It is time to align public sector incentives with the private sector

February 22, 2010

By Mark Milke
Director of Research
Frontier Centre for Public Policy

Mark Milke
Mark Milke

CALGARY, AB, Feb. 22, 2010/ — If there was an Olympic medal for pay and benefits, Canada’s public sector would do quite well and take home the gold. The sector shows a remarkable ability to insulate itself from economic reality.

In most decades and in general, public sector work is both more secure – it’s not as if governments will declare bankruptcy-and, on average, more lucrative than the private sector when it comes to both pay and benefits.

The data is clear: In fact, in a recent Frontier Centre for Public Policy study produced by my colleague, Ben Eisen, he noted how much more municipal, provincial and federal civil servants are paid on average when compared to equivalent job classifications in the private sector. For example, the Canada-wide average pay premium was 59 per cent for federal civil servants over the private sector equivalent, an average of 35 per cent provincially and an eight per cent advantage at the municipal level. 

Depends on the province

The averages can vary depending on the province. The average pay premiums for federal, provincial, and municipal public servants working in British Columbia amount to 61 per cent, 38 per cent and 15 per cent respectively; in Alberta, the pay premium over the private sector is a tad more narrow, at 27 per cent, 24 per cent and five per cent.

Other analyses show similar results on pay and benefits. When the Canadian Federation of Independent Business surveyed 2006 census data, it found public sector employees at the federal level garnered 41.7 per cent more than private sector equivalents, 24.9 per cent more at the provincial level and 35.9 per cent in municipalities. (The difference between the two study results can be explained by examinations of different data sets.)

The CFIB study also broke down the advantage by sector. So, for example, government health care pay and benefits package is on average 19 per cent higher than private counterparts. In education, the difference is 17.6 per cent. The post office and urban transit employees in the public sector garner a whopping 40.5 per cent and 35.7 per cent pay and benefits advantage over the private sector.

What might the responses be from the public sector to these discrepancies? Well, “So What?” might be one and “too bad for the private sector” might be another. If private sector wages and benefits are on average lower than the government sector, it might say, private sector employees can unionize more often and force wages and benefits up.

Private sector employees could try, of course, except public sector employees have another distinct advantage to simply being more heavily unionized: they are often in a monopoly or quasi-monopoly position. Thus, taxpayers and consumers have little choice but to pay the taxes and use the services delivered by such employees.

Besides, even if private industry matched public sector unionization rates, wages and benefits wouldn’t reach public sector levels because there are natural limits to what a business can pay. Competition and profit margins determine wages and benefits, and attempts by a unionized workforce to push beyond those natural limits can only end in a denial of reality for so long. Then the ultimate check on above-market wages – bankruptcy – kicks in. 

The public sector can sustain the above-market wages and benefits because governments rarely go bankrupt (never in Canada that I am aware of) and because the public sector is too often given near-monopoly power over delivery of services. The health care and education sectors are prime examples.

Two remedies

There are two remedies of course. First, governments should restructure their operations to treat ministries as business units. In that scenario, outcome goals are set regardless of who delivers the service – a public sector union, private business and its employees, or a non-profit – while preserving quality and universal access but allowing for competition in service delivery.

Second, and over the long-term, the public sector must be weaned from guaranteed pensions, that is, away from defined benefits to defined contributions. Existing agreements would have to be honoured and grandfathered but all new public sector employees should be required to contribute to their own future benefits, with matching contributions from their employer, i.e., the taxpayers.  

Taken together, these two reforms are about the only way the interests of the public sector can be aligned with the private sector, the latter of which ultimately foots the bill.

Channels: Amherst Daily News, Truro Daily News, New Glasgow Evening News, Calgary Beacon, February 25, the Prince Rupert Daily News, March 3, the Laval News, March 5, 2010

Please follow and like us: