New Brunswick’s Fiscal Challenges and the Argument for Public Sector Restraint

New Brunswick Premier Brian Gallant announced recently that he is voluntarily reducing his pay by 15 per cent and members of his cabinet will endure a 10 per cent reduction in their wages. He also officially opposed any recommendations to increase the pay of elected officials.

Gallant’s promise is a good sign for the province, which is in desperate need of leadership, particularly in light of the economic issues facing the region. Despite the provincial government’s willingness to examine the salaries of its highest ranking employees, Danny Legere, who is the President of the New Brunswick Canadian Union of Public Employees, says he and his members will not consider wage reductions. Furthermore, he warned that the provincial government “will get the strongest possible resistance if they try to roll back wages in the public sector.”

In New Brunswick, wherein economic and political problems have plagued the province for quite some time, average public sector compensation increased 20 per cent between 2009 and 2013 (as per Statistics Canada), while inflation averaged roughly 8 per cent during that same period. In comparison, average private sector compensation rose 9 per cent between 2009 and 2013. Yet, the labour movement refuses to accept its role in public finance issues in Canada. Data available in the CANSIM Table 383-0030 shows that public sector spending in New Brunswick averages roughly $4.5 to 4.7 billion annually. Additionally, sub-national government sector employees comprise nearly 19 per cent of New Brunswick’s labour market. One thing is clear, therefore, which is that the federal government and its provincial counterparts are not spending less on the public sector. In fact, public sector salaries constitute the largest expense for every government in Canada.

There must be some consensus among New Brunswick’s elected officials if the province is to emerge from its economic woes. Moreover, the provincial government and the province’s labour representatives must cooperate if both parties wish to stimulate the provincial economy. It might be true that some members of the Canadian Union of Public Employees cannot make ends meet, as Legere claims, and although that is unfortunate, they are ultimately beholden to the provincial government, and more importantly, the province’s taxpayers.

Rationalizing the public sector is another option available to governments in Canada that wish to reduce their expenditures and align them with current economic realities. Although this process may entail eliminating public sector positions that are redundant and unnecessary, reducing public sector employment rates through attrition is a more palatable alternative. Since 2010, attrition has resulted in 10,000 less public sector positions annually and, in a growing economy, prospective employees should be able to identify other opportunities in the private sector. (In economics, the “crowding out” effect explains how reducing the public sector, or government involvement in the market, can create new job opportunities in the private sector.) Importantly, however, as argued frequently by former Nova Scotia Finance Minister Graham Steele, attrition is an imperfect solution because some departments will have much larger outflows of retirees and simply eliminating those positions would be incongruous with departmental demands. In any case, although this solution is less than ideal, it is a step in the right direction.

Aligning benefits, wages, and pensions with the private sector is another positive step forward. In New Brunswick, on average, federal, provincial, and municipal employees earn 43, 25, and 34 per cent more than their private sector equivalents when calculating both wages and benefits. The Canadian Federation of Independent Businesses has also calculated that New Brunswick defined benefit plans have unfunded liabilities of roughly $500 million. Lastly, the average retirement age for public sector workers is 60, whereas in the private sector it is 63, and for the self-employed it is 66–and the government actually provides early-retirement incentives.

Recent developments in New Brunswick pertaining to public finances are positive. Premier Gallant is positioning himself to reduce government expenditures and place the province on a sturdy foundation from which to grow the economy. Although he will still receive nearly $152,000 annually, down 15 per cent from $164,000, his gesture demonstrates a serious willingness to consider deep reforms for the sake of New Brunswick’s future.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Unfunded Liabilities and the Need for Reform

There is a major economic issue emerging in Canada: unfunded liabilities. Government and media often focus on economic issues like budgetary deficits, slow economic growth, and unemployment, and though these issues are paramount, unfunded liabilities are a stark reality that every level of government must accept in the coming years.

Unfunded liabilities are exactly what they seem: that is, liabilities (or financial obligations) for which there is a lack of funding. In the context of government, the issue encompasses pension plans and the large shortfalls in funding them.

