flanagan wages paper

8/3/2019 Flanagan Wages Paper

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Greg Flanagan

A Public Finance View onPublic Sector Wages and Salaries

Taking up the gauntlet


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Summary

Public nance economist Greg Flanagan analyzed the claims made in the paper Public Sector Wage Growth inAlberta, published by the University o Calgary School o Public Policy, and ound severe shortcomings in themethodology used by the authors, Ken Boessenkool and Ben Eisen (B&E). As Flanagan observes, the ongoing use oabsolute data by ocials in government and their supporters is misleading i not outright propagandistic.

Flanagan presents here a more accurate picture o the Albertas public sector that accounts or changes in population,ination, average earnings, and GDP. Tese actors were not accounted or by B&E and their conclusions arethereore unounded.

Tis study o Albertas public sector wages makes several important observations. First, the average unionizedgovernment employee makes $57,473 per year ar less than the $83,326 claimed by the B&E paper. More

signicantly, using the same Statistics Canada data set, and actoring in the average earning o AUPE-representedemployees, Flanagan calculates the average earning o more than 8,000 non-union employees (management andother excluded occupations) to be $146,661.

A urther analysis o the Statistics Canada data, adjusted or ination and population, shows Albertas public sectorspending on wages and salaries is the ourth-lowest in Canada, and that a comparison o increases in public sectorwages puts Alberta in the middle o the pack. Te true increase in spending on public sector salaries and wages inAlberta is 36 per cent, ar lower than the 103 per cent claimed by Boessenkool and Eisen. Tis 36 percent increasein Alberta is not signicantly higher than the 31 percent increase ound in the rest o Canada over the same period,especially when Albertas average personal income is 55 percent higher than the average o the other provinces.

Finally, a comparison o expenditures on public sector wages and salaries as a portion o total economic output (thatis, as a percentage o Gross Domestic Product) shows that Albertas public sector wage bill is the most aordable oany province in Canada at less than six per cent o GDP.

A Public Finance View onPublic Sector Wages and Salaries

Taking up the gauntlet


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Introduction

A recent study by Ken Boessenkool and Ben Eisen (B&E)1 claims that Alberta public sector wages have grown at amuch greater rate and are signicantly higher than in the public sectors in the rest o Canada. Using the evocativeterm shooting up to characterise increases in public expenditure, they place the blame or recent decits inAlberta on the wages paid to public sector workers. Tey also claim that these increases in public sector raises haveconsumed 95 percent o the revenue increases over the past decade.

Te authors, B&E throwdown the gauntlet to deenders o the status quo and challengethem to justiy these

disparate increases. I would not claim to deend the status quo in Alberta. However, beore I jumped to theirconclusions I would certainly take a more complete and detailed approach to the issue o whether public expendituresin Alberta are out o line with other provinces or excessive by any other measure.

As B&E primarily use Statistics Canada able 1830002 I shall also start with these statistics. B&E allude to the eecto changes in population and the price index (ination); I will be explicit in including these actors. As I have statedin numerous reports, the ongoing use o absolute data by ocials in government and their supporters is misleading inot outright propagandistic. When discussing and comparing public nance questions the data should in most casesbe expressed in constant dollars2 and per capita.

able 1830002 contains data on public sector employment and wages and salary expenditures or all ederal,provincial, and territorial governments, on a monthly basis. Te data is compiled in seven subcategories, our ointerest here: General government; School boards; Universities, colleges, vocational and trade institutions (postsecondary); and Health and social service institutions. Te 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 dollarsexpended at the date measured. It is also important to observe the ootnotes and other explanatory material with aCANSIM able. For example, ootnote 1: Employment data are not in ull-time equivalents and do not distinguishbetween ull-time and part-time employees.

The problem with per employee spending comparisons

B&E proess to overcome the variance in population and ination: We can minimize the impact o these issues bycomparing per-employee spending on public sector wages across our our categories o spending.3 Tis simplisticapproach raises serious concerns about their conclusions. Te context o the complement o ull-time and part-time appointments is critical to a measure o per employee spending. A couple o simple hypothetical examplesillustrates the problem. In example 1 there are two jurisdictions that each spend a total o $1 million on wage andsalaries. Jurisdiction A has 20 ull-time employees, thereore, the per employee cost is $50,000.4 Jurisdiction B has10 ull-time employees and 20 part-time workers each with an average .5 position. Te per employee cost in this

case is $33,333.5 Although A and B both have 20 ull-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 arecompared. Jurisdiction C, with the same wage and salary cost o $1 million, has 15 ull-time employees but 10 othese employees work overtime equal to .5 workload. Again both A and C have 20 ull-time equivalent workloads.However, in this case C has a per-employee cost o $66,667,6 while A has a per-employee cost o $50,000.

Per employee spending is critically sensitive to the complement o part-time and ull time positions, and to the degreeovertime is used to cover unlled positions. B&Es methodology does not account or such dierences. Much deeperstudy o this ratio is needed to make any o the conclusions they present. Alberta has had the lowest unemploymentrate in Canada over the decade discussed, rom 2000 to 2010. It is a reasonable hypothesis that to attract employeesAlberta would have a greater ull-time ratio o employees than other jurisdictions. People with employment optionsdo 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 averagesA second issue arises in B&Es methodology. Just one example: they calculate the per-employee spending orprovincial and territorial general government or 2010 at $83,326, based on 29,456 employees and a total wage andsalary cost o $2,454,450,656.7 A decomposition o this inormation is instructive. According to government sources

1 Public Sector Wage Growth in Alberta, Te School o Public Policy, University o Calgary, Volume 5, Issue 1, January 20122 Constant dollar data adjusts valuations or the eect o ination 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. Tis calculation implies 20 part-time workers would equal 10 ull-time workers in output and cost. In practice part-time

employees require more administration and guidance and thereore greater cost or less output per employee.6 $1,000,000/15 =$66,667. Tis 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 or employee burnout.7 Op. cit. Chart 2, p4. or Statistics Canada able 1830002.


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29,556 were employed in 2010, a slight dierence rom able 1830002. O these employees 21,082 were memberso the Alberta Union Provincial Employees, and 8,474 were outside the union. Te average salary or the unionemployees was $57,473 (considerably lower than $83,326). Te spending on union employees wages and salarieswas $1,211,645,786.8 Tis means more than hal the total expenditure on public employees (i.e. $1,242,804,870) waspaid to the non-union employees. Tis amounts to an average salary per non-union employee o $146,661. o betterunderstand the details o public sector employee compensation a greater degree o detailed data needs to be studiedand standardized across jurisdictions beore any meaningul comparisons can be claimed.

Accounting or infation and populationHow can able 1830002 data be useul in interprovincial comparison o public sector spending? Te problemsassociated with using the data on the numbers o employees has been illustrated; and the need or a deeper analysiso these raw numbers advised. Te data on wages and salaries can be useul but also needs to be adjusted orcomparison over time and across jurisdictions. Te data on wages and salaries in able 1830002 is recorded at thetime expressed in the dollar cost at that time, or what is termed current dollars. O course a dollar in 2011 is notthe same as a dollar in 1981. A dollar today buys a raction o what it bought 30 years ago. Or, to put it anotherway, it takes $2.42 in 2011 to buy the same service one could buy in 1981 or $1.00.9 Additionally, provinces havehad dierent rates o ination. Te rst 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 dierent rateso compounded ination or each province in Canada over the last decade.10

Figure 1, Provincial Infation between 2000-2011

Te rst thing to note is that Alberta has had approximately a ve percent greater increase in the cost o livingcompared to the rest o the provinces over the decade.

Another adjustment needs to be made to the data. Population in Canada has grown considerably in the last threedecades this able covers. In 1981 there were 24,819,915 Canadians and by 2011 there were 34,482,779. Tisis a 40 percent increase. Tis large population increase has not spread across the provinces evenly. Many newimmigrants choice o residence and much interprovincial movement have signicantly changed the distributiono the population. Figure 2 shows how Alberta has attracted a greater share o this population distribution in thelast decade. Te next adjustment that needs to be made to the data in able 1830002 is to divide it by appropriatepopulation data over the same time period in order to express it in per capita terms.

8 Memo Corporate Human Resources, Government o Alberta, August 2011.9 Accumulated ination in Canada over the period rom 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 able 3260021, All-items CPI (2002=100)


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Figure 2, Provincial Population Change between 2000-2011

Making an appropriate comparison

Only afer adjusting by province or ination (converting all dollar data to constant dollars) and adjusting or thechanges o provincial population afer net new immigrants and interprovincial migration can deensible comparisonso provincial public sector spending on wages and salaries be made. Te our categories compared in this ashionhere will include (as in B&E): provincial general government; health and social service institutions; colleges anduniversities; and local school boards. For brevity all our categories have been combined into total provincialexpenditure on public sector wages and salaries. Each category could be considered independently i desired.11

Figure 3 shows provincial total government expenditures on public sector wages and salaries measured in constant(2002=100) dollars per capita or the period rom 2000 to 2010. Te rst thing noticeable rom this presentation

o the data is that there appears to be economies o scale in the supply o government services.12 Te smaller thepopulation o a province is, the higher the cost o provision o the public-sector as measured by wages. Quebecsexpenditures are higher than expected rom an economies-o-scale perspective but Quebec also has a greater levelo public services. And o course the level o services across provinces is not necessarily equal, thereore, thisidea would need to be investigated much more thoroughly than is possible here. Te second observation is thatexpenditures on public sector wages and salaries (constant dollar per capita) in all o the provinces have generallyexpanded. Alberta is not particularly dierent in this respect. Changes to spending over the decade need to be lookedat in more detail. Tereore the specic 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.

Tereore a complete provincial comparison o all categories is not possible.12 Economies o scale exist when the cost per unit o a product alls as the size o the actory (plant, machine) increases in size. Used here it means

the cost per unit o public service is less the larger the population in the jurisdiction.


