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The GS System Fails in Today’s Labor Markets

Companies understand that you get what you pay for.

The January jobs report highlights the contradiction between the government’s approach to managing salaries and the reality for other employers. On CNBC, prior to Friday’s report, experts were predicting the added jobs would be slightly over 200,000; instead the number was 304,000. Wage levels increased by 3.2 percent for the year. The job gains and pay increases extend a trend that began in 2010.

The economic growth, as well as demographic trends and a changing mix of occupations, are creating skill shortages—the number of open jobs exceeds the number of job-seekers for the first time. A national expert on hiring recommends making offers to highly skilled applicants the day they are interviewed. Federal agencies will find it very difficult to compete in this environment.

Labor Markets Change Continually

The macro, national trends have been widely reported. Largely ignored are the variations in job growth and pay increases by industry, occupation and location. There are large areas across the country that have seen few new jobs. From August 2017 to August 2018, the number of jobs in non-metropolitan counties grew by less than 0.2 percent, compared to a growth rate of 1.1 percent nationwide. During that 12-month period, the U.S. added over 1.7 million jobs nationwide. But only 38,000 of those new jobs were in rural counties. Rural counties that are located farthest from cities lost jobs over that period.

The differences are attributable to the local balance of supply and demand. It’s the imbalances that govern pay differentials. To drive home the point, Bureau of Labor Statistics surveys show the average pay of computer specialists in San Jose, California, is $122,900 while in rural Kansas it’s $57,070.

To highlight the importance of supply and demand, the average pay in manufacturing increased only 1.4 percent, while pay levels at utility companies increased 6 percent and at information companies 7.6 percent.  

Not surprisingly, wage levels are usually low in rural areas. That’s the reason Citibank moved its credit-card operations to Sioux Falls, South Dakota, in 1981. Then the city had a population of barely 80,000 and an economy based on agriculture and meat-packing. Today it’s the nation’s credit card center and its population exceeds 180,000. In rural areas the closing of a plant can quickly lower prevailing wage levels.

But even with the job growth, pay levels in Sioux Falls are low relative to high-pay areas. Credit card centers do not require high skill employees. The BLS reports the average pay in Sioux Falls is $43,930 and in San Jose its $77,180. (All BLS local pay data are from 2017; 2018 data are not yet reported.)

Employer Salary Policies

Today it is likely that the only large, truly national employer that pays its employees the same regardless of where they work is the U.S. Postal Service. The base salaries of experienced city carriers under the current labor agreement, for example, exceed $60,000. That is not a high salary in Manhattan but it is well above the local averages in cities like Omaha, Nebraska, and San Antonio, Texas.

Pay programs for non-exempt employees—hourly, clerical, and technicians—are universally based on local pay surveys. That’s of course true for the Federal Wage System and its roughly 250 wage areas.  

Single location companies as well as hospitals normally pay close attention to local rather than national surveys, and hundreds of local surveys are conducted for that purpose. Hospitals have to be concerned with how their labor costs compare with other local hospitals. Executive compensation alone is routinely compared with national norms but that’s only because of investor concerns.  

As we get closer to the 2020 election, the candidates and the media will no doubt pay increasing attention to the pay increase trends that have held down worker incomes. However, the averages cover millions of employers, large and small and in every industry. There are companies and occupations where pay is steadily increasing. The labor markets important to federal agencies are limited to employers competing for talent and specific skills.

Further, it’s been reported that with the increased focus on talent, companies are placing more emphasis on assessing candidate expertise and skills. Companies understand that you get what you pay for, and the best talent can command higher pay levels. Their pay programs have the flexibility to pay the best qualified employees, for example, at the 75th percentile or higher.  

The Atlanta Federal Reserve Bank maintains on its website a Wage Growth Tracker that confirms “high skill” jobs command higher salary increases than low or mid skill jobs. The pattern suggests the salaries of jobs requiring higher skills will pull ahead over time. That’s across all industries.

There are four important differences between the General Schedule salary system and the pay programs in leading companies. Two of the differences are often mentioned: the emphasis on pay for performance and the anchor or tie to market pay levels. The third difference is the flexibility to recognize and reward individual contributions. The fourth is the confidentiality that masks concerns with discretionary reward decisions. The program model supports talent management.

A New Pay System is Essential

Today, the General Schedule salary system is effectively administered in a vacuum. Any connection to prevailing market pay levels or practices has been lost. The system is a handicap for agencies recruiting well qualified talent. Starting salaries for new college grads in technical fields are well below the levels in federal contractors.

There are no goals for the program and no data are generated to evaluate its effectiveness. Its administration brings to mind the parable of the blind men and the elephant—it’s so complex that it defies explanation.  

It’s doubtful that anyone finds the annual pay gap reports from the Federal Salary Council credible. The most recent Pay Agent report states, “the current locality pay methodology lacks credibility.” The gap is effectively ignored by policy makers. It would be interesting to learn if anyone besides journalists actually reads the reports.

When the Federal Employee Pay Comparability Act was passed, the goal was to make government more competitive in high pay areas. Recently, however, five new locality areas were approved despite BLS data showing average pay levels are below the national average. As each new area is approved, it drops the criteria needed to qualify—pay in the “Rest of US”—so additional areas will undoubtedly qualify.

It has been more than two decades since job-specific market data has been assembled. The recent Pay Agent report states, “the comparisons of Federal vs. non-Federal wages and salaries fail to reflect the reality of labor market shortages and excesses. They also require the calculation of a single average pay gap in each locality area, without regard to, for example, the differing labor markets for major occupational groups.” BLS surveys were not planned and are unable to follow trends in dynamic labor markets.

That’s obvious in the debate over a 2019 federal pay increase. Freeze? 1.9 percent increase? 2.3 percent increase? The gap has not been mentioned. Somehow the increase for the military is more important than what’s happening in the nation’s labor markets. The debate has ignored the issues highlighted in the Pay Agent report.

In contrast, the Federal Wage System, which applies to hourly workers, is based on a management model similar to that commonly used with blue collar jobs in other sectors. It’s simple and is anchored solidly to local market dynamics.  

Over the years, Congress has authorized a number of separate pay systems—the Intelligence and financial regulatory agencies along with specialists in healthcare, law enforcement and the Foreign Service are all paid under separate pay systems. There are also several ongoing demonstration projects as well as a long list of categories of non-General Schedule employees.

In the current political climate it’s unlikely the GS system can be replaced. A better possibility and a change that is direly needed would be to create a separate pay system for STEM specialists, those in science, technology, engineering and math positions. These specialists are in high demand and the best can command salaries well above GS levels. The special rate system is not the answer.

Another possibility would be to create a dual career ladder system limited to government’s world class experts in high demand fields. They should not be recruited away for higher pay.

The GS system is antithetical to effective recruiting and retaining critical skills. The problems will get worse.