A Public Finance View on Public Sector Wages and Salaries

Taking up the gauntlet

Greg Flanagan

A Public Finance View on Public Sector Wages and Salaries

Taking up the gauntlet
Summary Public finance economist Greg Flanagan analyzed the claims made in the paper Public Sector Wage Growth in Alberta, published by the University of Calgary School of Public Policy, and found severe shortcomings in the methodology used by the authors, Ken Boessenkool and Ben Eisen (B&E). As Flanagan observes, the ongoing use of absolute data by officials in government and their supporters is misleading if not outright propagandistic. Flanagan presents here a more accurate picture of the Albertas public sector that accounts for changes in population, inflation, average earnings, and GDP. These factors were not accounted for by B&E and their conclusions are therefore unfounded. This study of Albertas public sector wages makes several important observations. First, the average unionized government employee makes $57,473 per year far less than the $83,326 claimed by the B&E paper. More significantly, using the same Statistics Canada data set, and factoring in the average earning of AUPE-represented employees, Flanagan calculates the average earning of more than 8,000 non-union employees (management and other excluded occupations) to be $146,661. A further analysis of the Statistics Canada data, adjusted for inflation and population, shows Albertas public sector spending on wages and salaries is the fourth-lowest in Canada, and that a comparison of increases in public sector wages puts Alberta in the middle of the pack. The true increase in spending on public sector salaries and wages in Alberta is 36 per cent, far lower than the 103 per cent claimed by Boessenkool and Eisen. This 36 percent increase in Alberta is not significantly higher than the 31 percent increase found in the rest of Canada over the same period, especially when Albertas average personal income is 55 percent higher than the average of the other provinces. Finally, a comparison of expenditures on public sector wages and salaries as a portion of total economic output (that is, as a percentage of Gross Domestic Product) shows that Albertas public sector wage bill is the most affordable of any province in Canada at less than six per cent of GDP.

