Canadian Exceptionalism in Compensation

The Parliamentary Budget Office's most recent release "The Fiscal Impact of Federal Personnel Expenses: Trends and Developments"  provides some interesting statistics on the amounts of employee compensation paid by Canada’s federal government.  According to the report: “in 2011-12, Canada’s federal personnel expenses were $43.8 B, or 2.55 per cent of GDP. These expenses supported a workforce of 375,500 employees and provided approximately $114,100 on average in total compensation per employee.”  Media reports attributed to the President of the Treasury Board claiming that these average compensation amounts were inaccurate and that actual compensation was lower (Tony Clement said the average compensation was closer to $95,000) were rebutted by the PBO with an information update.  As entertaining as all this was, the fact is that any discussion of public employee compensation in Canada should cover more than just the federal government and that it might be more appropriate to compare us to where we stand relative to other countries.

The Banca D’Italia’s December 2012 edition of Public Finance Statistics in the European Union provides a table (Table 19) listing the compensation of public employees as a percentage of GDP for the EU countries as well as Canada, the United States and Japan.  Compensation is defined as “General government payments in cash or in kind to employees, including net earnings and actual and imputed social security contributions.”  The accompanying Figure 1 plots the public compensation to GDP shares for 2005 and 2011 (only those up to 2010 were available for Canada and Japan).  In the Canadian case, this share is much larger than 2.55 percent of GDP because it also would include provincial/territorial and municipal governments.

Note: Figures for Canada and Japan in 2011 are from 2010.

 

The results show that amongst the G-7, the compensation of public employees in Canada as a share of GDP is only second to France.  Moreover, between 2005 and 2011 (actually 2010 in the Canadian case), Canada had the most growth in this ratio rising from 11.2 to 12.5 percent.  Believe it or not, Canada and Greece in 2010 both had the same public employee compensation to GDP ratio of 12.5 percent.  As Figure 2 shows, between the mid-1990s and mid 2000s, Canada devoted a higher share of its GDP to public employee compensation compared to the European Union (EU), the United States and even Greece, though it has declined. Now that is food for thought.

 

 

Comments

[Nathanael]

Well, before Harper was elected, you *did* have a reputation for particularly good government officials in Canada. I guess that's because you were paying to get the best!

[Leo]

The Greece comparison is a bit cheap. Austerity has been destroying their GDP since 2008, so their high ratio is more a matter of their GDP being artificially suppressed than salaries being elevated.

[Pierre-Yves Fortin]

From what I understand, while employee salaries are often pro-cyclical and lagging, federal employment is anticyclical (and likely lagging too). this seems to have been supported by both the surge of government expenditures stemming from the Economic Action Plan, as well as the bargaining freeze from the Expenditure Restraint Act that affected most federal employee groups in the years 2008-2010.

To me, this looks more like a response to the financial crisis than a structural increase - especially since we are already seeing the reductions as announced by the government taking place.

Also on that note, I wouldn't be surprised that even with the reductions in employee numbers we would continue to see an increase in the average total compensation of employees - from what I understand, the government is investing in a lot a computer systems to replace clerical duties, while pursuing its hiring of specific classes of public servant, namely accountants and medical staff. I would asssume that this would push the average salaries higher wether individual total compensation (or public spending on personnel) creeps up or not.

[Livio Di Matteo]

Leo:
I guess what struck me is the fact that our GDP has not collapsed like Greece and yet we still had a similar public employee compensation share of GDP. Do you think our rapid ramp up in spending may have been partly responsible for our weathering the recession as well as we did?
Pierre-Yves:
I agree the surge for Canada since 2008 is a response to the financial crisis at all three levels of government. Interesting point on the skill/class level of public employees. I suppose we could end up with fewer public employees but higher compensation levels.

[Jacques René Giguère]

Increasingly, public servants are highly qualified profrssionnals: scientists such as meteorologists or public health experts. Populist newspapers are fuelling a dishonest fire by telling store clerkd that they pay a higher salary to the civil service than they themselves receive, though they pay the engineers who build their car a similar amount. Of course, the whole point from the Sun-Post-G&M complex is to persuade us to dismantle the public service and then let an "efficient" private cpontractor to charge twice as much.

[Bob Smith]

Jacques,

"highly qualified" doesn't neccesarily translate into "highly paid" (unless you happen to believe in a somewhat updated labour theory of value). What's the market price for public health experts?

