Risk Adjust Private Wages To Compare To Public Wages

My comment to "What is the state employee union wage premium?" by Tyler Cowen on Marginal Revolution:

One also has to look at wage volatility in addition to average wage. Real wage volatility is increasing in the US, e.g. see The Great Increase in Relative Volatility of Real Wages in the United States by Julien Champagne and André Kurmann.

Increased volatility in real wages is an increase in risk to a wage earner of lower income and periods of unemployment.

Private sector versus government worker and teacher wages needed to be risk adjusted for valid comparisons. An equal numerical real wage between private and public is not equal if public workers face much less real wage negative adjustment risk.

Champagne and Kaufman state:
"We document that the increase in absolute volatility of the real wage is not generalized but concentrated among male, skilled and young workers. Also, there are large differences across industries..."

Around 80 percent of teachers are female and they are subject to much lower real wage volatility than private sector male workers, due to collective bargaining, tenure, difficulty in terminating, employment contracts, guaranteed benefits, cost of living increases, etc.

It is also highly likely given cost of living increase embedded in government employee contracts and difficulty in cutting wages or firing of government employees, that all government workers have lower wage volatility than private sector male or female workers.

Private sector employees, after adjusting for age, experience, education, regional variations in cost of living, etc., should make more than comparable public sector employees make to compensate for the increase in wage risk. If the numbers on their face are equal, they are in reality unequal.

Addendum: Also see my earlier post "Without A Productivity Measure, Government-Private Pay Comparisons Are Misleading."

Without a productivity measure, pay measurements are meaningless. For example, if three government engineers are needed to do the same work of two private sector engineers, then even at the same salaries and benefits, the government employees are overpaid.