Canada Post is the most recent to have announced problems funding pension liabilities. The National Post reported in December 2013 that the crown corporation has a $6.5 billion pension shortfall, which requires major changes in the company’s structure, such ending urban door-to-door delivery, layoffs, an increase in the price of stamps, and monetary relief from the federal government. As a result, it will either need to seek concessions from pensioners, perhaps via higher premiums.

The National Post reported further that Canada Post’s pension shortfall is part of a larger problem. The federal government, for instance, holds nearly $150 billion in unfunded liabilities. For instance, C.D. Howe Institute’s Alexander Laurin noted that the number is actually closer to $219 billion after accounting for future veteran and other employees, which will require surpluses in the future. This will require either spending cuts or tax increases, both of which are politically difficult decisions. The difficulty associated with unfunded liabilities is likely why there has been little-to-no action from government on the issue.

These shortfalls make it clear that there is need for reform in the public pension system: it is evidently unsustainable. The only jurisdiction considering reform is the Province of New Brunswick, which recently switched to shared-risk pension plans from the former defined-benefit pension plans. New Brunswick’s provincial government asserts the new plan changes cost of living increases to a conditional state based on performance. When the plan generates an annual surplus, however, “There is an opportunity to reinstate for years when cost of living increases were not provided.” The province chose this plan in hope of finding a long-term solution that is financially sustainable without cutting retiree pensions.

Ultimately, solutions to the looming pension crisis are necessary and require serious attention. Detroit’s bankruptcy last year was, in part, largely attributed to unfunded liabilities and, therefore, government at all levels need to consider similar actions to those taken in New Brunswick.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Strike Signaling and the UNB Negotiations

In light of the University of New Brunswick’s (UNB) strike, I present a model for common information signaling between unions and firms during wage bargaining.

In order for a sustainable hiring of labour to take place, wages must fall in between a certain window. The lower end is defined by the value a worker places on his own time and effort. The employee’s value to the company, i.e. his marginal product, is on the higher end. Paying employees the actual value of their marginal product would imply that profits are near zero. Similarly, paying employees close to their own lower limit encourages them to quit.

During wage negotiations, unions and firms engage in a great deal of signaling. They make claims about their willingness to work or the financial situation of the company in order to define clearly the negotiation window. An employee’s willingness to work is usually a combination of his job satisfaction, coupled with the wage he receives. To this extent, workers, or their unions, have an incentive to claim that their minimum acceptable wage is high, even if it is not. This is a form of information signaling to the firm regarding the willingness of employees to work under the given circumstances.

From the firm’s perspective, the ability to provide wage increases for its employees depends on how the marginal product of each worker relates to their wages. This correlates closely with the firm’s profit margin. In other words, a positive profit margin typically indicates a gap between wages paid and the cumulative marginal product of the company’s workforce, therefore indicating that there is room for negotiating a wage increase.

To complicate things, both sides have an incentive to conceal their true position, so they rarely trust one another’s information. The firm assumes that the union is exaggerating working conditions and job satisfaction, while the union assumes that the firm underreports their financial health and profitability. This is the rationale behind strikes and lockouts.

The basic idea behind strikes and lockouts is that it forces each party to reveal their position and preferences. Strikes delay production, reducing both revenue and remuneration. Therefore, the mindset of the union is as follows: “If you really need to resist wage increases, then you should prove your position by hurting yourself first.” Similarly, a firm-induced lockout signals that, “If wage increases are really that important to you, you are probably willing to be locked out to secure them.” This back-and-forth signaling reveals their true preferences, which both parties observe via workers’ continued willingness, or unwillingness, to strike, in addition to the firm’s continued commitment to a lockout.

When both parties acquire enough information, their true negotiation windows become clear and they can reach a conclusion. In the case of the UNB strike, the negotiation window appears quite large, with the Association of University of New Brunswick Teachers (AUNBT) requesting a 26 per cent wage increase, among other demands. At the same time, UNB claims that it is in rough financial shape, suggesting that there a divide between both parties–the negotiation window is quite large. Concordantly, this standoff may take longer than expected to draw out the true preferences of both the AUNBT and UNB.

Mike Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute