Control government spending in Canada by aligning public-sector pay with the private sector

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 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 Canada come out ahead.

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 private sector 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.

Government-sector workers in Canada also retire 2.3 years earlier, on average, than private-sector workers and are away from their jobs for personal reasons (12.7 days) more often than private-sector workers (7.8 days).

When it comes to job security, another non-wage benefit, government workers have a distinct advantage. In 2015, 3.8 per cent of private-sector employment in Canada experienced job loss—approximately seven 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 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.