Under the Federal Employees Pay Comparability Act of 1990 (FEPCA), most federal civilian employees receive an annual adjustment to their pay each January. As specified by that law, the size of the adjustment is set at the annual rate of increase of the employment cost index (ECI) for wages and salaries minus one-half of a percentage point.1 The across-the-board increase as spelled out under FEPCA, however, does not always occur. For example, the President can limit the size of the increase if he determines that a national emergency exists or that serious economic conditions call for such action. (Similarly, the Congress can authorize an adjustment that differs from the one sought by the President.) Legislation forgoing across-the-board adjustments for 2011 and 2012 was recently enacted in the Continuing Appropriations and Surface Transportation Extensions Act, 2011 (Public Law 111-322).
Under this option, the annual across-the-board adjustment that would be expected to occur under FEPCA would be reduced by 0.5 percentage points each year from 2013 through 2021. Under such a scenario, federal civilian salaries (as well as benefits directly tied to salaries) would not be affected in 2011 and 2012 because the annual pay adjustment has already been canceled for those years. Assuming that appropriations were reduced by a commensurate amount, federal outlays would be reduced by almost $10 billion over 5 years and by $50 billion over 10 years.
One rationale for this option is that compensation costs for federal civilian employees make up roughly 15 percent of federal discretionary spending, and therefore any significant reduction in that category of spending would require that personnel costs be constrained. In addition, it would signal that the federal government and its workers were sharing in the sacrifices that many beneficiaries of federal programs may be asked to make in the name of deficit reduction. Similarly, it would demonstrate that federal workers have not been shielded from the impacts of the economic downturn, which has resulted in large numbers of workers in the private sector either losing their job or having their wages remain flat or decline.
An argument against this option is that it would make it more difficult for the federal government to recruit qualified employees. That effect might be pronounced for federal agencies that require workers with advanced degrees and professional skills. Recent research suggests that although federal workers with less education are paid more than private-sector workers with comparable characteristics, federal workers with professional and advanced degrees are paid less than comparable workers in the private sector. Thus, lower across-the-board increases in federal pay might bring federal and private pay closer to parity for less educated workers but at the same time widen the gap between federal employees and private-sector employees working in jobs that require high levels of education. For federal employees who are eligible to retire but have not done so, such action could also reduce their incentive to continue working. If a significant number of those workers decided to retire as a result of smaller increases in pay, increased retirement costs could offset some of the payroll savings produced by the policy change.