Controlling compensation costs can help Notley government rein in spending

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Appeared in the Calgary Herald, March 9, 2017

Alberta has seen its financial position erode markedly after several years of operating deficits and growing government debt. While some believe the boom-bust of provincial finances is inherent to an energy-producing jurisdiction, this is at best an oversimplification. In reality, Alberta’s fiscal challenges today are largely due to the fact that successive governments in Alberta—past Progressive Conservatives and the current NDP government—have done a poor job controlling the growth in government spending.

With the Notley government set to unveil another big deficit budget on March 16, it will be critical for the government to put forth a plan that constrains future spending increases. And an important area of spending to scrutinize is the wages and benefits of government employees, which consume around half of the Alberta government’s annual program spending.

There’s ample reason to better control compensation costs. While the government must provide competitive compensation to attract qualified employees, research shows that the wages and benefits of government employees tend to eclipse those for comparable private-sector positions.

A new Fraser Institute study spotlights the wage premium enjoyed by government employees in Alberta at all levels (federal, provincial and local). Using Statistics Canada data from 2015, the study finds that government employees receive, on average, 7.9 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 Alberta come out ahead.

First consider the imbalance on pensions, one of the costliest benefits provided to workers in both sectors. In 2015, seven of 10 government workers in Alberta (70.8 per cent) were covered by a defined benefit pension plan—which guarantees a level of benefits in retirement—compared to less than one of 10 workers in the private sector (7.6 per cent).

Government-sector workers in Alberta also retire, on average, 1.1 years earlier than private-sector workers and are away from their jobs for personal reasons 73 per cent more days per year (10.7 days vs. 6.2 days in the private sector).

When it comes to job security, another non-wage benefit, government employees have a distinct advantage. In 2015, 4.6 per cent of private-sector employment in Alberta endured unfortunate job loss compared to just 0.4 per cent of government-sector employment. Indeed, government employees not only enjoy significantly greater job security, they also receive greater pay for similar jobs.

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 economic realities—productivity concerns, market forces, hard budget constraints—guide the process in the private sector. Moreover, the monopoly environment of the government sector can amplify these differences, compared to the competitive environment of the private sector.

But this is more than just a fiscal issue. It’s about fairness, too. Why should government employees receive a premium paid for by private-sector workers via taxes who receive less for similar positions?

Enacting measures that link the wages and benefits of government employees to similar positions in the private sector would take the politics out of the wage-setting process and help level the playing field. It would also allow the Notley government to better control spending, rein in debt, and maintain fairness for taxpayers who ultimately foot the bill.

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