The problem is that there's often a mismatch between public sector wages (and other compensation) and market wages and compensation (and not always on the over-compensation side, for many years low public sector wages for skilled employees made it impossible to attract top talent). Surely there's something wrong with, for example, the labour market for teachers in Ontario when wages have been rising at a time when vast numbers of newly graduated teachers have been unable to find work.

[Jim Sentance]

It would be interesting to see a breakdown of where, how many and what type of government workers we're looking at over the past five years or so.

[Pierre-Yves Fortin]

Jim: Maybe you'd be interested in this: http://www.statcan.gc.ca/pub/11-621-m/11-621-m2007053-eng.pdf
I'm personnally fond of the reports of the Advisory Committee on Senior Level Retention and Compensation available at http://tbs-sct.gc.ca/hrh/adcm-eng.asp.

[Pierre-Yves Fortin]

Or the Demographic Snapshot of the Federal Public Service at http://www.tbs-sct.gc.ca/res/stats/demo11-eng.asp

[Determinant]

Also on that note, I wouldn't be surprised that even with the reductions in employee numbers we would continue to see an increase in the average total compensation of employees - from what I understand, the government is investing in a lot a computer systems to replace clerical duties, while pursuing its hiring of specific classes of public servant, namely accountants and medical staff. I would asssume that this would push the average salaries higher wether individual total compensation (or public spending on personnel) creeps up or not.

Just for the Feds, it really depends on who qualifies as a "Public Servant". Since the 1990's there is a whole species of outsourced contractor which has developed. These people get paid by a staffing firm, have no employment relationship with the government yet perform public service duties in a federal office. They call it the Shadow Public Service. Lower-paid classifications are especially prone to this. These people do things like Program Administration (I've seen ads for contractors to do just that) yet they aren't on the government payroll. It also means that actual public servants (employees of the Crown) are paid more, on average as the more senior people are the ones actually on the government books.

Also, those national statistics depend on if each national government has a geographic pay equity policy. I have a book (the book, actually) on Public Service Employment Law. The author says that in the US Federal Government there is no provision for equal pay for the same job at different locations; unions are very local and there are a lot of pay differences based purely on location. In Canada there has been a specific Treasury Board policy since the 1960's that a job classification will be paid the same rate of pay across Canada. A PM-4 (Program Administrator, level 4, working level) is paid the same nationally and is represented by a national union, either PSAC or PIPSC. That is going to add to the payroll bill since you don't have money on employees in Atlantic Canada.

I would also say it depends on how unionized each nations public service is. The Public Service of Canada is unionized and has the right to strike, there is no right to strike in the US. Germany has a two-track public service with ordinary public servants and "Beamter" http://en.wikipedia.org/wiki/Beamter who have permanent tenure, higher pay and higher status. There is no exact counterpart to this in Westminster Civil Service systems like Canada's.

[Jacques René Giguère]

Bob Smith: ""highly qualified" doesn't neccesarily translate into "highly paid" (unless you happen to believe in a somewhat updated labour theory of value). What's the market price for public health experts?"
In as much as the government hires public health experts and is the market, it still does so at a higher wage than the clerk at Staples who reads the Sun and is told that it is unjust that a masters degree is paid more than himself. For the Sun reader, $100 K is comprehensible and seems babylonian while the $5M paid to a hockey player is both so high he can't compare himself with it while it is earned in a manner he understand. While epidemiologists or meteorologists looks like the front row students and teacher's pets who never got their slapped with a ruler.
For us on this blog, learning and school were mostly fun experiences. For most people, it was a useless hassle. They may remember their K teacher with fondness but anything that stick to the teachers and the front-row types is welcome revenge.

[whitfit]

Bob Smith says: "What's the market price for public health experts?"

And gives part of the answer. It is a thin market, but in order to induce smart, committed people to enter the field and work hard at it, you probably have to pay a decent salary.

