The prize of public-sector pay

Seven years after the 2008–09 recession, the federal and many provincial governments continue to struggle with deficits, spending more than the revenues they collect, and digging deeper into debt. All told, governments in Canada are projecting to rack up $43.8 billion in deficits this year alone.

With the pay and benefits for government employees consuming a significant share of government spending — often about half of a provincial budget — controlling these costs is key to any government’s effort to repair public finances.

And there’s ample reason to better control compensation costs. While governments must provide competitive compensation to attract qualified employees, decades of research has shown that the wages and benefits of government employees tend to eclipse those for comparable private-sector positions. This is not just about economics. It’s unfair to have government workers receive a premium paid for by private-sector workers who receive less for similar positions.

A new Fraser Institute study spotlights the wage premium enjoyed by government employees in Canada at all levels (federal, provincial and local). Using Statistics Canada data from 2015, the study finds that government employees receive, on average, 10.6 per cent higher wages than comparable workers in the private sector. (This wage premium accounts for differences between individual workers in the two sectors such as

First consider pensions, one of the costliest benefits provided to workers in both sectors. In 2015, 89.3 per cent of government-sector workers were covered by a registered pension compared to just 23.8 per cent of privatesector workers. Tellingly, virtually all government pensions (eight of 10) provide defined benefits, guaranteeing a certain income level in retirement, rather than being dependent on how investments perform. cent of those in governmentsector employment.

So what drives this disparity in wages and benefits?

The reason is twofold. In the government sector, political factors largely determine the wage-setting process, while the private sector is largely guided by market forces and profit constraints. These differences are amplified by the monopoly environment in which the government sector operates versus the competitive environment of the private sector.

The first step to solving the government compensation premium is better data collected on a more regular basis. Better information, available more regularly, will hold governments to account for managing compensation costs.

The longer-term solution, however, is to enact measures that link the wages and benefits of government employees to similar positions in the private sector. Doing so would allow governments to better control spending, rein in debt and maintain fairness for taxpayers who ultimately foot the bill.