Align Public Sector Incentives With the Private Sector: How to make government work long-term

Worth A Look, Public Sector, Frontier Centre


If there was an Olympic medal for pay and benefits, Canada’s public sector would do quite well and take home the gold. It shows a regular, remarkable ability to insulate itself from economic reality. In most decades and in general, public sector work is more secure—it’s not as it governments will declare bankruptcy– and on average, also more lucrative on both pay and benefits.
The data is clear on such points. In a recent Frontier Centre 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% for federal civil servants over the private sector equivalent, an average of 35% provincially and an 8% advantage at the municipal level. 
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%, 38% and 15% respectively; in Alberta, the pay premium over the private sector is a tad more narrow, at 27%, 24% and 5%.
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% more than private sector equivalents, 24.9% more at the provincial level and 35.9% 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% higher than private counterparts. In education, the difference is 17.6%. The post office and urban transit employees in the public sector garner a whopping 40.5% and 35.7% pay and benefits advantage over the private sector.
Two responses to this from the public sector might be: So what? And too bad for the private sector. If private sector wages and benefits are on average lower than the government sector, private employees can unionize more often and force wages and benefits up.
They could try, except public sector employees garner the wage differentials they do not just because they are more heavily unionized, but because 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. That’s 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.
There are two remedies to this. The first is to have governments restructure their operations to treat ministries as business units. In that scenario, outcome goals are set and the intent is to achieve quality outcomes regardless of who delivers the service—a public sector union, private business and its employees, or a non-profit; that preserves quality and universal access but allows for competition in service delivery.
The second option, and also necessary long-term, is to wean the public sector away from guaranteed pensions, 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.