The research in this paper investigates whether state and local public employees are overpaid at the expense of taxpayers.

This research is timely. Thirty-seven states are struggling with substantial budget deficits. Several governors have identified excessive public employee compensation as a major cause of their states’ fiscal duress. The remedies they propose include public employee pay freezes, benefits reductions, privatization, major revisions to the rules of collective bargaining, and constitutional amendments to limit pay increases, each as a necessary antidote to the public employee overpayment malady.

The data analyses in this paper, however, indicate that public employees, both state and local government, are not overpaid. Comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, and disability, reveal no significant overpayment but a slight undercompensation of public employees when compared with private employee compensation costs on a per hour basis. On average, full-time state and local employees are undercompensated by 3.7%, in comparison with otherwise similar private-sector workers. The public employee compensation penalty is smaller for local government employees (1.8%) than for state government workers (7.6%).