Wednesday, April 6, 2011

Get Your Facts Straight

Every once in a while the Cato Institute issues these 5-10 minute videos on some economic problem plaguing the nation. Recently, I watched a not-so-coyly conservative video about public sector pay versus private sector pay.

A couple of decent points are made. Mainly, and I wrote this earlier on EconStu, California is handing out enormous pension payments (read: six figures), and that is not helping that state's finances.

Here's the big issue though. The claim that the mean wage for public sector employees is higher than that of private sector ones is meaningless. Math example!!!!


We have a mini-country, Microworld. In Microworld there are precisely 3 public sector employees, Al, Bob, and Jane. Al has a PHD. Bob and Jane have bachelors degrees. In the private sector, there are also 3 employees, Will, Emma, and Tanya. Here are their wages:


Public Sector:
Al- 200,000
Bob- 50,000
Jane- 50,000

Private Sector:
Will- 60,000
Emma- 60,000
Tanya- 60,000

Mean public sector wage= $100,000
Mean private sector wage: $60,000

So, the idea that a mean tells you any reliable information in this scenario does not hold up. It turns out that once you control for education, you'll find that public sector employees are actually underpaid. Go figure.

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