Introduction A recent study by Ken Boessenkool and Ben Eisen (B&E)1 claims that Alberta public sector wages have grown at a much greater rate and are significantly higher than in the public sectors in the rest of Canada. Using the evocative term shooting up to characterise increases in public expenditure, they place the blame for recent deficits in Alberta on the wages paid to public sector workers. They also claim that these increases in public sector raises have consumed 95 percent of the revenue increases over the past decade. The authors, B&E throwdown the gauntlet to defenders of the status quo and challengethem to justify these disparate increases. I would not claim to defend the status quo in Alberta. However, before I jumped to their conclusions I would certainly take a more complete and detailed approach to the issue of whether public expenditures in Alberta are out of line with other provinces or excessive by any other measure. As B&E primarily use Statistics Canada Table 1830002 I shall also start with these statistics. B&E allude to the effect of changes in population and the price index (inflation); I will be explicit in including these factors. As I have stated in numerous reports, the ongoing use of absolute data by officials in government and their supporters is misleading if not outright propagandistic. When discussing and comparing public finance questions the data should in most cases be expressed in constant dollars2 and per capita. Table 1830002 contains data on public sector employment and wages and salary expenditures for all federal, provincial, and territorial governments, on a monthly basis. The data is compiled in seven subcategories, four of interest here: General government; School boards; Universities, colleges, vocational and trade institutions (post secondary); and Health and social service institutions. The table contains data starting January 1981 through to September 2011. It is important to note that the wages and salaries presented are in current dollars, that is, the dollars expended at the date measured. It is also important to observe the footnotes and other explanatory material with a CANSIM Table. For example, footnote 1: Employment data are not in full-time equivalents and do not distinguish between full-time and part-time employees. The problem with per employee spending comparisons B&E profess to overcome the variance in population and inflation: We can minimize the impact of these issues by comparing per-employee spending on public sector wages across our four categories of spending.3 This simplistic approach raises serious concerns about their conclusions. The context of the complement of full-time and parttime appointments is critical to a measure of per employee spending. A couple of simple hypothetical examples illustrates the problem. In example 1 there are two jurisdictions that each spend a total of $1 million on wage and salaries. Jurisdiction A has 20 full-time employees, therefore, the per employee cost is $50,000.4 Jurisdiction B has 10 full-time employees and 20 part-time workers each with an average .5 position. The per employee cost in this case is $33,333.5 Although A and B both have 20 full-time equivalent positions and an equal wage and salary outlay, Jurisdiction B appears to have much lower per employee cost. In the second example Jurisdiction A and C are compared. Jurisdiction C, with the same wage and salary cost of $1 million, has 15 full-time employees but 10 of these employees work overtime equal to .5 workload. Again both A and C have 20 full-time equivalent workloads. However, in this case C has a per-employee cost of $66,667,6 while A has a per-employee cost of $50,000. Per employee spending is critically sensitive to the complement of part-time and full time positions, and to the degree overtime is used to cover unfilled positions. B&Es methodology does not account for such differences. Much deeper study of this ratio is needed to make any of the conclusions they present. Alberta has had the lowest unemployment rate in Canada over the decade discussed, from 2000 to 2010. It is a reasonable hypothesis that to attract employees Alberta would have a greater full-time ratio of employees than other jurisdictions. People with employment options do not want insecure and irregular part-time jobs. Secondly it is well known that many public sector workers, especially in the health sector, are working considerable overtime hours due to labour shortages in Alberta. The big problem with averages A second issue arises in B&Es methodology. Just one example: they calculate the per-employee spending for provincial and territorial general government for 2010 at $83,326, based on 29,456 employees and a total wage and salary cost of $2,454,450,656.7 A decomposition of this information is instructive. According to government sources
Public Sector Wage Growth in Alberta, The School of Public Policy, University of Calgary, Volume 5, Issue 1, January 2012 Constant dollar data adjusts valuations for the effect of inflation on purchasing power over time. 3 Op. cit. p3. 4 A simple wage per employee count calculation: $1,000,000/20 =$50,000. 5 $1,000,000/30 =$33,333. This calculation implies 20 part-time workers would equal 10 full-time workers in output and cost. In practice part-time employees require more administration and guidance and therefore greater cost or less output per employee. 6 $1,000,000/15 =$66,667. This calculation assumes employees working overtime generate the same cost and output proportionally. In practice overtime may require less administration and guidance per employee but likely at greater proportional cost and the potential for employee burnout. 7 Op. cit. Chart 2, p4. or Statistics Canada Table 1830002.
1 2

29,556 were employed in 2010, a slight difference from Table 1830002. Of these employees 21,082 were members of the Alberta Union Provincial Employees, and 8,474 were outside the union. The average salary for the union employees was $57,473 (considerably lower than $83,326). The spending on union employees wages and salaries was $1,211,645,786.8 This means more than half the total expenditure on public employees (i.e. $1,242,804,870) was paid to the non-union employees. This amounts to an average salary per non-union employee of $146,661. To better understand the details of public sector employee compensation a greater degree of detailed data needs to be studied and standardized across jurisdictions before any meaningful comparisons can be claimed. Accounting for inflation and population How can Table 1830002 data be useful in interprovincial comparison of public sector spending? The problems associated with using the data on the numbers of employees has been illustrated; and the need for a deeper analysis of these raw numbers advised. The data on wages and salaries can be useful but also needs to be adjusted for comparison over time and across jurisdictions. The data on wages and salaries in Table 1830002 is recorded at the time expressed in the dollar cost at that time, or what is termed current dollars. Of course a dollar in 2011 is not the same as a dollar in 1981. A dollar today buys a fraction of what it bought 30 years ago. Or, to put it another way, it takes $2.42 in 2011 to buy the same service one could buy in 1981 for $1.00.9 Additionally, provinces have had different rates of inflation. The first thing to make the data comparable in this table across years and across jurisdictions is to convert the current dollar data to constant (comparable) dollars. Figure 1 shows the different rates of compounded inflation for each province in Canada over the last decade.10 Figure 1, Provincial Inflation between 2000-2011