What I don't understand is why there is little analysis, outside of the Drummond report, about what aspects of the civil service can be trimmed, and what aspects have less room for that trimming. I work in the public service, and am a professional. I earn less than my private sector peers. I was in a meeting yesterday representing a government, and most of the private sector people in the room earn more than me, and some earn a lot more (like 4-6x) than me. I get some ancillary benefits (I am less likely to have to put in as many weekends and evenings), but when the salary gap grows to be huge, what is the incentive to stay with the government? Sure, there will always be applicants for those jobs, but it won't necessarily be the best, or even the mediocre - it will be the bottom of the pool. When you have multi-billion dollar projects that are funded by taxpayers, what professionals does the government want?

The story does change with different parts of the government. Part of the problem is the one size fits all nature of the way the public and politicians deal with this issue - freeze/cut every salary, for instance, or eliminate pensions (which some politicians/pundits talk about as if it is a gratuitous benefit as opposed to compensation) is not a good public policy approach. But it is what we see.

This has an interesting connection to the robot displacement discussion. As the markets for resource and goods production become more automated, and as important services that require hands on, skilled resources are largely within government control (health care and education, for the most part) one should expect to see the government wage proportion of GDP grow.

It also has a connection to the wage inequality story. It is easier to become a public servant when you know you will be earning a little less than your professional peers - but as the gap of the pay to the top professionals grows, there will be fewer highly talented people in the public service. The problem here is that the average taxpayer - Jacques' clerk at Staples - earns much less than the average professional public servant, while the average professional public servant - a doctor, lawyer, business analyst - earns much less than their peers. As those differences grow, a highly skilled and sustainable public service might become a fantasy.

[Pierre-Yves Fortin]

Not everyone in the government is a public health expert - and even when you get to the level of expertise required to be, say, the Governor of the Bank of Canada or the President of Canada Post, there are still external employers willing to pay more for those on canada's books. looking at the classification tables, employees at the clerical level are likely to be paid above the market rate (which is probably why, as Determinant said, those functions are prone to be outsourced to contractors) while heads of departments and crown corporations are likely to be paid lower than market rate. you may argue that "serving Canada" may play a role in their valuation of their work and their compensation. until they get an offer from the UK.

Here is my tought - if we were willing, as a country, to pay for a CEO of Canada Post (paid around $500,000) as much as the CEO of UPS ($13 million) or Fedex (9 mil), could this turn the crown corp around?

[Shangwen]

According to the stats given above by Pierre-Yves, the employed population in Canada is 17 million, and the number of federal workers is 375,000, or 2%. The two-worlds narrative does not really hold here: comparing monarch butterflies to the entire population of winged insects, and asking whether it is fair that they have such nice wings, is not really useful.

The question is not whether those particular positions should be paid so much, but what they accomplish and whether or not they should exist. We all know of hard-working civil servants, and civil servants who do nothing all day. I know both. The issue is the programs that, having been created in the first place, must now employ them. A brilliant and savvy pork administrator is still destroying wealth. If he's so good, maybe we'd all be better off if he was managing a shipping center or a zoo. But if a government program is doing things that deliver great value or are uniquely public (the courts, the military, the central bank, the foreign service), paying them well is no big deal.

[Bob Smith]

Whitfit: "I earn less than my private sector peers."

Do you? Are you sure about that. Certainly public sector salaries (at least amongst professionals) are lower than the private sector. On the other other hand, public sector benefits (to say nothing of relative job security or quality of life) are generally much more generous. My wife works in the public sector and makes $30,000 a year less than I do. On the other hand, she works 9 to 5 (or equivalent) and even if I could save $30,000 a year in my RRSP (which I, legally, can't) there is no way that I could finance a retirement plan equivalent to hers (full pension at 53). If you asked my wife, she'd tell you that she makes less than me, but economically that isn't the case.

In any event, Jacques is mischaracterizing the views of the clerk at Staples and Sun readers (he's clearly not a regular reader) - what drives them nuts isn't that some crown attorney, engineer, or teacher is making more than they are, it's that the clerk at the LCBO, the garbageman or the TTC fare collector or station sweeper is making more than they are (which is why, in Toronto, the lighting-rod for anti-union sentiment that got Rob Ford elected was the garbage strike and sleeping TTC fare collectors). And what drives people nuts about teachers isn't that they're well paid (although I query whether the current pay levels are really neccesary to attract decent teachers), it's that they secure that pay package by holding the kids of the Staples clerk and the Sun reader hostage using their monopoly on the provision of public education services (ditto for garbage collectors). Jacques may chock the antipathy towards teachers up to crude jealousy or false consciousness, but I'd attribute it to very real (and quite reasonable) resentment at being jerked around by people who use the public education system (and the children in it) as a pawn to advance their private interests.

