Budget & Tax

Overcrowding on the Government Gravy Train

December 10, 2008

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

The compensation of Oklahoma’s government employees exceeds that of their private-sector counterparts. But a bigger problem is that we simply have too many government employees in this state: Oklahoma’s ratio of government employment to private-sector employment is a disturbing 5th highest in the country. Bringing this ratio in line with the national average would have saved Oklahoma taxpayers $2.8 billion last year.

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 to examine 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.

The first part of the article examines Oklahoma’s state and local employment levels. In 2007, state and local government employed 21.34 people for every 100 people the private sector employed—hereafter referred to as the “employment ratio.” Oklahoma’s state and local employment ratio is 32 percent higher than the national average of 16.22.

The second part of the article examines Oklahoma’s state and local compensation levels. In 2007, state and local government compensation was $43,417 per job while private sector compensation was $42,051 per job. In other words, the average state and local government job paid 3.2 percent higher than the average private sector job—hereafter referred to as the “compensation ratio.”

In 2007, adjusting these employment and compensation ratios to the national average would have saved taxpayers nearly $3.1 billion.

Oklahoma’s Government Employment Problem

According to the Bureau of Economic Analysis, in 2007 Oklahoma’s state and local governments employed 275,443 people (full and part time). That’s 17.6 percent of the state labor force. Of the total, Oklahoma state government employed 83,709 people (this includes higher-education employees) and local governments employed 191,734 people. In the aggregate, they were paid $11,958,907,000 in total compensation, or 13 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.

The employment ratio, for example, is derived by dividing government employment by private employment. Chart 1 shows that in 2007 Oklahoma state and local governments employed 21.34 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 32 percent higher than the national average. Clearly, Oklahoma has a government employment problem.

The compensation ratio is derived by dividing public sector compensation per job by private sector compensation per job. In 2007, public sector compensation in Oklahoma was $43,417 per job, which is 3.2 percent higher than the private sector compensation of $42,051 per job.

The compensation ratio is shown in Chart 2. Between 1969 and 1996, Oklahoma’s public sector compensation was below that of the private sector. However, since 1996 public sector compensation has exceeded private sector compensation. In 2007, Oklahoma’s compensation ratio ranked as the 27th highest in the country.

It is important to note that compensation is comprised of 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 2007, Oklahoma’s public sector wages and salaries were $31,368 per job, which is 10.3 percent lower than the private sector wages and salaries of $34,953 per job. In 2007, Oklahoma’s wage and salary ratio ranked as the 36th highest in the country.

The benefit ratio is derived by dividing public sector benefits per job by private sector benefits per job. In 2007, Oklahoma’s public sector benefits were $12,049 per job, which is 69.8 percent above the private sector benefits of $7,098 per job. In 2007, Oklahoma’s benefit ratio ranked as the 10th 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 2007. In 2007, adjusting the employment ratio to the national average would have saved taxpayers $2,796,612,406, while adjusting the compensation ratio to the national average would have saved taxpayers an additional $302,439,902.

Looking at the entire 1969 to 2007 time period, adjusting the employment ratio would have saved taxpayers a staggering $58,540,926,230 in real 2007 dollars (though adjusting the compensation ratio would have cost taxpayers $7,935,625,679 in real 2007 dollars).

Conclusion

Overall, policymakers should be most concerned with Oklahoma’s 5th highest in the nation employment ratio. If Oklahoma’s employment ratio were at the national average in 2007, it would mean 66,084 fewer state and local government employees. This would save Oklahoma taxpayers $2,796,612,406.

Yet, the high employment ratio is not the only concern for policymakers. Oklahoma also has a high benefit ratio of 69.8 percent, which is the 10th 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 lower 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.

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 the December 2007 article “Overcrowding on the Government Gravy Train,” which appeared last year in these pages.

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). The tax collection data are from the U.S. Census Bureau (http://www.census.gov/govs/www/estimate.html). 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.