A Labor Economist Predicts Stability in the Fed Pay Trendline, But With a Big Caveat

The White House this spring proposed a 5.2% pay raise for civilian federal employees for 2024, while federal employee unions and their allies in Congress—in the recent period of high inflation—want 8.7%. 

But any boost won’t get locked in until later in the year—and seems far off as feds, the country and the entire world economy hang by the thread of stumbling debt limit negotiations between House Speaker Kevin McCarthy and the Biden administration. Indeed, it will be some time before anyone will know definitively what next year’s federal compensation looks like. Bottom line, though: to most feds and those who track their pay and benefits, the trend has been inadequate pops in pay, over many years—including during the long and now gone period of much lower inflation.

What is the longer-term outlook for public sector pay? And what are some of the global forces that could affect that outlook? This week, Government Executive talks with Peter W. Philips, a labor economist and compensation expert on the faculty at the University of Utah. Philips offers his insights on where federal pay and benefits may be heading—as well as the debt limit standoff. 

Q & A with Peter W. Philips

Government Executive: As a labor economist, what would you say to feds and unions who say a strong boost is needed—citing a very real erosion of fed pay vs. the cost of living over decades? 

Philips: First of all, we all have to note that there's no such thing as a single condition or situation for those on a federal wage. Some people in the federal government, for what they do, earn really good money. But some others do not. And some others are just scraping by—at least where their fed pay is concerned. On this last group, for example, in Utah where I live seasonal and temporary federal employees with the National Park Service are not paid very well. It’s just the way it is at that end of federal employment. Point is, depending on what kind of work you do, federal employment—against inflation or certainly compared with the private sector—offers compensation with some well-known strengths and weaknesses. 

Government Executive: Could you go a bit deeper on this, with examples? 

Philips: It’s all there in the data. At the top end of federal government pay, you have various highly qualified experts, scientists and career technical experts of many kinds. Generally, they're paid well. Often perhaps not as well as their high-end counterparts in the private sector, as statistics show. But in many such jobs the overall compensation can be pretty close. These employees don't have trouble having a house, putting food on the table, driving a relatively new car and so on. Now, for other feds who don’t earn as much, federal work is a tighter trade-off. On the one hand they have a very secure job. On the other hand, as I said, they tend to get paid less than those with comparable work in the private sector. 

Government Executive: But, beyond that well-known tradeoff, the trend in real fed pay is objectively downward. As with the better-publicized nosedive in Social Security retirement, where buying power is down 36% since 2000, and despite nominal boosts, fed buying power is down nearly 10% in a decade—so what would you advise feds or prospective feds facing this? 

Philips: Inflation is a very real factor. Look—your pay depends on what you earn and put in your pocketbook. But also what happens with prices on the grocery store shelves. It's a horse race between your paycheck and inflation. Up until the end of the pandemic recession, for a long time inflation was contained compared to historic trends. But then inflation picked up sharply, surprising many people—even economists. In the last year or so, no one has been sure whether that high inflation would stick around, or whether it was a blip. 

For feds, I would say my point here is that government, generally, is never going to be first or early at all in adjusting to inflation. It always wants to avoid ratcheting things up quickly, as policymakers hedge against whether this kind of situation is just a blip. There is always a long lag between when higher inflation starts to eat into a fed paycheck and when that paycheck starts to respond to inflation. Having said that, yes, federal government compensation was not keeping up with that even lower inflation we experienced in recent decades.  

Government Executive: In past interviews, as fed pay lost ground against even low inflation, you called it “surreptitious pay cuts” and “slow-speed wage cuts.” With that past take in mind, and today’s higher inflation, what’s your future take on the economy the fed pay’s buying power? 

Philips: First, again I have to point out that erosion in the buying power of the average paycheck has not been unique to the government sector. It’s happened in the private sector, too. It’s been happening to state and local employees, for that matter. As for my future take on things, there’s data but predicting is a hard thing. That said, I'm a betting man. And I bet that inflation will continue its recent trend of slowing down—as it has been for the past six months, at least. 

