The Civil Service in the Recession

The Civil Service in the Recession

If you want to know how hard times are hitting government workers, there's a group of frank, friendly, tuned-in guys you could call up: Ottawa luxury car dealers. What's it like selling cars in a city dominated by federal employees during a RECESSION?

"There has been no recession," says Paul Giacomin, owner of the capital's 417 Infiniti Nissan dealership, as far as his bottom line is concerned; he calls Ottawa a "strong city." "Business is up for us. Very up. In fact, it's up about 30 per cent from 2008," testifies sales manager Paul Renaud of Audi-Porsche dealership Mark Motors West. "This year has been great," reports Neil Donnelly, new-car sales manager at Tony Graham Lexus. "We're having a record year. By far. I made three different forecasts at the start of the year: a totally optimistic forecast, a semi-optimistic one, and a flatline, which would have been fine, since we also set records in '08. We've blown through the most optimistic one."

Not everybody is so ebullient; some Ottawa dealers in what the Europeans call the "executive car" class confess to merely matching or approaching 2008 numbers. But mostly the showrooms are busy, and it's no secret why. "Ottawa's a little isolated," admits Renaud; when there's a short-term economic shock, "you know government workers are gonna keep getting paid." "We didn't have that good a year, but definitely, being in a government town helped a lot," says Bel Air Lexus Toyota sales manager Marc Durocher. Infiniti's Giacomin attests that dealers in government-dominated Quebec City are doing almost as well as he is; others aren't. "Rightly or wrongly, this city hasn't managed to attract private sector jobs, and as a result we've been very much shielded from the impacts that might have happened elsewhere." Donnelly echoes him, right down to the adjective: "I would say we're definitely shielded."

It's not new for people to use bubble, or shield, or island metaphors in talking about government towns like Ottawa. But these days, the nation's capital feels like the town the recession forgot. UNEMPLOYMENT stands at just 5.6 per cent, well off the national rate of 8.6 per cent. The Teranet-National Bank house price index grew in Ottawa by a healthy 2.8 per cent in the 12 months leading up to August; for the country as a whole, it was down 3.4 per cent. Indeed, Ottawa stands better than average in almost all the categories of the RBC Economics "City Scorecard." Even measures that have declined are healthier: non-residential building permits may be down 22 per cent from last year in Ottawa, but that's still better than the national number of minus 26 per cent.

Rarely in recent Canadian history has the sense of separation between the public and private sectors been felt so keenly, and not just in Ottawa. On Nov. 4, Ontario Premier Dalton MCGUINTY admitted that public sector workers had been "sheltered" from economic chaos, saying that, "By and large it's been a private sector recession, not a public sector recession." He even mused about repeating the despised "Rae Days" exercise of 1993, when civil service and government employees were forced to take 12 days of unpaid leave.

Whether or not "Dalton Days" are ahead, the numbers confirm his take on the "sheltered" public labour force. STATISTICS CANADA says that over the 12-month period between October 2008 and October 2009, Canada lost almost half a million jobs. Nearly 450,000 of these were in the private sector, where employment was off a full four per cent for the year. The figure for the public sector was just 1.6 per cent, and more than half of that drop-off was recorded in the last month of the sequence. For most of the past year, the public sector was fighting the recession to a draw; indeed, despite the slight net job loss, public sector employment has risen in more months than it has fallen.

And it's not just job security, but wages as well. Another barometer of relative economic health in the public and private camps is the federal Labour Department's tracking of major collective bargaining settlements. For the third quarter of 2009, annualized wage increases in the public sector resulting from new union deals outpaced those in the private sector by 2.1 per cent to 1.5 per cent. For all of 2009 so far, the public sector is ahead 2.5 per cent to 1.9 per cent. Those may not look like big differences, but don't forget the power of compound interest. Over a three-year collective bargaining agreement, a 0.6 per cent yearly advantage translates to almost two full percentage points.

