Wednesday, May 5, 2010

Public Sector Unions and Fiscal Deficits

The Canadian Federation of Independent Business (CFIB) in 2008 published a study authored by Ted Mallett and Queenie Wong that compared the incomes of employees in the public and private sectors in Canada.

The results of this study have not been given the attention they deserve at the present time when governments are searching for ways to eliminate large deficits: If the incomes of public sector workers were equal to those in the private sector, fiscal deficits of governments would be lowered by at least $19 billion.

The income advantages enjoyed by public over private sector workers for different types of employers are:

Federal Government 17.3% 41.7%
Post Office 16.9% 40.5%
Urban Transit 12.9% 35.7%
Municipal Government 11.2% 35.9%
Educational Institutions 10.8% 17.6%
Healthcare Institutions 8.5% 19.0%

where the first figure shows the difference in wages and salaries only and the second shows total compensation (wages and salaries plus the value of other forms of compensation like pension contributions, length of work week, holiday and sick-leave provisions).

Source: CFIB analysis of Census 2006 custom tabulation, Wage Watch, December 2008, found at (

It is important to note that these comparisons involve only occupations that have the same responsibilities in both sectors, such as office clerks, accountants, administrative officers and human resource specialists. Excluded are professors, urban transit drivers, fire-fighters, elected government officials and senior government employees such as deputy ministers, since they are not found in the private sector. The data are also adjusted for age to account for the fact the public sector employees on average are older than those in the private sector.

The data in the CFIB study show great variations in these percentages for different provinces and cities but the fact of greatest interest here is the authors’ conclusions that government deficits would have been $19 billion lower if the median wages and benefits in the public had been the same as in the private sector. The data are from the 2006 census, a year in which public sector employment was 20 percent of private sector employment. Because of the growth in public sector employment levels, compensation and general inflation since then, the excess in 2010 would be several billion dollars larger.

To justify any reduction in public sector compensation, it is essential to understand that the existing gap is due entirely to the higher levels of unionization of the public sector and to the disproportionate power the public sector unions have in raising the incomes of their members.

What explains this power of public sector unions? The answer is that public sector workers produce services that are free to the public and that face no competition from the private sector. At the same time, politicians face direct and grave consequences if strikes inconvenience the public while the consequences of covering higher labour costs through increased taxes are relatively minor, especially in a world of economic growth and automatically rising tax revenues.

The merit of policies to reduce public sector incomes must also take into consideration that they are unfair and inconsistent with Canada’s effort to ensure “equal pay for equal work”. Office clerks, accountants and others in occupations compared in this study should be paid the same whether they work in the public or private sector.

The blame for the existing income differences falls fully on politicians, who gave public sector employees the right to strike without making any provisions to prevent the observed, inefficient and unfair outcome. Unions and their members simply and understandably have been taking advantage of the opportunities offered them by the politicians.

What measures would help reduce the existing fiscal deficits and restore equity in the compensation of public and private sector workers? The most obvious measure would be the elimination of public sector unions, which would probably appeal to the vast majority of Canadians who are not members of unions and support the notion that no one has to work for the government if they do not like the absence of unions.

A second-best policy would permit public sector unions to exist but deprive them of the right to strike for higher compensation. Under these conditions, the main function of the unions would be to represent individual workers that have grievances against management. The existence of such an institution would improve the quality of the work environment raise productivity.

The elimination of public sector unions’ right to strike should be accompanied by the adoption of a formula that ties annual increases in public sector wages and compensation to those in the private sector. To eliminate the existing gap, the public sector increases should be a fraction, say 50 percent of private sector increases until the levels in the two sectors are equalized.

Politicians probably are reluctant to accept the preceding proposals because they would face fierce opposition from unionized workers in both sectors, endangering their electoral prospects. However, the effectiveness of such union opposition can be blunted significantly and can even raise electoral prospects if the vast majority of non-unionized Canadians are made aware of the consequences of not doing so: unjustifiable income advantages for a privileged group and higher deficits or taxes for the rest.