public sector wage premium. Senior public servants are more likely to be paid similar to what they would earn in the private sector, although there is still a small wage premium (2.4%) on average. The study also finds that, among senior public servants, women are the main beneficiaries of the wage premium, while among ordinary public servants it is men who are the main beneficiaries (p. 114):

…low-paid public sector jobs appear to be favouring post-school educated men and high-paid public sector jobs appear to be favouring women in general.

The findings by Sue Richardson and her colleagues suggest there could be some positive discrimination in favour of women in the hiring process for the senior public service. This would be controversial if true. Further research on this issue would be highly desirable.

In summary, the best Australian evidence, which is consistent with the international evidence, supports the hypothesis of a public service wage premium. We should ask what is responsible for this premium? Is it the political power of public servants, one aspect of which is the existence of strong public sector unions?

The US public choice school that came to prominence in the 1970s provocatively analysed bureaucracy as if public servants are self-interested empire builders, rather than dedicated servants of the public good. In the famous 1977 article The expanding public sector: Wagner squared, Nobel laureate James M. Buchanan and fellow public choice economist Gordon Tullock argued government tends to grow ever larger, and public servants more powerful and better compensated, because public servants vote. Bigger government is in the interests of public servants, so they vote for candidates who support it. This leads to bigger government and more public servants, who also vote for candidates who support bigger government. This is the Wagner squared hypothesis. (Adolph Wagner was the nineteenth century German economist who proposed a law of expanding state activity.)

In my view, the Wagner squared hypothesis is too pessimistic—it came before the Thatcher and Reagan revolutions, and Australia’s own micro-economic reforms which all suggested the situation is not completely hopeless. But it reminds us that there are significant non-market factors that influence public service salaries. When negotiating future enterprise bargaining agreements, governments should keep in mind that, on average, their public servants are overpaid relative to their private sector peers.