The Political Economy of Public-Private Compensation Differentials: The Case of Federal Pensions

Lee Craig ()

The Journal of Economic History, 1995, vol. 55, issue 2, 304-320

Abstract: Numerous empirical studies indicate that, as a result of rent-seeking behavior, public-sector workers are overcompensated relative to their private-sector counterparts, with pensions representing part of the difference. I present a history of the Federal Employees Retirement Act of 1920 and show that rent seeking by federal workers cannot explain several features of the act. Instead, I argue that the act represented an optimal incentive contract between Congress and civil service employees in which civil servants accepted mandatory retirement and a compensating wage differential in exchange for the federal pension plan.

Date: 1995
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