Budget & Tax

Oklahoma's Government-Employment Problem Persists

November 2, 2009

Brandon Dutcher, J. Scott Moody, Wendy Warcholik, Ph.D.

Oklahoma taxpayers have no direct way to judge whether or not they are getting a good "bang for the buck" for the goods and services provided by the public sector.

In the private sector, productivity is the sum of all goods and services (as measured by Gross Domestic Product) divided by the number of workers. In the public sector, however, there is no reliable measure of the "goods and services" received because prices are not set on a voluntary basis. Rather, citizens pay taxes that are deemed necessary to fund government at a level determined by elected policymakers.

This article will provide an indirect way to better understand the productivity of Oklahoma's public sector by examining government employment and compensation levels across the 50 states.

The basis of comparison is an examination of the number of jobs and their pay in Oklahoma versus the national average. There is nothing magical about the national average, of course. But since it represents an amalgam of 50 states, it is reasonable to assume that being above the national average indicates "low productivity" among the government's workforce and vice versa.

Overcrowding on the Government Gravy Train

According to the U.S. Department of Commerce's Bureau of Economic Analysis, in 2008 Oklahoma's state and local governments employed 280,079 people (full and part time). That's 17.7 percent of the state labor force. Of the total, Oklahoma state government employed 85,716 people (this includes higher-education employees) and local governments employed 194,363 people. In the aggregate, they were paid $13,089,084,000 in total compensation, or 13.9 percent of non-farm earnings (wages and salaries plus benefits).

However, aggregate statistics are not very useful when it comes to informing public policy. Rather, policymakers need relative metrics to judge whether or not Oklahoma has too many government employees or if they are paid too much.

Dividing government employment by private-sector employment gives us the "employment ratio." Chart 1 shows that in 2008 Oklahoma state and local governments employed 21.51 people for every 100 people employed by the private sector.

This is the 5th highest employment ratio in the country, up from the 14th spot in 1970. Oklahoma's employment ratio is 29 percent higher than the national average. Clearly, Oklahoma has a government-employment problem.

The "compensation ratio," shown in Chart 2, is derived by dividing public-sector compensation per job by private-sector compensation per job. In 2008, public-sector compensation in Oklahoma was $46,734 per job, which is three percent higher than the private-sector compensation of $45,354 per job.

Between 1969 and 1992, Oklahoma's public-sector compensation was below that of the private sector. However, since 1992 public-sector compensation has exceeded private-sector compensation. In 2008, Oklahoma's compensation ratio ranked as the 30th highest in the country.

It is important to note that compensation has two components. The first part is the wage or salary paid to the employee for services rendered. The second part is benefits, such as health insurance, retirement, and so on. Let's explore these two components of compensation.

The wage-and-salary ratio is derived by dividing public-sector wages and salaries per job by private-sector wages and salaries per job. In 2008, Oklahoma's public-sector wages and salaries were $33,863 per job, which is 10.6 percent lower than the private-sector wages and salaries of $37,859 per job. In 2008, Oklahoma's wage and salary ratio ranked as the 38th highest in the country.

The benefit ratio is derived by dividing public-sector benefits per job by private-sector benefits per job. In 2008, Oklahoma's public-sector benefits were $12,870 per job, which is 71.7 percent above the private-sector benefits of $7,496 per job. Oklahoma's benefit ratio ranked as the 6th highest in the country. Unsurprisingly, Oklahoma's high benefit ratio contributes to the unfunded actuarial liability of the Oklahoma Public Employees Retirement System. A reduction in current benefit levels would not only save taxpayers money today, but would also save money in the future via lower unfunded actuarial liabilities.

Charts 3 and 4 show how much state and local government spending could have been reduced if either the employment ratio (Chart 3) or compensation ratio (Chart 4) had been reduced to the national average in each year between 1969 and 2008. In 2008, adjusting the employment ratio to the national average would have saved taxpayers $2,891,859,576, while adjusting the compensation ratio to the national average would have saved taxpayers an additional $107,806,005.

Looking at the entire 1969 to 2008 time period, adjusting the employment ratio would have saved taxpayers a staggering $63,559,237,821 in real 2008 dollars (though adjusting the compensation ratio would have cost taxpayers $8,433,536,759 in real 2008 dollars).

Conclusion

Overall, policymakers should be most concerned with Oklahoma's employment ratio, which is the 5th highest in the nation. If Oklahoma's employment ratio were at the national average in 2008, it would mean 62,394 fewer state and local government employees. This would save Oklahoma taxpayers $2,891,859,576.

Yet, the high employment ratio is not the only concern for policymakers. Oklahoma also has a high benefit ratio of 71.7 percent, which is the 6th highest in the country. The high benefit ratio is a significant contributing factor to Oklahoma's growing unfunded retirement actuarial liability.

Finally, policymakers should remember that the best course of action is to grow the private sector, boosting both income and employment. Policymakers must pursue pro-growth economic policies-such as fewer regulations, lower taxes, and secure property rights-that will promote economic development by allowing private-sector businesses to better compensate and hire additional employees. Such policies are a win-win for both the private and public sectors.

Research Notes: The employment and compensation data used in this study are from the Bureau of Economic Analysis Regional Economic Accounts (http://www.bea.gov/regional/index.htm#state) and include the recent comprehensive revision from 1969 to 2008. All calculations were performed by the authors. The data exclude farm and proprietorship income as well as dividends, interest and rents, and personal current transfer receipts. The data were adjusted for inflation using the "Gross Domestic Product" deflator.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.

Brandon Dutcher (M.A., Regent University) is OCPA's vice president for policy. This article is an updated version of "Overcrowding on the Government Gravy Train," which appeared in the December 2008 issue of Perspective.