Are public sector servants paid too much?

Public sector workers are overpaid compared to their private counterparts, even when adjusting for

unionization, education, and experience, a disparity exacerbated by considering the additional benefits

that they receive, including both better pension plans and job security.

Why should we be interested in researching this issue? The pay premiums given to public servants

impose larger tax burdens on citizens, and the private sector is forced to pay more to remain

competitive. A study that looked at wages from 1973 to 2000 for 18 OECD countries, including Canada,

found a 0.3 percent increase in private sector wages, for every 1.0 percent increase in public sector

wages. (Afonso and Gomes 2010).

Do public servants get paid more than their private counterparts?

To find out, we will look at some past research.

Pay Premiums:

The first evidence of Public servants pay premiums were based on data collected from the 1971

Canadian Census. The study looked at data for workers that worked full-time (avg. 40 hrs a week a year)

for pay/profit, and whose main source of income was from wages. The private sector industry

considered in this study was manufacturing since it was the biggest private sector employer, and had an

a lot of usable data points for both males and females. The study found a 9.3 per cent premium for the

public sector (roughly $737), including both pure pay and endowment difference. If we take

endowments out of the equation, we are still left with a 6.2 percent premium. If we break this down by

gender, makes receive a 6.2 percent pay premium and the figure is higher for women at 8.6 percent.

Other interesting findings from this study are that bilingualism is not rewarded (any more) in Public

sector, and while training were only associated with slightly larger premiums and only when looking at

females. When analyzing the pay premium, public sector premium had a consistent pay premium rather

than returns for positive-wage generating characteristics like education experience, training and

bilingualism.( 231-240 Gunderson 1979)

Some may argue that the pay premium can be justified as a way for public service to meet policy goals

such as rewarding bilingualism, but, at least based on the numbers, this doesn’t seem to be the case. If

we could factor in a quantitative premium for greater job security and better fringe benefits, this would

make it more clear, theoretically, to justify that publics servants are overpaid, at least when comparing

them to their private counterparts in 1971.

Pay premiums over the years:

A journal article published in 1989, repeated the process used by Gunderson and looked data from 1970

to 1980 and concluded the rent payments premium persisted over the 10 year period. (Shapiro and

Stelcner 1989). We can see that public servants are consistently paid more.
. Canadian census data used in the studies mentioned above did not allow the researchers to control for

union status and given the high rates of public-sector unionization, this is potentially a serious

shortcoming because union wage differentials could be mistakenly interpreted as public-sector wage

differentials. To counter this, we take a look at a study that uses the Labour Force Survey from January

to December 2013. In this study the overall surplus was found to be 35.1 average higher for public

sector workers, however when controlled for age, level of education, experience and other variables, it

came down to 9.7 percent on average. When adjusting for unionization, in addition to personal

characteristics, it was reduced to only 6.2 percent. Furthermore, some notable premiums by industry

include 15.6 percent for clerical occupations, 17 percent for teachers and professors, and 19.5 for

occupations in social science, government service and religion.

Non-wage benefits:

Overall employee compensation depends on more metrics then just wage alone, and so we look our first

non-wage benefit, pensions. According to the 2013 annual Pension Plans in Canada Survey (PPIC) little

over 2 out of every 10 private sector workers are covered by registered pension plan while 9 out of

every 10 public servants have access to same. This gap grows bigger when we look at the kind of

pension plans each sector has access to. Among workers who are registered in a pension plan, 94.2

percent of public sector workers enjoy a defined benefit plan, compared to 47.5 of those in the private

sector. Defined benefit plans are superior as the employer bears all the financial risk

and must increase contribution to the plan if the return on the pension’s investment fund do not match

what the plan guarantees. Based on data from 2009 to 2013, public servant workers in Canada tend to

retire 2.4 years earlier if mean is used and 2.9 years if we look at the median. Moreover, when looking at

job security figures, the study found that 3.6 percent of private sector workers experienced job loss

while only 0.7 percent of those employed by the public sector. (Lammam et al. 2013)
My analysis:

When trying to answer the question of whether public servants are overpaid, I first looked pure pay

premiums. As mentioned above, public sector workers have been consistently paid more than their

private counterparts, this has existed since the first study in 1970, and remains present in 2013. A short

coming for the 1970 Gunderson study was that it only looked at the manufacturing industry data for the

private sector, a pay premium derived from this study is understandably not the best number to

determine is public sector workers are actually overpaid. Before we looked at the next study, we found

this pay premium persisted over the next 10 years from 1970 to 1980Shapiro and Stelcner

The premium existed when the data was adjusted for unionization, as in public sector salaries were

compared to only those private sector workers who were unionized.

Moving on from this, the biggest non-wage difference lied in

According to McInturff, “Salaries are higher in the public sector precisely for those groups of people who

experience the greatest discrimination in the private sector—because the public sector goes further in

correcting those discriminatory practices. The result is not higher wages but rather a more equitable

system of pay.” Higher rates of unionization, pay equity legislation, and better access to family benefits

all help reduce wage discrimination in the public sector.

Counterarguments:

Corruption

Hiring Process

Public policy tool reinforcing social change (Keynesian)

Addressing pay gap

Intro+ why we should be interested+ outline pg 1-2

Content 3-6

Counter arguments 7,8,9

Conclusion 10
Afonso, Antonio, and Pedro Gomes (2010). Interactions between Private and Public Sector Wages. IZA
Discussion Paper No. 5322. <http://ftp.iza.org/dp5322.pdf>

Gunderson, Morley. 1979. "Earnings Differentials Between The Public And Private Sectors." The
Canadian Journal of Economics 12(2):231-240. Retrieved (https://www.jstor.org/stable/134598).

Lammam, Charles, Milagros Palacios, Feixue Ren, and Jason Clemens. 2018. "Comparing
Government And Private Sector Compensation In Canada." Fraser Institute. Retrieved December 5,
2018 (https://www.fraserinstitute.org/studies/comparing-government-and-private-sector-compensation-
in-canada).

SHAPIRO, DANIEL M., and MORTON STELCNER. 1989. "Canadian Public-Private Sector Earnings
Differentials, 1970-€ “ 1980." Industrial Relations: A Journal of Economy and Society28(1):72-81.