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Retirement System Characteristics and Compensating Wage Differentials in the Public Sector

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  • Ronald G. Ehrenberg

Abstract

This paper presents evidence that a trade-off exists between wages and certain characteristics of retirement systems in the public sector. Cross-section econometric estimates for uniformed municipal employees, based upon data from two national surveys of municipalities, suggest that, other things equal, an increase in the contribution made by uniformed employees to their retirement system leads to a compensating increase in their salaries, while retirement systems with more “generous†characteristics are associated to some extent with lower salaries. The estimates also indicate that the extent of retirement system underfunding is related to employers' and employees' perceptions of the probability that promised retirement benefits will not be fully paid and that these perceptions too are reflected in compensating wage differentials. The author concludes that pension reform legislation in the public sector will be likely to have an impact on public sector wages and, therefore, careful consideration should be given to the design of such legislation.

Suggested Citation

  • Ronald G. Ehrenberg, 1980. "Retirement System Characteristics and Compensating Wage Differentials in the Public Sector," ILR Review, Cornell University, ILR School, vol. 33(4), pages 470-483, July.
    • Handle: RePEc:sae:ilrrev:v:33:y:1980:i:4:p:470-483
    DOI: 10.1177/001979398003300402
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    Cited by:

    1. Steven G. Allen & Robert L. Clark, 1987. "Pensions and Firm Performance," NBER Working Papers 2266, National Bureau of Economic Research, Inc.
    2. Paige Qin & Michael Chernew, 2013. "Compensating Wage Differentials and the Impact of Health Insurance in the Public Sector on Wages and Hours," NBER Chapters, in: State and Local Health Plans for Active and Retired Public Employees, National Bureau of Economic Research, Inc.
    3. Montgomery, Edward & Shaw, Kathryn, 1997. "Pensions and Wage Premia," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 510-522, July.
    4. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    5. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, April.
    6. Inkmann, Joachim, 2006. "Compensating wage differentials for defined benefit and defined contribution occupational pension scheme benefits," LSE Research Online Documents on Economics 24516, London School of Economics and Political Science, LSE Library.
    7. Johnston, Andrew C., 2021. "Preferences, Selection, and the Structure of Teacher Pay," IZA Discussion Papers 14831, Institute of Labor Economics (IZA).
    8. Robert L. Clark & Joseph F. Quinn, 1999. "Effects of Pensions on Labor Markets and Retirement," Boston College Working Papers in Economics 431, Boston College Department of Economics.
    9. William D. Manson & Gene E. Mumy, 1982. "Human Capital Theory and Retirement Income: Some Further Considerations," Eastern Economic Journal, Eastern Economic Association, vol. 8(3), pages 247-249, Jul-Sep.
    10. Steven G. Allen & Robert L. Clark & Daniel A. Sumner, 1986. "Postretirement Adjustments of Pension Benefits," Journal of Human Resources, University of Wisconsin Press, vol. 21(1), pages 118-137.
    11. Herman B. Leonard, 1987. "Investing in the Defense Work Force: The Debt and Structure of Military Pensions," NBER Chapters, in: Public Sector Payrolls, pages 47-78, National Bureau of Economic Research, Inc.
    12. Mitchell, Olivia S, 1988. "Worker Knowledge of Pension Provisions," Journal of Labor Economics, University of Chicago Press, vol. 6(1), pages 21-39, January.
    13. Geoffrey K. Turnbull & Chinkun Chang, 1998. "The Median Voter According to GARP," Southern Economic Journal, John Wiley & Sons, vol. 64(4), pages 1001-1010, April.
    14. Haynes, Jonathan B. & Sessions, John G., 2013. "Work now, pay later? An empirical analysis of the pension–pay trade off," Economic Modelling, Elsevier, vol. 30(C), pages 835-843.
    15. Johnson, Richard W., 1997. "Pension Underfunding and Liberal Retirement Benefits Among State and Local Government Workers," National Tax Journal, National Tax Association, vol. 50(1), pages 113-42, March.
    16. Olivia S. Mitchell & Rebecca A. Luzadis, 1985. "Firm-Level Policy Toward Older Workers," NBER Working Papers 1579, National Bureau of Economic Research, Inc.
    17. David G. Lenze, 2009. "Accrual Measures of Pension-Related Compensation and Wealth of State and Local Government Workers," BEA Working Papers 0054, Bureau of Economic Analysis.
    18. Kathy Hayes & Shawna Grosskopf, 1985. "Measuring the Welfare Loss of Pension Mandates: A Methodology and Example," Public Finance Review, , vol. 13(1), pages 47-62, January.
    19. Ehrenberg, Ronald G & Schumann, Paul L, 1984. "Compensating Wage Differentials for Mandatory Overtime?," Economic Inquiry, Western Economic Association International, vol. 22(4), pages 460-478, October.
    20. Qin, Paige & Chernew, Michael, 2014. "Compensating wage differentials and the impact of health insurance in the public sector on wages and hours," Journal of Health Economics, Elsevier, vol. 38(C), pages 77-87.
    21. Alan L. Gustman & Olivia S. Mitchell, 1990. "Pensions and the U.S. Labor Market," NBER Working Papers 3331, National Bureau of Economic Research, Inc.
    22. Johnson, Richard W., 1997. "Pension Underfunding and Liberal Retirement Benefits Among State and Local Government Workers," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(1), pages 113-142, March.
    23. Erwin Ooghe & Erik Schokkaert & Jef Flechet, 2003. "The Incidence of Social Security Contributions: An Empirical Analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(2), pages 81-106, June.

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