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

Alberta constant dollar per capita cost has clearly increased, as have all o the provinces. However, there are otherprovinces that have increased at a greater percent. Notably both Saskatchewan and Newoundland and Labrador arehighest at 43 percent. Both British Columbia and Quebec are the lowest with 15 percent increases. Te provincescollectively, excluding Alberta, that is the rest o Canada (ROC), have increased an average o 31 percent. WhileAlberta at 36 percent is one o the higher provinces, this comparison indicates that Alberta is nowhere near theextreme dierence 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 signicant changes in relative population expansion and redistribution amongprovinces, and dierent inationary changes in purchasing power o each province (less dramatic) are taken intoaccount, the provinces under dierent governments and considerable dierent economic conditions have beentracking very similarly in the last decade when comparing their public sector expenditures.


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Although Albertas expenditure on wages and salaries or public sector employees is similar to other provinces,Alberta is exceptional among the provinces. Alberta is very rich in comparison. Te average personal income inAlberta in 2010 or every man, woman, and child was over $52,000 per year. Tis means a amily o our on averagehad an income o $210,000. O course averages make a nice statistic. Income distribution is very unequal and toomany amilies in Alberta still rely on ood banks to get by. Figure 5 illustrates personal income per person in eachprovince. Note Alberta is almost $20,000 greater than the rest o Canada (ROC). Tis high personal income must bea actor in considering both the airness and eciency requirements in the public sector in Alberta. A simple wage/

employee ratio comparison cannot recognize the unique circumstances o Alberta, nor any other jurisdiction or thatmatter.

Figure 5, Personal Income per person 2010

Comparing provincial economies

Now or something dierent. A more interesting approach when considering the public sector is to put expenditureinto context by comparing it to gross domestic product (GDP). Te public service must also support the productivecapacity o a state. Recognizing its limitations, gross domestic product is a conventional measure o the productivityo a jurisdiction as well as (in per capita terms) the well-being o the citizens in that place. In Figure 6 the wage andsalary data ound in able 1830002 is divided by the GDP o each jurisdiction. Here we can see the relative stabilityo public service wages over time. Te lines indicate an increase in this ratio in all jurisdictions in 2009. Tis reectsthe universal drop in GDP experienced in the recession starting in 2008. Tis is good and reects the stabilizationunction o public sector expenditures. In almost all jurisdictions the ratio begins to decline back to its trend in 2010.

For reection here it is particularly important to note the small percentage o GDP allocated to public sector wages

and salaries in Alberta. It raises the obvious question: Is Alberta providing a sucient public sector to its citizens tosupport the high level o GDP and high average personal income occurring in Alberta? Tis is the question morepublic policy analysts need to be pursuing in Alberta.


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Figure 6, Total Provincial Government Public Sector Wages and Salaries, 2000-2010

Compared to Gross Domestic Product

Conclusion

Public Finance is the study o the role, size, and indirectly the appropriate proportion o an economy the public sectorshould make up in order or a modern economy to be ecient. What insight is gained by simply comparing eachprovinces unadjusted public sector wage und divided by raw employee numbers entailed in the analysis B&E? Ithere is a Public Finance purpose in comparing dierent provinces salary schedules then a much more sophisticatedmodel o public sector wage determination would need to be constructed. Te level o analysis concerned with publicpolicy should be much broader. Within the connes o an appropriate level o public sector, the details o part-time/ull-time employee ratios, overtime work, union and non-union complement, and wage and salary determination

is rightly lef up to local negotiation where the many specic details, GDP, personal income rates, availability ocompetent labour, etc., etc., are lived and known.

Te broader question o what the appropriate level o provincial (or ederal) public sector wage and salaryexpenditures should be also depends on many variables that change by jurisdiction. Tis report has taken theapproach that when comparing situations over time and/or across jurisdictions some common metric is necessarythe constant dollar per capita measure. Gross domestic product, a measure o both output and well being, is alsouseul and convenient (and much used) as a general denominator in cross-jurisdictional comparisons (includingnations). Comparisons do not o course answer the ultimate questions o Public Finance. Tey do provide, though,some sense o appropriateness, particularly in a ederal state that purports to maintain a rough equivalence o serviceto all o its citizens regardless o what jurisdiction they reside in the nation.

Te evidence in this report illustrates that Alberta on a constant dollar per capita basis is not an outlier in its level oexpenditures on public sector wages and salaries. It urther shows that on a GDP or personal income basis Alberta

is the lowest when ranked in public sector expenditures, signicantly below what could be expected given its level owealth especially when so much o that wealth is owned in common by the population o Alberta.


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About the author

Greg Flanagan is a public nance economist and has taught economics or over twenty-ve years. He is currently aresearch associate with Parkland Institute and was most recently Assistant Dean, Faculty o Management, Universityo Lethbridge (retired). He was also at Mount Royal University or 20 years. Greg holds degrees in economics andpolicy studies rom University o Calgary, York University, and the University o British Columbia. Greg is coauthoroEconomics 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.


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Alberta Union o Provincial Employees10451 - 170 Street NW, Edmonton, AB T5P 4S7T: (780) 930-3300 F: (780) 930-3392www.aupe.org

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