This paper investigates the timely question of whether Indiana public employees are overpaid at the expense of Indiana taxpayers. After his election in 2004, Governor Mitch Daniels rescinded the rights of highway police, hospital attendants, mechanics, and other state workers to collectively bargain for wage and hour increases, working conditions, and other benefits, eliminating the unionization rights and contracts of approximately 25,000 state employees. Governor Daniels is also promoting vouchers for private schools and reducing public school funding, which may result in teacher pay cuts and layoffs.

This paper’s data analysis indicates that, contrary to allegations, Indiana public employees are not overpaid. (When we refer to public employees, we are referring to state and local employees, not federal workers.) Comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, citizenship, and disability reveal that public employees in both state and local governments earn less than comparable private-sector employees. On an annual basis, full-time state and local employees are under-compensated by 7.5% in Indiana, in comparison with otherwise similar private-sector workers. When comparisons are made for differences in annual hours worked, full-time state and local employees are under-compensated by a smaller 5.9% in Indiana in comparison to otherwise similar private-sector workers.

When comparing public- and private-sector pay, it is essential to recognize that the occupational and educational mix of the two sectors are very different, with the public sector employing occupations that require much higher levels of education. Consequently, on average, Indiana public-sector workers are more highly educated than private-sector workers; 49% of full-time Indiana public-sector workers hold at least a four-year college degree compared to 24% in the private sector. Indiana state and local governments pay college-educated employees 6% less in annual compensation, on average, than private employers. The compensation differential is greater for professional employees, lawyers, and doctors. On the other hand, the public sector appears to set a floor on compensation, so that the 1% of public-sector workers without high school diplomas earn more than comparably educated workers in the private sector.