Times are Tough for (Almost) Everybody

Commentary, Frontier Centre, Public Sector, Role of Government, Taxation, Uncategorized

Working for the Canadian government has been a sweet deal for a long time. In addition to job security, outstanding benefits and generous pensions, federal employees are paid, on average, much higher wages than workers in other sectors of the economy. Although most people know that government workers are highly paid, it is less well known that the gap between government employees and everyone else has grown steadily over the past 20 years. The growth of government salaries relative to the rest of the economy is a costly trend which, if it is not stopped, represents a serious threat to Canada’s long-term fiscal health.

There is nothing new about the fact that government work is lucrative. In 1991, federal public administration workers, henceforth referred to as public servants, enjoyed a “pay premium” of 34 per cent compared to the average wage earned by individuals in other occupations. In other words, the average federal public servant earned about a third more money than the average worker in the economy.

Since then, the gap between government employees and the rest of us has grown into a yawning chasm. Between 1991 and 2008, the average Canadian’s wages rose by 47%. However, during this same period, federal public servants saw their weekly wage swell to $1,286, a whopping 71% increase from 1991.

As a result of the pay escalation for federal public servants, their “pay premium” compared to the rest of the economy grew to 59% in 2008 from 34% in 1991. Whereas in 1991 the wage gap between federal public servants and the national average was about $200 per week, the unrelenting growth of public sector salaries has caused that gap to grow to $475 per week in 2008.

The continued growth of this gap is unsustainable. Canada’s federal public service is large, employing about 300, 000 people. If wage growth in the federal public service were held to the level of wage growth in the rest of the economy since 1991, the cost of federal public administration would have been reduced by a staggering $2.5 billion in 2008. The trends described here have accelerated over the past decade, so there is reason to fear that the cost of rapid public administration wage growth will become an even greater burden for taxpayers in coming years.

In fairness, it is extremely difficult for governments to determine the “right” level of wages for their employees. That’s because, unlike private firms, they cannot rely on market signals to determine the appropriate “price” of the labour they employ. Whereas private companies face the prospect of bankruptcy if their costs regularly exceed their revenues, governments face no such threat and therefore lack the powerful incentives for cost-control which other firms face.

The result of the different incentives facing private firms and government is that public sector salaries grow faster than wages elsewhere in the economy. This is unsustainable because it is, of course, the tax revenues generated by the rest of the economy that pay public servants’ salaries. As the growth of government wages outstrips wage growth in the rest of the economy, it contributes to the gap between government expenses and government revenues, potentially creating a long-term situation of structural deficits.

Although it is difficult to determine the “right” level of compensation for public servants, common sense makes clear that current trends are unsustainable and unfair to other workers whose taxes pay for the hefty raises that are regularly given to public employees. A useful starting point to determine the proper rate of wage growth for public servants is the rate of wage growth in the rest of the economy. For any particular year this is an imperfect measuring stick but, in the long-term, fiscal realities dictate that public sector wage growth must be brought much closer into line with what is happening in the private sector. The Canadian taxpayer cannot afford another 20 years of rapidly expanding public sector pay premiums.