Grade Inflation or Human Capital: Why Have Federal Wages Risen Rapidly?

Abstract: Federal real wages have increased substantially over the past quarter century. We examine this trend with a new dataset from the Office of Personnel Management that includes annual records for over three million federal workers from 1988-2011. We demonstrate that federal wage growth has outstripped private sector growth and is due primarily to individuals moving between grades. Further, federal wage gains have been distributed relatively evenly across the wage distribution. We show that increased wages have been associated with increased human capital levels, with federal employees becoming increasingly educated and experienced. Furthermore, federal work has shifted from clerical to administrative and professional jobs. Our results suggest that increased human capital and occupational changes account for about three-quarters of real wage growth during this period. Finally, we find limited evidence of the manipulation of job classifications to generate higher wages. These results have implications for policy regarding the costs of government.