Fraser Forum

B.C. Federation of Labour president misses the point of comparing government and private-sector pay

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In a letter to the editor published by the Vancouver Sun, B.C. Federation of Labour president Irene Lanzinger interprets a recent Fraser Institute study as demonstrating the benefits of joining a union. This misses the main point of our study, which is that government workers in B.C. receive higher wages than their private-sector counterparts, regardless of whether they are covered by a union agreement or not.

Using data from Statistics Canada’s Labour Force Survey, the study finds that government employees in B.C. (federal, provincial and local) receive, on average, 7.4 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. And the wage premium is in addition to the more generous non-wage benefits—such as pensions, early retirement and job security–that the government sector also enjoys.

Our analysis shows that even after accounting for unionization, there is still a wage premium for government workers (4.2 per cent). Put differently, government workers—even those who are unionized—receive higher pay than comparable private sector workers doing similar jobs.

So what’s the reason for the disparity in pay between the government and private sector?

The reason is twofold. In the government sector, political factors largely determine the wage-setting process, while wages in the private sector are guided by productivity, market forces, and profit constraints. Employers in the private sector compensate their employees based on employee productivity, the value they add to the bottom line. If employers overpay, they risk going out of business. But if they pay too little, they risk losing valuable staff.

Government employers, on the other hand, do not face the same risks, as they have the ability to fund overly generous compensation through higher taxes. While raising taxes entail political and economic costs, the budget constraints and economic realities in the government sector are much less stringent than in the private sector.

These differences are amplified by the monopoly environment in which the government sector operates versus the competitive environment of the private sector. Most of the government sector operates without the threat of competition, meaning consumers can’t choose an alternative provider of government services that may be cheaper or of higher quality. The mon¬opoly on service provision means that government workers can demand and in fact receive a wage premium without competitive discipline and fear of responses from other firms. Unlike firms in the private sector, governments do not have an incentive to balance the need to retain and attract workers with their ability to compete against rivals on price, quality, and cost.

The fact is wages and benefits in the government sector are out of step with the private sector. Since compensation costs constitute a significant portion of government program spending—about half in most provinces—governments could find substantial savings by aligning wages and benefits with private sector norms. This would not only be the financial prudent thing to do, but it would also ensure fairness to the taxpayers in the private sector who ultimately foot the bill.

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