"The Wisconsin Governor wants unions to stop holding the public to ransom"

Financial Post
We need Scott Walker here
By Niels Veldhuis and Milagros Palacios

LibertarienFacing a $3.6-billion deficit, Wisconsin Governor Scott Walker recently declared his state “broke.” To overcome this fiscal challenge, Mr. Walker proposed cutting generous public sector pension and health care benefits, and threatened immediate layoffs if concessions were not made. He also introduced legislation to restrict collective bargaining in the public sector and limit future wage increases to the rate of inflation.

Mr. Walker has clearly tapped into the growing backlash from ordinary working taxpayers against the generous compensation of the public sector. His willingness to tackle Wisconsin’s fiscal situation head-on is a welcome breath of fresh air.

While Canadian politicians should be following Mr. Walker’s lead, most are simply deferring fiscal problems into the future, unwilling to make the tough choices today.

Take Ontario Premier Dalton McGuinty. His government plans to run a $18.7-billion deficit (3% of GDP) this year and another $69.2-billion over the next six years. Jean Charest’s government in Quebec plans to finish the year with a $4.6-billion deficit (1.5% of GDP) and another $4.6-billion over the next two years.

What about Premier Ed Stelmach in Alberta? No tough choices being made there. His government plans to run a deficit of $4.8-billion (1.8% of GDP) this year and another $4.1-billion over the next two years. And it doesn’t stop there. Stephen Harper’s Conservatives expect a $45.4-billion deficit this year (2.8 % of GDP) and plan to return the budget to balance in five years by limiting spending growth (something they have not done to date) and hoping that revenues will grow at 5.6% a year.

If our politicians here in Canada admitted to the seriousness of the current fiscal situation, as Mr. Walker has in Wisconsin, and were bold enough to aggressively deal with the problem, they’d start in the same place: with overly generous public sector wages and benefits. Like Wisconsin, Canada’s public sector enjoys a significant wage premium. That is, workers in the public sector are paid significantly more than comparable private sector workers.

Specifically, after accounting for differences in education and skills (and other factors that influence wages) public sector workers enjoy a wage premium of up to 38%.

The premium varies depending on occupation and industry. Those in retail (sales clerks, cashiers, supervisors) enjoy a 26% premium in the public sector. Those in management enjoy an 18% premium; child care and home support workers receive a 15% premium, while financial, secretarial and administrative occupations receive a 13% premium. Even chefs and cooks get 15% more in the public sector.

And that’s just the wage premium. Factor in pension, health, and other benefits such as job security, and there’s no wonder we’re starting to see a growing backlash against public sector compensation.

How do public sector workers get away with it? It’s simple; their unions are able to hold the general public for ransom.

Typically, public sector services (health care, education, garbage collection, transit services, etc.) are provided in a monopoly environment. That is, very few services are exposed to competition. When governments have a monopoly on service provision, public sector unions can extract a significant wage premium by threatening to strike. And if they do, we have no alternatives to the monopolized services.

A dramatically different situation exists in the private sector. Suppose unionized workers at a grocery store decide to exercise their right to strike. First, the strike does little more than inconvenience consumers because so many alternatives are available. Second, competitive pressures push both the employer and union to settle their differences quickly. Unions facing such pressures generally understand that unreasonable wage increases and other demands will ultimately be detrimental to the company and result in reduced employment (auto workers not included).

Meanwhile, the employer must balance the negative effects of a prolonged dispute (lost market share, customer dissatisfaction, reduced profitability, etc) with demands for wage increases.

In the private sector, competitive pressures on both parties help resolve disputes on terms that both sides can live with.No such mechanism exists when the service is provided by a government monopoly. That’s why public sector unions can extract significant premiums for their services.

To rectify the problem, and restore the fiscal health of Canadian governments, our politicians should take a page from Governor Walker’s playbook and roll back the wage premium.

Canadian governments should also restrict collective bargaining in the public sector by banning the right to strike for public sector employees and having their wages and benefits linked to private sector counterparts.

Rather than the inherently political negotiation process that current exists, public sector compensation should be determined by wage boards, independent governmental bodies responsible for collecting, analyzing, and setting wages in the public sector on the basis of wages and benefits in the private sector.

One of the main benefits of this approach is to better match public sector wages with economic conditions of the times.

During the recession and into the recovery, Canadians in the private sector have unfortunately dealt with job losses and reduced wages and benefits, while public sector workers enjoy their premium and demand for even more. It’s time our politicians fixed the imbalance.

Niels Veldhuis and Milagros Palacios are economists with the Fraser Institute.