THE POLITICAL-ECONOMY OF PUBLIC-PRIVATE COMPENSATION DIFFERENTIALS - THE CASE OF FEDERAL PENSIONS

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 di fference. I present a history of the Federal Employees Retirement Act of 1920 and show that rent seeking by federal workers cannot explain s everal features of the act. Instead, I argue that the act represented an optimal incentive contract between Congress and civil service emplo yees in which civil servants accepted mandatory retirement and a compe nsating wage differential in exchange for the federal pension plan.