The U.S. labor supply and demand have shifted dramatically in recent years. In April 2020, the pandemic sparked record unemployment levels, with 0.2 available jobs per unemployed worker. Two years later, amid the “Great Resignation,” the number spiked to 2.0 available jobs per unemployed worker. While the imbalance has narrowed to around 1.4 in early 2024, the labor market still favors job seekers.

In the competition to recruit and retain talent, private sector employers have steadily increased wages, with quarterly wage growth of at least 5% throughout 2022. As a result, the longstanding pay gap between the private and public sectors widened to 24%. However, public sector wage growth has been on the rise in recent months, even outpacing the private sector in the second half of 2023. Understanding the implications of the upward trend starts with a look at what’s driving the numbers.

Pay Increases Require Complex Processes

Lower pay is a significant factor when public sector employers compete against the private sector to hire and retain employees. But increasing pay levels isn’t a simple process for federal, state and local governments. Expanding salary budgets often involves legislative processes, union negotiations and tax increases. As a result, increases take longer to implement, with salary budgets and annual pay raises frequently established years in advance.

In addition, there are often broader implications to consider when increasing pay in the public sector. Traditional defined-benefit pension plans remain the norm in the industry. Managing pay increases and long-term pension costs is a balancing act. Addressing future cost concerns by creating tiers within the pension plan for new hires or implementing a defined contribution plan can require union negotiations or legislative approvals.

The recent uptick in public sector wages is in response to post-pandemic worker shortages and inflation. Essentially, the public sector is making the adjustments in late 2023 and early 2024 that the private sector made in 2021 and 2022. The lag time exacerbated the existing public-private wage gap, but it’s not the only factor that makes it difficult to fill public sector positions.

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Navigating the Silver Tsunami

In the public sector, the current workforce is significantly older compared to the private sector. Today, only 8% of the federal government workforce is younger than 30, compared to 23% in the private sector. As the boomer generation (born between 1946 and 1964) continues to retire, public sector jobs need to be more competitive to attract younger workers.

The gap between public and private pay levels can make government jobs less appealing to younger generations, especially in highly competitive fields like technology. In addition to wages, public sector employers need to compete in other areas. For example, compared to the private sector, public service careers often provide greater job security and more robust benefit packages, including pensions and other post-employment benefits like health insurance. However, these advantages may not be enough to attract Gen Z employees (born between 1997 and 2012).

Looking Beyond Pay to Attract Younger Workers

Gen Z employees seek jobs that provide a sense of purpose and an opportunity to make a difference. Public sector roles can be a natural fit. Adapting job postings to emphasize the mission and community impact of a government agency or local school can help mitigate salary concerns.

Work-life flexibility is also a priority for Gen Z job seekers. While not traditionally known for flexible work, the pandemic prompted many public sector employers to figure out remote and hybrid work options. The public sector workforce continues to value flexibility. In a 2023 survey, 60% of federal, state and local government employees say their job satisfaction would decrease if they had to return to in-office work full-time. Forty-five percent said it would cause them to look for another job. Offering roles that give employees flexibility in how, when and where the work gets done is another way to appeal to Gen Z beyond salary.

Providing opportunities for professional development and career advancement is another potential differentiator for public sector employers competing to attract Gen Z talent. Providing details about training programs and career paths as part of recruitment is key.

Ensuring Market-Competitive Pay

While benefits and perks are important, compensation remains a primary factor in employee decisions to join or stay with a public sector employer. As the industry increases pay, it’s important for public sector employers to take a strategic approach to rightsizing their compensation structure. A thorough compensation study that evaluates the market value of each role, benchmarks salary ranges and identifies discrepancies can help optimize expanded salary budgets. A compensation study also provides a guide for defining or adjusting the organization’s job architecture and pay formulas over time.

The public sector industry experts at CBIZ can help you evaluate your compensation strategies and optimize your organization’s resources to compete in today’s labor market. Connect with a member of our team and gain access to more resources here.

This article includes input from Joe Rice, Director of Compensation Consulting, and Phil Marciano, Managing Director at CBIZ Marks Paneth. Joe and Mark lead organization-wide compensation initiatives, providing public sector clients with critical compensation planning resources.