It’s time to align public sector incentives with private sector (Guest commentary)

Public sector must be weaned off defined benefit pension plans

If there was an Olympic medal for pay and benefits, Canada’s public sector would take home the gold. The sector shows a remarkable ability to insulate itself from economic reality.

Public sector work is both more secure — it’s not as if governments will declare bankruptcy — and, on average, more lucrative than the private sector when it comes to pay and benefits.

Municipal, provincial and federal civil servants are paid much more on average when compared to equivalent job classifications in the private sector, according to a recent Frontier Centre for Public Policy study. For example, the Canada-wide average pay premium was 59 per cent for federal civil servants over the private sector equivalent, an average of 35 per cent provincially and eight per cent municipally.

Depends on the province

The averages vary depending on the province. The average pay premiums for federal, provincial and municipal public servants working in British Columbia amount to 61 per cent, 38 per cent and 15 per cent, respectively. In Alberta, the pay premium over the private sector is a tad narrower, at 27 per cent, 24 per cent and five per cent.

Public sector employees at the federal level garnered 41.7 per cent more than private sector equivalents, 24.9 per cent more at the provincial level and 35.9 per cent more at the municipal level, found an analysis of 2006 census data by the Canadian Federation of Independent Business (CFIB). (The difference between the two study results can be explained by different data sets.)

The CFIB study also broke down the advantage by sector. So, for example, government health-care pay and benefits are on average 19 per cent higher than private counterparts. In education, the difference is 17.6 per cent. Post office and urban transit employees in the public sector garner a whopping 40.5-per-cent and 35.7-per-cent pay and benefits advantage over the private sector.

Public sector monopoly

What might the responses be from the public sector to these discrepancies? “So what?” might be one and “Too bad for the private sector” might be another. If private sector wages and benefits are on average lower than the government sector, private sector employees can unionize and force wages and benefits up, the public sector might say.

Private sector employees could try, of course, except public sector employees have another distinct advantage on top of being more heavily unionized — they are often in a monopoly or quasi-monopoly position. Thus, taxpayers and consumers have little choice but to pay the taxes and use the services delivered by such employees.

Besides, even if private industry matched public sector unionization rates, private sector wages and benefits wouldn’t reach public sector levels because there are natural limits to what a business can pay. Competition and profit margins determine wages and benefits, and attempts by a unionized workforce to push beyond those natural limits can only end in a denial of reality for so long. Then the ultimate check on above-market wages kicks in — bankruptcy.

The public sector can sustain the above-market wages and benefits because governments rarely go bankrupt and the public sector is too often given near-monopoly power over delivery of services. The health-care and education sectors are prime examples.

Two remedies

There are two remedies. First, governments should restructure operations to treat ministries as business units. In that scenario, outcome goals are set regardless of who delivers the service — a public sector union, private business and its employees or a non-profit — while preserving quality and universal access but allowing for competition in service delivery.

Second, and over the long term, the public sector must be weaned from defined benefit pension plans to defined contribution ones. Existing agreements would have to be honoured and grandfathered but all new public sector employees should be required to contribute to their own future benefits, with matching contributions from employers.

Taken together, these two reforms are about the only way the interests of the public sector can be aligned with the private sector, the latter of which ultimately foots the bill.

Mark Milke is director of research at the Frontier Centre for Public Policy, a Western Canada-based think tank with offices in Winnipeg, Regina and Calgary. For more information, visit

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