Alberta should better align government-sector compensation with the private sector

In light of a projected $24.2 billion deficit, the Kenney government has asked unionized civil servants in Alberta to take a 4 per cent salary reduction this year. Alberta Finance Minister Travis Toews said the proposal “reflects the province’s current economic and fiscal reality.”

Indeed, it’s hard to ignore government-worker compensation amid Alberta’s fiscal challenges, as the province spends a substantial portion of its budget on the wages and benefits of government employees who (on average) enjoy both a wage and benefit premium over their private-sector counterparts.

Specifically, a recent study found that government workers in Alberta (federal, provincial and local) received 9.3 per cent more (on average) in wages than their private-sector counterparts in 2018 (the latest year of comparable data). This analysis controls for factors such as age, gender, education, industry and type of work.

In addition to the wage gap, the study also found that government workers enjoy earlier retirement, more generous pensions and higher job security and than the private sector. Accordingly, since February, nearly all job losses in the province have been in the private sector.

At the same time, Alberta faces a historic budget deficit. The COVID recession has led to unprecedented borrowing, due to both lower tax revenues and higher emergency spending.

Alberta’s government debt was already rapidly climbing before the pandemic. Due primarily to persistent budget deficits, the province went from being “debt free” in 2015/16 to carrying $40.1 billion in net debt in 2019/20—before the full impact of COVID.

A high government debt burden diverts billions of dollars away from important services such as health care, and can lead governments to raise taxes to pay off the resulting debt interest payments. In 2020/21, Alberta’s provincial government debt interest costs will consume an estimated $2.5 billion (or approximately $570 per Albertan).

At a basic level, there are three ways governments can their budget deficits—spending cuts, tax hikes or some combination of the two. Research by late Harvard economist Alberto Alesina and his colleagues has shown that spending cuts are a less-economically harmful way to tackle deficits compared to tax hikes.

To move towards a balanced budget in Alberta, it’s difficult to ignore government-worker compensation since it accounted for 55 per cent of Alberta’s operating expense in 2018/19. Bringing government-sector compensation in line with the private sector at the provincial level would be a good way to reduce the deficit and minimize the costs of further government debt accumulation in the pandemic’s wake, without reducing services for Albertans.