Government Executive: That’s a happy vision for feds—and if it happens can you predict a little more deeply what that might mean for feds? 

Philips: Whatever the trend turns out to be, as I said private sector employers are quicker to respond to inflation—both in raising wages as inflation increases and in lowering wages in the face of deflation or moderating inflation. That’s because, first, government—lawmakers and policymakers—just moves more slowly. Second, it’s because the labor market is different for government. Greater job security on offer means the kind of person attracted to federal employment is often its own unique universe. There is much less turnover once people are there. In our economy, high turnover industries are leisure, hospitality or construction. Low turnover industries are government, education, health and so on. The stability of jobs and people in government just adds to the fact that wages move—well, glacially isn’t the right word. But more slowly. This all has implications for federal employees. 

Government Executive: With pay erosion in both the private and public sector, does federal employment offer any additional “ace in the hole” advantages beyond greater job stability? 

Philips: Look—in a world where job security is becoming increasingly precarious, very much so in the private sector especially, this is a very important factor. Greater job security available in the government sector remains sufficiently attractive for people to hang on to those jobs even when their paychecks are eroding. That is what we see on this. And, yes, beyond stability,  benefits for public sector employees also remain generally better. 

Government Executive: How would you characterize the state of federal benefits? 

Philips: Circling back to what I said earlier, on average—while we see public sector pay still tends to be lower than private—its benefits continue to be more generous, right? It’s in the data. And, I’ll just tell you as an anecdote, I'm a professor at the University of Utah. Our benefits are generous. I had to replace one of my knees and I am covered for as much rehabbing as necessary. That’s better than many of my private-sector friends. Better benefits are a fact for federal employees as well as other public-sector employees. And, I’ll add another advantage beyond that: feds also have defined benefit pensions to go along with any of their other retirement savings. Most private sector employees no longer have such benefits. All these advantages—job security, better benefits and defined-benefit pensions—are very valuable to public sector people, and they tend to offset lower salaries. 

Government Executive: Even with better benefits, when wages erode in value people get nervous. You say the data gives you optimism for a continuing downward drift in inflation. But economists note that wages can rise and feed higher inflation. So, aren’t you worried about a possible “wage-price spiral”? 

Philips: No. Most of our recent inflation, according to the data, came with the pandemic due to a breakdown in fragile supply chains—across our globalized economy—which meant many things became scarce and expensive. I don't think our rising wages have much to do with the problem now or in the immediate future, so I don’t think we are facing a wage price spiral. Now with inflation hanging on, there can be a “knock-on effect”—meaning wages can feed inflation’s acceleration, somewhat. We saw this back in the 1960s and 1970s, particularly when inflation accelerated during the Vietnam War and the 1973 OPEC oil price spike. Unions even negotiated cost-of-living provisions in their contracts, But very, very few contracts have those agreements today. 

Government Executive: Finally, the elephant in the room: The danger of a debt ceiling default. Your thoughts, as the deadline nears and Congress might need at least a few days more to pass whatever’s negotiated? 

Philips: We all—feds and the entire world’s economy—rely on the U.S. federal government paying its bills pretty much on time. If the current debt ceiling standoff doesn’t end, it could be catastrophic. For feds, yes they might see their pay and benefits delayed even in a brief lapse. But, far worse, our country’s advantages could be lost to a “Humpty Dumpty” effect, where if our brand cracks even temporarily, can you really patch it up and reestablish certainty around the world? My biggest concern: If we're talking a breach lasting 30 or 60 days past deadline, that's a five-alarm fire—and not just for feds. We’re not talking just worsening inflation or a higher cost of borrowing anymore. We’re talking a serious downturn in the U.S. and world economy, with corresponding long-term massive deflationary, unemployment and other effects. We cannot afford this or future political failures over the debt ceiling.