Linking government compensation to private sector can help repair Ontario’s finances

With a projected $4.3 billion deficit this year and mounting debt as far as the eye can see, the Wynne government will have to better control spending to repair the damage to Ontario’s finances. In these efforts, a key area of spending to scrutinize is the wages and benefits of government employees, which are responsible for roughly half of Ontario government pro¬gram spending each year.

There’s ample reason to better control compensation costs. While the government must provide competitive compensation to attract qualified employees, research shows that the wages and benefits of government employees tend to eclipse those for comparable private-sector positions.

A new Fraser Institute study spotlights the wage premium enjoyed by government employees in Ontario at all levels (federal, provincial and local). Using Statistics Canada data from 2015, the study finds that government employees receive, on average, 13.4 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 age, gender, education, tenure, experience, and type of work.

But wages are just one component of total compensation, which includes pensions, early retirement and job security. As any business-owner or manager will tell you, it’s the total cost of compensation that matters rather than the individual components. Yet even on various non-wage benefits, the available Statistics Canada data suggests government employees in Ontario come out ahead.

First consider the imbalance on pensions, one of the costliest benefits provided to workers in both sectors. In 2015, eight of 10 government workers in Ontario (79.7 per cent) were covered by a defined benefit pension plan—which guarantees a level of benefits in retirement—compared to just one of 10 workers in the private sector (11.4 per cent).

Government sector workers in Ontario also retire, on average, 1.4 years earlier than private-sector workers. Furthermore, they are away from their jobs for personal reasons 60 per cent more days per year (10.9 days vs. 6.8 days in the private sector).

When it comes to job security, another non-wage benefit, government workers have a distinct advantage. In 2015, 3.2 per cent of private-sector employment in Ontario experienced job loss—six times higher than the 0.5 per cent of government-sector 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 economic realities—productivity concerns, market forces, hard budget constraints—guide the process in the private sector. Moreover, the monopoly environment of the government sector amplifies these differences, compared to the competitive environment of the private sector.

This is more than just a fiscal issue. It’s about fairness, too. Why should government employees receive a premium paid for by private-sector workers who receive less for similar positions?

Taking the politics out of the wage-setting process will help level the playing field between government and private-sector workers. This can be done by enacting measures that link the wages and benefits of government employees to similar positions in the private sector. Doing so would allow all governments (including Ontario’s) to better control spending, rein in debt, and maintain fairness for taxpayers who ultimately foot the bill.