Economists reassure us that such disparities tend to even out over the long run, or else the queues for public sector jobs would get longer and longer without limit. Nonetheless, the recession has arrived at the end of what was already a pretty good run for the public side. Between 2004 and 2008, across Canada, employment in public administration jobs grew faster (2.9 per cent per year) than employment in the economy as a whole (2.2 per cent). Annual growth was also faster in public sector employee earnings (3.9 per cent versus 3.4 per cent). Both federal and provincial employees came out well ahead of Joe Private on both measures, and the data on union wage settlements confirms the story: public sector workers gained more at the bargaining table not only in 2009, but also in 2008, 2007, and 2006.

Even before the world's economy imploded, workers who chose to take their chances in the world of private business or industry had good reasons for feeling like suckers. What other reaction could they have to reading in the news that MPs' travel and office expenses were up 3.7 per cent in fiscal 2008-09? Or that the number of federal government executives at the EX-5 pay grade, with annual salary and bonuses averaging about $214,000, has grown from 14 to 69 in three years?

Last December the Canadian Federation of Independent Business released its post-census "Wage Watch" report. Its key finding was that government and public workers earn, on average, "roughly eight per cent to 17 per cent more than similarly employed individuals in the private sector." When benefits are taken into account, the overall public edge swells to 30 per cent. An entire cottage industry has risen up to attack the "Wage Watch" report on behalf of unionized public sector workers. The attacks from labour economists tend to take the form - "We're not really paid more, but if we are, we're worth it; and even if we aren't worth it according to your inhumane market-based calculations, it's important to preserve things like male-female pay equity and set a proper example of decency for the private economy."

One way or another, though, there is broad agreement that the public-private "pay gap" is real, and it is recognized even in the less polemical scholarly literature on economics. Repeated studies over decades have confirmed that public sector employees, especially federal employees and women, get paid more than their private counterparts for similar work, though at the high end of the income scale (i.e., for top executives and very highly trained workers) the "pay gap" becomes negative. As recently as September, a multi-country study from New Zealand estimated the size of Canada's pay gap at 30 per cent.

So when private sector workers peer into the public sector bubble, what they see is greater job security, permanently higher pay for all but the most elite workers, and airtight insulation from economic shocks. The public sector itself may even be subjectively aware of faring better. In Harris-Decima's Labour Day poll for Monster.ca, 53 per cent of public sector workers described themselves as feeling more secure in their jobs than they did one year ago, compared with 42 per cent of private sector workers. A remarkable 39 per cent of the public sector answered "yes" when asked if they were overpaid compared to employees in the private sector.

Perched atop these layers of putative injustice is the ugliest gargoyle of all: the question of non-wage benefits. Public sector employees generally enjoy better sick leave and maternity leave provisions, and the rock-steady pensions of old are disappearing for private sector workers while the public sector clings to them. As Canada Pension Plan Investment Board CEO David Denison observed in a September speech, "Defined-benefit plans have traditionally been the preferred choice for providing retirement income for middle- and upper-income Canadians, but ... fundamentally, defined-benefit plans promising 100 per cent guarantees have simply become too expensive for plan sponsors to underwrite." When it comes to the public sector, the ultimate "plan sponsor" is the taxpayer, but so far, nobody has decided that gold-plated pensions for public administrators, elected officials, teachers, and health care workers are too expensive for him to underwrite.

So is it time to start contemplating a bloody uprising against the spongers? One must admit that this is the worst possible moment to contrast the welfare of public and private workers. Doing so is "a complex thing," says University of British Columbia economist Kevin Milligan, because private sector earnings vary more widely. Workers in private business enjoy higher highs as well as lower lows; any study taken even over a period of a few years can fail to capture the true picture.