The first thing to note is that Alberta has had approximately a five percent greater increase in the cost of living compared to the rest of the provinces over the decade. Another adjustment needs to be made to the data. Population in Canada has grown considerably in the last three decades this Table covers. In 1981 there were 24,819,915 Canadians and by 2011 there were 34,482,779. This is a 40 percent increase. This large population increase has not spread across the provinces evenly. Many new immigrants choice of residence and much interprovincial movement have significantly changed the distribution of the population. Figure 2 shows how Alberta has attracted a greater share of this population distribution in the last decade. The next adjustment that needs to be made to the data in Table 1830002 is to divide it by appropriate population data over the same time period in order to express it in per capita terms.

Memo Corporate Human Resources, Government of Alberta, August 2011. Accumulated inflation in Canada over the period from 1981 to 2011 as measured by the Consumer Price Index is 142 percent; Statistics Canada series v41693271 Canada; All-items CPI (2002=100). 10 Statistics Canada Table 3260021, All-items CPI (2002=100)
8 9

Figure 2, Provincial Population Change between 2000-2011

Making an appropriate comparison Only after adjusting by province for inflation (converting all dollar data to constant dollars) and adjusting for the changes of provincial population after net new immigrants and interprovincial migration can defensible comparisons of provincial public sector spending on wages and salaries be made. The four categories compared in this fashion here will include (as in B&E): provincial general government; health and social service institutions; colleges and universities; and local school boards. For brevity all four categories have been combined into total provincial expenditure on public sector wages and salaries. Each category could be considered independently if desired.11 Figure 3 shows provincial total government expenditures on public sector wages and salaries measured in constant (2002=100) dollars per capita for the period from 2000 to 2010. The first thing noticeable from this presentation of the data is that there appears to be economies of scale in the supply of government services.12 The smaller the population of a province is, the higher the cost of provision of the public-sector as measured by wages. Quebecs expenditures are higher than expected from an economies-of-scale perspective but Quebec also has a greater level of public services. And of course the level of services across provinces is not necessarily equal, therefore, this idea would need to be investigated much more thoroughly than is possible here. The second observation is that expenditures on public sector wages and salaries (constant dollar per capita) in all of the provinces have generally expanded. Alberta is not particularly different in this respect. Changes to spending over the decade need to be looked at in more detail. Therefore the specific percent increases are illustrated in Figure 4.

11 Starting in 2005, health and social services institutions are embedded in provincial general government in Prince Edward Island; Colleges, vocational and trade institutions and local school boards are embedded in provincial and territorial general government in New Brunswick. Therefore a complete provincial comparison of all categories is not possible. 12 Economies of scale exist when the cost per unit of a product falls as the size of the factory (plant, machine) increases in size. Used here it means the cost per unit of public service is less the larger the population in the jurisdiction.

Figure 3, Total Provincial Government Public Sector Wages and Salaries, 2000-2010

Alberta constant dollar per capita cost has clearly increased, as have all of the provinces. However, there are other provinces that have increased at a greater percent. Notably both Saskatchewan and Newfoundland and Labrador are highest at 43 percent. Both British Columbia and Quebec are the lowest with 15 percent increases. The provinces collectively, excluding Alberta, that is the rest of Canada (ROC), have increased an average of 31 percent. While Alberta at 36 percent is one of the higher provinces, this comparison indicates that Alberta is nowhere near the extreme difference reported by B&E using their methodology. Figure 4, Change in Constant $ Per Capita Public Sector Wages 2000-2010

At this point it is clear that when the significant changes in relative population expansion and redistribution among provinces, and different inflationary changes in purchasing power of each province (less dramatic) are taken into account, the provinces under different governments and considerable different economic conditions have been tracking very similarly in the last decade when comparing their public sector expenditures.
7