[Chris J]

It would be interesting to compare the of gov't salaries. Is the mean going up because low-level clerks are now part of a priavatized service provider?

[whitfit]

Bob Smith says: Do you? Are you sure about that.

In response to my assertion that I earn less than private sector peers.

I am sure about that. I work in an industry where there are pretty clear salaries. I don't earn more than all of my private sector peers - it depends on the organization and environment. And, I am early on in my career, and even with current pension rules I wouldn't be able to retire with a full pension until my mid 60s. Plus, that assumes the pension benefits won't be reduced in the next 30 years. We also pay into our pensions, and the pension plan has to be (mostly) fully funded or the benefits are reduced and the contributions are increased. I have done the math, and I calculate I get about a 10% bump on my compensation through the pension. That is significant, but still leaves me below private sector peers on pay. There is some security benefit - but that really only counts close to retirement when you have accrued the benefits, and they can't be reduced. Now, I took this job because the lifestyle is better. I don't have to find my own clients, and I have a more predictable schedule. That is worth it to me. But, wouldn't be if pay is seriously carved back.

My point was that the way that the politicians talk about the pay of public servants is to lump it all together and to talk about cutting it all the same way. However, public servants are not all in the same boat when it comes to how well they are paid vs. private sector peers.

[Bob Smith]

"My point was that the way that the politicians talk about the pay of public servants is to lump it all together and to talk about cutting it all the same way."

No doubt, and certainly, the public sector is big enough that it's hard to generalize. Mind you, the same criticism could be levelled at the politicians (and their union masters) who lump public sector wages together and talk about "protecting" those wages/benefits the same way. It's particularly galling when left-wing politicians defend high public sector wages/benefits without asking whether the money used to fund those wages might be put to more worthy uses (from a left-wing prospetive). One might think, for example, that since the City of Toronto is the city's biggest slumlord, that a principled left-wing politician might think that maybe paying above-market wages for garbage collectors or TTC floor-sweepers (or paying top wages for cops - which even in my most law-and-order extremes, I find ridiculous) is a poorer use of public funds than, say, trying to exterminate roaches and bed-bugs in its public housing stock.

In any event, just because it's hard to generalize shouldn't mean that we can't (or shouldn't) take a hard look at specific cases.

[Neil]

The biggest problem with the federal government is pay equity across the country, rather than cost-of-living-adjusted equity. In means that in major cities from Montreal west, they're an employer of last resort for all but the lowest skill jobs.

The pay rates vs market is typical of unionized environments. Great pay and benefits for low skill employees. Crummy pay partially offset by above average benefits for mid-range employees. And, unlike private unionized environments, the punishment continues even further up the ladder, as there's absolutely atrocious pay for top level employees.

When I first entered the workforce, the public sector posting were tempting: good pay, has a pension, and so on. A few years of private sector experience, and all of a sudden, public sector postings look unattractive, and the federal ones look like a joke. Sure there's a pension, but the size of the pay cut is substantially more than the value of the pension.

@Shangwen
"A brilliant and savvy pork administrator is still destroying wealth."
Of course, whether a program is pork or not is a matter of opinion. But that aside, once a program is funded by the politicians, even if it destroys wealth, a brilliant administrator will destroy less wealth than a bad administrator. Hiring good people pays off regardless of the merit of the program.

[Whitfit]

Neil says:

"When I first entered the workforce, the public sector posting were tempting: good pay, has a pension, and so on. A few years of private sector experience, and all of a sudden, public sector postings look unattractive, and the federal ones look like a joke. Sure there's a pension, but the size of the pay cut is substantially more than the value of the pension."

I think that this is something that most people don't understand. At least where I work, the pension is really a pooled investment program, with the government matching your contribution up to about 9%. This is combined with the government taking a portion of the risk of underfunding when an individual retires. It is a good benefit, but it isn't gold plated, and it isn't gratuitous.

I think Bob Smith is right - the real issue is that what we need to do is take a hard look at the various programs and government spending, and to make some choices. It is frustrating to be seeing lots of money being spent on programs that benefit certain of a politicians constituencies or friends while the government is claiming that it has to cut your pay and benefits because everyone has to share the pain.