Freezing Government Wages is Prudent Cost-Control: Public Sector Wage Growth is Not Smart Economic Stimulus

Commentary, Public Sector, Ben Eisen


Manitoba’s provincial government recently announced that in response to a looming $600 million deficit for this fiscal year, the province would freeze the wages of public sector employees for the next two years. This was an entirely sensible decision. Manitoba’s provincial public servants are amongst the highest paid in the country. In fact, the average provincial level public administration worker in Manitoba is paid 50 per cent more than the average worker in the economy. That compares to a 35 per cent gap between provincial public servants and the average worker in Canada as a whole. Facing a budget crisis, a pause in the growth of public sector salaries is a prudent cost-control measure.
The freeze announcement provoked protests from the leaders of public sector unions. This was predictable because unions, like individuals, try to negotiate for the best deal possible from their employers. Also, no one likes to see their wages frozen.
Union leaders shouldn’t be blamed for being self-interested on wages—everyone is—but their argument that a wage freeze would actually be harmful to the economy is inaccurate. Peter Olfert, head of the Manitoba Government Employees Union, argues that freezing wages for public sector workers would harm the economy as it would leave them with less disposable income, causing them to spend less money and thereby prolong the recession.
Public sector unions all over the country make similar claims but it is important for governments to recognize just how weak it is.
The economic philosophy on which this argument is based— Keynesianism— holds that governments should boost spending during recessions to strengthen demand in the economy, and then scale it back during boom times. But has anyone ever heard a union leader claim that wages should be frozen, or wage growth restrained during a period of economic expansion? Of course not.
Instead, when the economy grows, we’re told that public servants deserve to share in the good times, and should get big raises, just like everybody else. So the appropriate policy during both recessions and booms is supposedly rapid public sector wage growth. It’s a nice try, but it’s not sensible economics.
The second point is that the money used to pay high public sector salaries has to actually come from somewhere. That “somewhere” is, of course, the private sector tax base.
Manitoba’s public servants’ salaries have been rising faster than the Canadian average for many years. As a result, the average annual wage for provincial public administration workers in Manitoba is currently about $4,400 per year higher than the average for public servants in neighbouring Saskatchewan. That’s the real reasons public salaries should be stalled, recession or not.
The additional taxes required to pay these high salaries inhibit economic growth during recessions and in all other stages of the business cycle. Take money out of the private economy through taxes to pay for high public sector salaries and there’s a negative impact on consumer demand by reducing the spending power of taxpayers.
Lastly, even if one is a committed Keynesian and  believes that increased government spending and large deficits should be used to boost the economy during recessions, one struggles to think of a less effective and less fair way to pump government money into the economy than through big raises to public sector unions.
 Some people are really hurt during recessions. If deficit spending is to be used to stimulate the economy, it makes more sense to direct stimulus money to those in need rather than to government workers who already enjoy secure, high-paying jobs. And if stimulative spending aimed at assisting the middle-class is desired, it would be more fair to distribute it between all workers in the economy- not just government union members- through a tax credit or a some similar instrument.
Governments’ responsibility during wage negotiations in good times and bad is the same: to get the best possible deal for taxpayers. This already difficult and complicated job need not be further clouded by the notion that wage negotiations are an instrument with which the government should tinker with aggregate demand in the economy. If the choice is made to pursue deficit spending during recessions, decisions about the best way to do so should be based on disinterested priority setting and rational cost-benefit analysis. But these two tasks should be viewed as separate from one another. The unions’ claim that public sector wage growth should be used for the sake of economic stimulus is entirely self-serving, and accepting it would severely harm the province’s fiscal health.