Although Albertas expenditure on wages and salaries for public sector employees is similar to other provinces, Alberta is exceptional among the provinces. Alberta is very rich in comparison. The average personal income in Alberta in 2010 for every man, woman, and child was over $52,000 per year. This means a family of four on average had an income of $210,000. Of course averages make a nice statistic. Income distribution is very unequal and too many families in Alberta still rely on food banks to get by. Figure 5 illustrates personal income per person in each province. Note Alberta is almost $20,000 greater than the rest of Canada (ROC). This high personal income must be a factor in considering both the fairness and efficiency requirements in the public sector in Alberta. A simple wage/ employee ratio comparison cannot recognize the unique circumstances of Alberta, nor any other jurisdiction for that matter. Figure 5, Personal Income per person 2010

Comparing provincial economies Now for something different. A more interesting approach when considering the public sector is to put expenditure into context by comparing it to gross domestic product (GDP). The public service must also support the productive capacity of a state. Recognizing its limitations, gross domestic product is a conventional measure of the productivity of a jurisdiction as well as (in per capita terms) the well-being of the citizens in that place. In Figure 6 the wage and salary data found in Table 1830002 is divided by the GDP of each jurisdiction. Here we can see the relative stability of public service wages over time. The lines indicate an increase in this ratio in all jurisdictions in 2009. This reflects the universal drop in GDP experienced in the recession starting in 2008. This is good and reflects the stabilization function of public sector expenditures. In almost all jurisdictions the ratio begins to decline back to its trend in 2010. For reflection here it is particularly important to note the small percentage of GDP allocated to public sector wages and salaries in Alberta. It raises the obvious question: Is Alberta providing a sufficient public sector to its citizens to support the high level of GDP and high average personal income occurring in Alberta? This is the question more public policy analysts need to be pursuing in Alberta.

Figure 6, Total Provincial Government Public Sector Wages and Salaries, 2000-2010 Compared to Gross Domestic Product

Conclusion Public Finance is the study of the role, size, and indirectly the appropriate proportion of an economy the public sector should make up in order for a modern economy to be efficient. What insight is gained by simply comparing each provinces unadjusted public sector wage fund divided by raw employee numbers entailed in the analysis B&E? If there is a Public Finance purpose in comparing different provinces salary schedules then a much more sophisticated model of public sector wage determination would need to be constructed. The level of analysis concerned with public policy should be much broader. Within the confines of an appropriate level of public sector, the details of part-time/ full-time employee ratios, overtime work, union and non-union complement, and wage and salary determination is rightly left up to local negotiation where the many specific details, GDP, personal income rates, availability of competent labour, etc., etc., are lived and known. The broader question of what the appropriate level of provincial (or federal) public sector wage and salary expenditures should be also depends on many variables that change by jurisdiction. This report has taken the approach that when comparing situations over time and/or across jurisdictions some common metric is necessary the constant dollar per capita measure. Gross domestic product, a measure of both output and well being, is also useful and convenient (and much used) as a general denominator in cross-jurisdictional comparisons (including nations). Comparisons do not of course answer the ultimate questions of Public Finance. They do provide, though, some sense of appropriateness, particularly in a federal state that purports to maintain a rough equivalence of service to all of its citizens regardless of what jurisdiction they reside in the nation. The evidence in this report illustrates that Alberta on a constant dollar per capita basis is not an outlier in its level of expenditures on public sector wages and salaries. It further shows that on a GDP or personal income basis Alberta is the lowest when ranked in public sector expenditures, significantly below what could be expected given its level of wealth especially when so much of that wealth is owned in common by the population of Alberta.

About the author Greg Flanagan is a public finance economist and has taught economics for over twenty-five years. He is currently a research associate with Parkland Institute and was most recently Assistant Dean, Faculty of Management, University of Lethbridge (retired). He was also at Mount Royal University for 20 years. Greg holds degrees in economics and policy studies from University of Calgary, York University, and the University of British Columbia. Greg is coauthor of Economics in a Canadian Setting, HarperCollins Publishers, and Economics Issues, a Canadian Perspective, McGraw-Hill, and has authored and presented numerous papers and articles on public policy.

10

11

Alberta Union of Provincial Employees 10451 - 170 Street NW, Edmonton, AB T5P 4S7 T: (780) 930-3300 F: (780) 930-3392 www.aupe.org

12044 12