Reining in civil servant pay packages one way to control government deficits
As federal and many provincial governments continue to struggle with both deficits and finding ways to constrain spending, its odd that very little has been done on the compensation of public sector workers.
All told, TD Economics estimates that governments in Canada racked up $45.9 billion in deficits last year alone. Most governments in deficit continue to rely on a combination of trying to slow the growth in spending while hoping that revenues catch up.
Given that the pay and benefits of public sector workers constitutes a material portion of government spending, its surprising that more governments have not tried to rein in public sector compensation as a means by which to control spending. For example, a major review of spending in Ontario calculated that roughly half of the provinces spending went to the compensation of its employees. Governments facing deficits would be well advised to examine the costs of compensation as a measure to eliminate deficits.
We have been involved with a number of studies examining the comparative wages and benefits of workers in the public and private sectors. After controlling for such factors as gender, age, marital status, education, tenure, size of firm, province, city, type of job, and industry, public sector workers in Canada (including federal, provincial, and local) enjoyed a 12.0 per cent wage premium, on average, over their private sector counterparts (data was for 2011).
Wages are just one component, however, of overall compensation. And as any business-owner or manager will tell you, its the total cost of compensation that matters rather than the individual components.
Data on the non-wage benefits available to public and private sector workers is less available than for wages. However, the data that is available indicates that public sector workers enjoy substantially more generous benefits than their private sector equivalents.
For example, 88.2 per cent of the public sector in Canada in 2011 was covered by a registered pension compared to 24.0 per cent of the private sector. Of those public sector workers covered by a pension, 94.0 percent were covered by a defined benefit pension, which means they were provided a guaranteed benefit (i.e. income) in retirement. Just 52.3 per cent of private sector workers who were covered by a pension enjoyed such a benefit.
The difference in generosity in pension benefits directly affects retirement. Private sector workers in Canada retire, on average, at age 62.4. Public sector workers, on the other hand, on average, retire at age 60, a full two-and-a-half years sooner.
Public sector workers also enjoy more job security than their private sector counterparts. In 2011, 3.8 per cent of those employed in the private sector lost their jobs. The comparable rate in the public sector was just 0.6 per cent, or less than one-sixth the rate of the private sector.
These data for Canada are not unique. Similar studies have been done over the past forty years and arrived at consistent results: public sector workers tend to have higher pay and more generous benefits than their private sector equivalents. This public sector compensation premium is also observed in other countries like the United States and many European countries. Interestingly, the gaps observed in the U.S. are actually much larger than those calculated for Canada.
The main question, though, is whether there is a genuine solution for this persistent compensation premium. The first step is better data collected on a more regular basis. Better information available more regularly will hold governments to account for their ability to manage their compensation costs.
The longer-term solution, however, is to enact measures and mechanisms by which to specifically link the compensation wages and benefits of the public sector to similar positions in the private sector.
As governments across the country grapple with deficits and growing debt, considerations about the difference between the compensation for their employees (public sector) and private sector equivalents should be part of the discussions. Simply put, public sector workers should receive compensation commensurate with their private sector counterparts.
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