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

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

Minimum Wage, Minimal Effect

The minimum wage is a classic wedge issue in political discourse and both sides of the argument represent wider philosophical camps. Proponents claim the policy helps exploited members of the working poor and promotes economic equality. Opponents criticize, however, criticize the minimum wage for hampering voluntary exchange and decreasing employment and competitiveness.

Those who value economic equality and fairness should back away from this current discourse and ask whether a minimum wage actually advances their objectives.  In practice, minimum wages poorly targets those it aims to help and has a number of adverse unintended consequences.

The most common criticism of minimum wage laws goes as follows: according to the law of demand, increasing the price of something decreases how much it people choose to consume. When the cost of low-wage labour increases, therefore, firms respond by scaling back their use of said labour through lay-offs or cutting hours. Research conducted by Canadian academics supports this assertion.

Supposing, for a moment, that minimum wage does not increase unemployment in the short-term, it is, in any case, likely to increase unemployment in the long-term. Because employers have invested in employee training costs and because there are costs associated with relieving employees (i.e. severance), for instance, businesses are less likely to cut jobs the day a minimum wage increase is legislated.

If firms are compelled to pay their workers more, they will use more effective means of production as substitutes for domestic labour. Using these substitutes–like automation and outsourcing–means that companies employ less labour.

A decrease in employment, however, is not the only possible outcome. The concept of compensating differentials, for instance, posits that wages are not the only compensation workers receive or, in the very least, consider. Rather, workers may be happier with a lower salary in exchange for something else, such as benefits or a safer work environment.

Faced with higher mandatory wages, firms may be compelled to curb other labour costs. For instance, they could remove training opportunities, stop providing compulsory uniforms, or make the workplace less comfortable by, for example, paying less for utilities like heating and air conditioning.

Let us imagine that increasing the minimum wage boosts the income of those fortunate enough to earn a wage at all. Does the mandatory wage increase help low-income households?

Unlikely. Looking at the profile of Canadian minimum-wage earners, roughly 6% of employed Canadians (most of which are students) live with their families, about 60% work part-time, and half leave their job within a year. These employees, in other words, are largely dependents working temporary jobs and not the working poor who policymakers attempt to target with minimum wage legislation.

If boosting the salaries of the working poor is the objective, looking at policies that address severe underemployment–policies that, for instance, provide basic minimum incomes or increase access to education–is a much more suitable measure. The minimum wage, however, is a distraction disguised as a panacea. Unfortunately, increasing it does little but harm to those it seeks to help.

Michael Sullivan 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