For the case of the public sector, the probability of involuntary separation is just 1.3 percent, which is one-third as high as the probability in the private sector case. I then calculate the difference in compensation between the public sector (low unemployment case) and the private sector, such that a worker would be indifferent between working in either sector. I find that workers would be willing to work for about 10 percent less compensation in the public sector, given the additional benefit of much higher job security. This estimate is conservative in terms of considering today’s labor market, as average unemployment duration today is much higher than its historical average.

This analysis suggests the possibility that public sector compensation may be significantly higher than competitive levels. Moreover, the fact that public sector workers are only about one-third as likely to voluntarily leave their job as private sector workers is consistent with the conclusion that average public sector compensation rates are in excess of competitive levels, indicating that there are relatively few external employment opportunities that dominate public sector workers’ jobs. The fact that average public compensation is higher than average private sector compensation suggests that public sector worker compensation may be well above competitive levels and indicates that public sector wages could be reduced without significantly impacting public sector employment. For example, I’ve calculated the impact of a 5 percent wage reduction for all public employees in California, a state with one of the most severe fiscal crises in the country. A 5 percent wage cut would reduce state spending by $1.33 billion, which would reduce California’s 2011 state budget deficit by nearly 15 percent.