By Jock Finlayson

As governments across the country tackle budget deficits that were pushed higher by the 2008-09 recession, the compensation of employees in the broadly defined public sector is garnering more attention. In Ontario the government is proposing to freeze pay for some groups of public sector workers and to roll back the fees currently paid to physicians. Here in BC the government is insisting on a “net zero” policy in its negotiations with public sector unions.

Almost instinctively, many people rooted in the private sector nod in agreement when someone says that public sector workers are “over-compensated.” Yet is this claim really true? Certainly there is evidence that points in this direction. According to the “Wage Watch” report produced by the Canadian Federation of Independent Business (CFIB), a comparison of pay levels reveals that government and other public sector employees receive wages that are eight to 17 per cent higher than similarly-employed individuals in the private sector.  Adding in non-wage benefits widens the overall public-private compensation gap to about 30 per cent.

The CFIB’s analysis drew on the 2006 Canadian census, so the data used pertains to 2005. In the years since, it’s possible that the above-noted compensation differentials may have narrowed, in part because of strong wage gains across much of the private sector during the 2006-08 period. It should also be noted that some other studies come up with public-private sector wage gaps that are smaller than those estimated by the CFIB. Still, most academic research supports the view that total compensation (pay plus benefits) is higher in the public than the private sector, for broadly similar occupations. Studies done in some other advanced countries reach the same conclusion.3

Why might pubic sector employees earn more than their counterparts in the private sector? There are several contributing factors. One is the presence of unions: in most provinces, up to 80 per cent of the public sector workforce is “organized,” while union density in the private sector hovers at under 20 per cent (and is trending lower). Unions exist for various reasons, but arguably the principal one is to bargain higher wages/benefits for their members. In the Canadian public sector, unions have largely succeeded in this task.

A second relevant factor is the age of the workforce: on average, public sector employees are older than those who toil in the private sector. All else equal, people’s earnings do tend to increase with age and years of work experience.

Educational qualifications also differ between the public and private sectors, with a higher proportion of those employed in the former holding a university degree or equivalent qualification. Again, more years of education generally lead to higher pay.

Another factor that fosters higher public sector remuneration is size of employer: public sector organizations are typically bigger than those in the private sector, and in Canada larger organizations usually pay workers more. The self-employed, as a group, earn less than the economy-wide average wage, have fewer benefits, and retire at a later age than the typical public sector worker. The same is true for the average employee in the small business sector, defined as firms with 100 or fewer employees. Within the private sector, people who work for larger-sized businesses tend to receive higher wages and better benefits, including workplace pensions, than employees in the small business sector.  If one compares workers in the large business sector with public sector employees, any measured wage differences diminish or even disappear.

Finally, pay levels also reflect the competitive dynamics at play in different parts of the economy. Most business enterprises function in highly competitive environments and set their compensation accordingly. Firms that pay employees “too much” relative to their competitors are apt to go out of business. Such constraints are less binding in the public sector, where there is little true competition for the goods/services produced, and the absence of pressure to generate profits means there are fewer enduring countervailing forces operating to limit personnel-related costs.

These days, the most striking difference between public and private sector employees lies not in wage levels, but in the nature and scope of fringe benefits, particularly pensions. Most long-serving public sector workers can look forward to fairly generous defined-benefit pensions that are based on their last few years of (maximum) earnings, often indexed to inflation. These kinds of guaranteed pensions are becoming increasingly rare in Canada’s private sector. In the future, the political debate over public-private sector compensation disparities is likely to zero in on the issue of pensions.

Jock Finlayson is the executive vice-president of the Business Council of BC.

PeopleTalk Summer 2012