Government workers are overpaid, right?

With governments across the country addressing budget deficits pushed higher by the 2008-09 recession, attention is turning to the pay levels of employees in the public sector and how these compare with private sector practices.

With governments across the country addressing budget deficits pushed higher by the 2008-09 recession, attention is turning to the pay levels of employees in the public sector and how these compare with private sector practices.

The federal government has imposed strict limits on pay hikes for its workers, and is forcing public servants to contribute more to help finance their pensions.

In Ontario, the government is proposing to freeze pay for some public sector employees and a roll back in Medicare fees paid to some physicians. In British Columbia, the government is insisting on a “net zero” policy in collective bargaining negotiations with its unions.

Many in the business world are apt to nod in agreement when they hear that government workers are “over-paid.”

Yet, is the claim really true?

According to the “Wage Watch” report produced by the Canadian Federation of Independent Business (CFIB), a comparison of pay reveals that government and other public sector employees receive wages that are 8 per cent to 17 per cent higher than similarly employed workers in the private sector.

Adding in non-wage benefits, the overall public-private compensation gap rises to 25 to 30 per cent.

Scholarly research generally supports the view that total compensation (wages/salaries, plus benefits) is higher in the public than in the private sector, for people in broadly similar occupations.

However, most of these academic studies find smaller pay differentials than the CFIB. In addition, it’s not always straightforward to make comparisons of the two sectors, because of differences in the types of jobs and in the characteristics of employees.

Why might people working in the broad public sector earn more than their counterparts in other parts of the economy?

One probable reason is unionization: in most provinces, 75 to 80 per cent of the public sector workforce is “organized,” while union density in the business sector is under 20 per cent (and has fallen over time).

Unions exist for various reasons, but a primary one is to obtain better wages, benefits and working conditions for their members. At least in the Canadian public sector context, it appears that unions have achieved this goal.

Another factor that may lead to higher compensation costs stems from the way government-funded and -delivered services are organized.

Public sector institutions often have a quasi-monopoly role in producing services that citizens depend on. Whether it is renewing one’s driver’s license, filing for Employment Insurance, or calling for the assistance of the fire department, Canadians have little choice but to rely on the government employees who are charged with providing a host of necessary services.

The public sector also dominates service delivery across large swathes of the education and health care sectors.

In the language of economics, the “markets” in which public sector workers operate exhibit weak or non-existent competition. When competitive forces are muted or aren’t permitted to operate, costs tend to be higher.

The lack of competition in the “markets” served by public sector organizations creates structural conditions conducive to rising labour costs over time.

There are other features of the public sector workforce that also affect compensation. For example, on average, public sector employees are older than those in the private sector.

All else equal, people’s earnings generally increase with age and years of work experience. This well-documented fact helps to explain why pay levels tend to be higher in industries — including those in the public sector — with older workforces.

Educational qualifications also differ between the public and private sectors. Relative to most private sector industries, a higher proportion of the people employed in fields like public administration, health care, education and social services hold a university degree or equivalent qualification.

More years of education typically lead to higher average pay. This needs to be taken into account when examining compensation patterns.

Today, perhaps the most striking difference between the remuneration of public versus private sector employees lies not in wages and salaries, but in the nature and scope of fringe benefits — particularly pensions.

A large majority of long-serving public sector workers can look forward to receiving defined-benefit pensions that are based on their last few years of (maximum) earnings, and are often indexed to inflation for as long as they live.

Many public sector employees covered by such pensions retire by age 57 or 58. For private sector workers — and for people who are self-employed — the typical retirement age is 62 or later.

The defined benefit pensions that are common in the public sector are increasingly rare in the business world, and are almost unheard of among the small businesses that collectively now account for more than half of the total private sector workforce.

Public employee pension plans in Canada are better funded, on an actuarial basis, than similar plans in many American states. But there are still funding shortfalls in some Canadian pension schemes.

And, as already noted, an ever shrinking proportion of the private sector workforce has access to guaranteed occupational pensions of any sort.

Looking ahead, we can expect to see more politicians taking up the cause of pension reform, with a critical eye on the generous defined benefit pension arrangements found throughout much of the Canadian public sector.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.