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The Overpaid and Underpaid: A Comparison of Labor Costs in Nonprofit and For-Profit Service Organizations

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Abstract

The comparison between nonprofit and for-profit organizations has been a lingering question for scholars and practitioners. This research explores employee wage differentials across sectors using a national sample of child care workforce. After controlling for a range of individual, occupational, organizational, and community factors, this research reports a significant wage premium for nonprofit child care teachers. In addition, this study finds evidence for both the labor donation and property rights hypotheses, but the property rights theory demonstrates comparatively stronger explanatory power. Although individuals with stronger intrinsic motivation are more willing to donate labor for charitable outputs, inefficient management in nonprofits actually sets wage levels over the market level. Overall, the study highlights nonprofits’ comparative advantage in employee motivation but disadvantage in efficient management. The findings have implications for public and nonprofit management.

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Notes

  1. It should be noted that labor utilization in the two sectors is not the same. A key difference is that nonprofits generally rely on volunteers to varying degrees, while for-profits rarely employ volunteers. This study only considers paid workers and explores their wage differentials.

  2. Some studies argued nonprofit wage premium results from higher-quality services nonprofit employees produce (Holtmann and Idson 1993; Cleveland and Krashinsky 2009). This study does not test the wage-quality link directly. However, after balancing a variety of factors including those contributing to child care quality (such as employee experience, professional development, and staff turnover), the study suggests that when comparable employees produce similar-quality services, nonprofit centers pay their teachers significantly more.

  3. We have also considered the propensity score matching method. However, based on Imbens’s argument (Imbens 2004, 2015), OLS can be more efficient when it is correctly specified. Moreover, as Heckman et al. (1997, 1998) pointed out, the estimator from matching is fundamental the same as simple OLS if there is no misspecification. As such, we think our method, two-step selection model, is a preferable way to balance the efficiency and endogeneity issue of the estimator. Compared with simple OLS estimation, two-step selection model is widely seen as an effective method to mitigate endogeneity due to selection bias. It is, however, is more efficient to estimate the coefficients compared with propensity score matching method because it is fundamentally an OLS estimation.

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Authors and Affiliations

  1. School of International Relations and Public Affairs, Fudan University, Handan Road 220 Yangpu, Shanghai, 200433, China

    Jianzhi Zhao

  2. School of Public Affairs and Administration, Rutgers University-Newark, 111 Washington Street, Newark, NJ, 07102, USA

    Jiahuan Lu

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  1. Jianzhi Zhao
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Correspondence to Jianzhi Zhao.

Appendix: NSECE Survey Design and Data Collection

Appendix: NSECE Survey Design and Data Collection

The NSECE employed a probability sampling design. It first selected 219 primary sampling units (PSUs) across all 50 states and Washington, DC. PSUs were then allocated to states by size based on the population of children under age 18 within each state. The sample frame was compiled by all available state-level and national lists of child care providers serving children under age 13 from various government agencies in all 50 states and Washington, DC. The lists of providers included licensing, regulation, and license-exempt lists, as well as lists of providers in specific programs such as those offering Head Start or public pre-kindergarten.

In the center-based provider survey, a total of 15,805 screening interviews were completed (a weighted screener completion rate of 94.3%). From these, 8265 eligible center-based providers completed a center-based interview (a weighted interview completion rate of 78.2%). In this survey, directors of the child care programs were asked about various topics related to center and service characteristics. The overall weighted response rate of the center-based provider survey is 73.7%.

For each center-based provider who completed a center-based provider interview, one classroom-assigned instructional staff member was selected randomly for the workforce survey on his or her demographic information, work responsibility, and organizational setting. A total of 7230 center-based provider questionnaires were completed with adequate data to sample a workforce respondent (a weighted screener completion rate of 88.1%). From these, 5556 eligible workforce employees completed a workforce interview (a weighted interview completion rate of 80.7%). The overall weighted response rate of the center-based provider workforce survey is 71.2%.

The two datasets used for the present analysis are from the NSECE quick tabulation files, supplemented by its public-use files. More details about the NSECE and its survey design can be found in National Survey of Early Care and Education Team (2013).

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Zhao, J., Lu, J. The Overpaid and Underpaid: A Comparison of Labor Costs in Nonprofit and For-Profit Service Organizations. Fudan J. Hum. Soc. Sci. 12, 117–136 (2019). https://doi.org/10.1007/s40647-018-0228-9

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