"If you looked at Alberta in 2006 or 2007," he observes, "you might have found civil servants jealous at how fast paycheques were rising in the oil patch while they were watching their salaries tick upward at the same old two per cent a year." But he adds that one would expect workers subject to extra income volatility to receive higher average incomes for the same work, in order to compensate them for being exposed to the business cycle. Instead, according to the pay-gap research, it's the protected public sector workers who make more on average - significantly more, when pensions and benefits are factored in.

Morley Gunderson, holder of the CIBC Chair in Youth Employment at the University of Toronto, says when the public-private pay gap was a major research preoccupation of his, some decades ago, he was known to advise "benign neglect" as the most acceptable means of addressing it. Senior administrators and highly educated professionals on the public side are earning less than they could in the market, not more; the beneficiaries of the pay gap are women and less-skilled workers, and maybe, Gunderson suggests, we can let them have a modest unearned economic rent.

"But," he adds, "inevitably [in tough times] taxpayers are going to ask why they're supporting workers earning above-market compensation, and we'll get a cycle of political pressure and reaction." Indeed, the first signs of that reaction may already be appearing, with a two-year public sector wage freeze underway in New Brunswick, rumours of a freeze in Alberta, and the Ontario government's Nov. 6 launch of a wide-ranging expenditure review by a Treasury Board panel.

Jock Finlayson, executive vice-president of policy for the Business Council of British Columbia, laments missed opportunities to rein in spending before the crisis arrived. "I don't see how one can justify the public-private disparity along the dimensions of job security and pensions and benefits," he says. "But the ultimate question is, do you have the tax base? Alberta has very expensive government, but depending on the outlook for oil, Alberta may be able to afford it. It's less easy to explain why Ontario boosted spending when it faced an inevitable downturn and an industrial restructuring. There's a danger during good economic times of building services, programs, and institutions that can only be financed at the peak of the business cycle."

As most economists acknowledge, there's a hypothetical quasi-Keynesian rationale for protecting public sector workers at the outset of a recession. Unlike most U.S. states, Canadian provinces have the constitutional power to run deficits. This means our governments can act counter-cyclically, waiting until the private sector is strong enough to absorb laid-off government workers, instead of pro-cyclically worsening local recessions, as states such as California have had to. But limits on U.S. state debt powers have also given the states incentives for fast-paced innovation. And the Canadian ability to dampen the business cycle doesn't mean much if you don't limit growth in government during the good times, as most jurisdictions failed to do.

Tony Dean, former head of the Ontario public service and now a fellow of the University of Toronto's School of Public Policy and Governance, counters that the Ontario civil service still hasn't rebounded to its 1995 pre-Common Sense Revolution size. "And the federal government reduced staff by 45,000 between 1994 and 1997," he adds. Prime ministers CHRÉTIEN and MARTIN "didn't exactly leave federal public servants feeling that they had safe jobs for life." Though there may be envy of civil servants, in many ways he thinks they are still doing more with less than in the days before world-changing texts like David Osborne and Ted Gaebler's Reinventing Government (1993).

"Not long ago," he notes, "when you had a new baby, you had to go to the town hall to register the birth, apply to the province for a birth certificate, and ask Ottawa for a social insurance number. Three offices, three separate trips. Today, in many places, you can do this all in one step through an online portal." We tend to take such changes for granted, he says, and forget the savings they have yielded for the treasury - and the clerical workers who don't have to be hired to shuffle those papers anymore. (Though whether the real workers were laid off when the rationale for their employment disappeared is another question.)

What seems certain is that the pain will ultimately spread to the public sector. How fast and how viciously depends on political will. Infiniti dealer Giacomin is watching the gathering storm, monitoring the political and economic winds with an expert's eye. "Up until now," he says, "governments haven't worried about deficits; they've been concerned with the immediate economic emergency. The next phase is coming soon, and when governments begin to adjust their spending, it will probably have harsh impacts on public employment, or on the employees' purchasing power. That's going to have an impact on a city like Ottawa. We'll see what this recession looks like on the way out."

Maclean's December 7, 2009