Federal Salaries Will Continue to Fall Behind Market Pay Rates

Recent research from the Federal Reserve Bank of San Francisco highlights why the Bureau of Labor Statistics’ Employment Cost Index currently understates the pay increases government should be granting to attract and retain talent. This is getting into the weeds but the pay gap is going to get progressively wider until the use of BLS data to adjust the General Schedule is reconsidered.

The focus here is not salary levels; the current GS 7 starting salary ($43,864, for the Washington area) is in the range of starting salaries for many non-technical graduates. In December 2008, the start of the recession, the GS 7 rate in Washington was $39,330. That’s an 11 percent increase. The ECI shows pay in the private sector increased 14.4 percent in the same period. 

That, however, ignores the step increases. The graduates who started in 2008 would have been promoted in 2009 to GS 9 and $50,408 -- a 28 percent increase. Today they would likely be at GS 12 (or higher) and possibly above $80,000. That’s the true measure of wage growth.

For employees hired in 2008 or later, the total of the increases from promotions and subsequent step increases is fully competitive with what a typical employee in the private sector has received. The cost of living only increased 11 percent from December 2008. 

But the ECI-based adjustments going forward will understate non-federal wage growth.

The ECI Understates Budgeted Pay Increases

In previous columns I argued there are three reasons why the ECI is not the right metric to govern annual GS increases. 

First, government is competing for talent with only a small percentage of the nation’s employers.  Many of the jobs in small, mom-and-pop businesses—dry cleaners, gas stations, hoagie shops, and so on—require less skilled employees. The BLS collects pay data from many employers that are not relevant to federal salary administration.   

Second, BLS analyses show small employers pay less than the country’s leading companies. Roughly 90 percent of U.S. employers have 20 employees or less.

Third, relying on the same percentage increase for all job levels and occupations ignores everything we know about labor markets. 

The page after page of “special [pay] rates” on OPM’s website along with the staffing problems for millennials and for high-demand specialists make it all too obvious the GS system is out of sync with labor market trends.

The Federal Reserve Bank of San Francisco March study, “What’s Up With Wage Growth?” focused on different issues.

In the first months of the recession, it reported that 41 percent of the jobs lost were in high-pay industries, 37 percent were in mid-wage sectors and 22 percent were in low-pay industries. With the recovery, the pattern of job growth has been almost a mirror image, dominated by low pay industries. That effectively holds down the averages when all occupations are combined in a single data summary.

The growing importance of part-time workers also holds down ECI increase rates. Those jobs generally pay less. The study points out that 80 percent of the part-time salaries are below market medians for specific occupations. 

New hires start low in their salary range and during layoffs they are usually the first to go. The recession triggered a halt to hiring. A few employers initiated layoffs. The reduced head count of young, low pay workers actually pushed average salaries higher for several months.

Now the retirement of Baby Boomers, with their long tenure and higher salaries, reduces average market salaries and the ECI increase. In government, however, where the workforce is dominated by older workers, a comparison of average salaries with those paid in industry, the pay gap is distorted by the higher salaries paid to the older government workforce.

As a summary point, industries and occupations with high turnover generally experience minimal increases in labor costs. Replacing higher pay employees with entry level, low pay employees is a way to hold down both salary and benefit costs. (Government with relatively low turnover may by policy pay below market rates but its benefit costs are driven up by the age and the years of service of its workforce.)

Now that employers are adding staff—young, low pay workers—and baby boomers are retiring, the moving ECI average will trend lower than the increases reflected in corporate salary budgets.  With the “silver tsunami” of boomer retirements, that will continue for years.

Market Rates vs. Labor Costs

The Employment Cost Index is a time series showing the annual increase in hourly labor costs for the country’s non-federal workforce. That includes all those mom-and-pop businesses. It mixes the pay of receptionists with world class scientists. But it does not document how much those scientists or receptionists or any occupations are paid. It tells us nothing about market pay levels.

Significantly BLS cannot state with any precision how much any federal job would be paid in a non-federal organization. The ECI is narrowly focused on percentage increases, not pay levels. BLS surveys cannot tell us, for example, if one of the country’s great hospitals pays more or less than those that are marginal. The data cannot help an insurance company like Prudential in Newark learn how their salaries compare with the pay of similar companies in Manhattan or Hartford.

Realistically, the BLS data are not useful in managing the pay programs of non-federal employers. It would be useful to learn if any non-government employers use BLS data to manage pay.

For non-government employers, market pay levels are core considerations for salary planning.  Employers compare their wage and salary levels with the pay levels for similar jobs. That’s a virtually universal practice. It’s logical and easy to explain to both leaders and job incumbents. 

Government relied on the same logic until the mid-1990s when BLS unilaterally terminated the survey that generated readily understood data. Now the adjustments are based on a scheme that few if any understand or believe. It’s now generating misleading information.