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A recent report from the American Enterprise Institute claims that, although private sector jobs pay more than equivalent public sector jobs, the latter are filled with significantly less-qualified employees than this pay difference should merit.

The report states that employees of a given caliber are paid more in the public than the private sector. Thus, if we use free market pricing for calibration, this suggests that public sector employees are overpaid. AEI claims that their reported wage discrepancies are the result of government promoting less qualified people more readily. Furthermore, AEI asserts that the government could save taxpayers $77 billion per year by reducing salaries to market rates.

That said, the chief problem is not of underpaying or overpaying employees. It is one of government money being less efficient than private sector money. This wastefulness could be remedied by making government agencies more responsive to profit-loss signals.  

Critics of the report counter that if the raw salary of a public sector position is less than that of its private sector counterpart, then the job will attract a less qualified application pool. However, even taking into account that the salary of similar positions is a little lower in the public sector, the discrepancy between employee qualifications far outweighs what this small amount of salary difference should merit. A small decrease in salary should attract slightly less qualified candidates, but the report shows that they are significantly less qualified. 

The government is getting less bang for its buck. This is because of the unique incentives of the hiring process. The federal government has no risk of going out of business, and it therefore lacks an incentive to control costs or quality. Additionally, the government "cares more" about its employees, due to the employees' having direct voting power to affect the government, and thus has less of an incentive to negotiate with them to the extent that private businesses do.

Proposed solutions for this issue include across-the-board pay cuts or salary increases to address the problem of inconsistent quality of public sector workers, but these solutions will not help, as they do not address the underlying cause of the problem. A lasting fix would be to change government incentives so that it is more accountable for its costs, and to address the temptation to "buy votes" through employee salaries.

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