UNIVERSITY OF WATERLOO

Is there a wage premium for public sector workers? Aidan Gawronski

1. Introduction Recent controversy regarding government expenditure has created pressure to freeze and potentially cut the salaries of public sector workers. Many people feel that there is a wage premium paid purely due to membership in the public sector. One viewpoint is that public sector workers are overpaid due to the strength of union bargaining power. With approximately 70% of public sector workers unionized they are able to extract higher wages than their private sector counterparts. An online newspaper article on the topic articulates these concerns. Thus over the last 50 years the trade union movement has become the preserve of public sector workers, whose unique circumstances are a trade unionists dream. If the unionized workers go on strike at GM or Ford or Chrysler, you can still buy a car from (non-union) Honda or Hyundai or Toyota. If Air Canada goes on strike, you can still fly WestJet or Porter. But if the people who issue EI and CPP cheques and passports, who control the border and inspect our food go on strike, the service they provide disappears, inconveniencing angry voters and frightening politicians. This effective monopoly confers a bargaining power private sector workers can only dream of, while their employer is immune from the threat of bankruptcy.1 Another interesting point of view is that public sector workers are both over and underpaid. The justification is that one of the greatest wage determinants in the public sector is job tenure. Therefore newer hires who are highly productive workers are underpaid, while relatively unproductive workers with a lot of tenure are overpaid.2 Also some have suggested that public sector workers are paid more, but the reason is simply that they are more educated on average. Clearly the wage premium issue is complicated and taking on multiple perspectives will likely yield the greatest understanding. An analysis which can determine both a wage premium (or lack thereof), as well its various components and interactions will yield the greatest understanding of whether or not public sector workers are overpaid. 2. Data The data set used combines all available months from 2011 of Canadas Labour Force Survey. This 10 month collection consists of 537 709 observations. The Labour Force Survey was developed after the Second World War in hopes of providing information allowing for a smooth economic transition back to peace. This cross sectional survey divides the population into three segments, employed, unemployed, and not in the labour force. For the purpose of examining wages all unemployed, and not in the labour force were removed. The Labour Force Survey covers non-institutionalized civilians 15 years and older. It is nationwide covering provinces and territories. It excludes people living on reserves, Aboriginal settlements, full-time members of the Canadian Armed Forces and other institutionalized persons. 3. Methodology To identify the difference in wages of public sector workers and private sector workers, key variables were culled from the Labour Force Survey and combined using multiple linear regressions. Four different versions of the basic regression equation were used to attempt to break down the components of any possible wage premium. All four of the estimated equations controlled using dummy variables for union membership (union), job tenure (ten and ten2), as well as sex (male), and holding multiple jobs (multi). Also, somehigh, high, somepost, postgrad, unib, and unigrad are dummy variables controlling for Crowley, Brian, The Ottawa Citizen: Things I didnt know about unions. The Ottawa Citizen. Nov 5, 2011. (http://www.ottawacitizen.com/opinion/Things+didn+know+about+unions/5661622/story.html) 2 Schumpeter, Are public-sector workers overpaid or underpaid? The Economist. Feb 24, 2011. (http://www.economist.com/blogs/schumpeter/2011/02/government_employer)
1

education. The comparison group for the education dummies was zero to eight years of education, while the other variables indicate highest level of education attained. The dummy somehigh means some high school education, high means a high school graduate, somepost means some post-secondary education, and postgrad means a post-secondary graduate. Finally unib means attainment of a university bachelors degree, and unigrad indicates attainment of university graduate degree. The independent control variables are necessary in an attempt to isolate the effect of being a public sector worker on hourly wage. The dependent variable here lwage is the log of the usual hourly wage rate. Because such a large proportion of public sectors workers are unionized it must be controlled for to ensure any wage premium is not occurring because of this. The job tenure dummy is included to test the theory that tenure is the greatest determinant of public sector worker wages. Perhaps the government hires more men than the private sector? Knowing that men earn more on average than women we must control for sex to ensure any wage differential could not occur through these means. It also seems possible that more people in the private sector are holding multiple jobs than their counterparts. It also seems logical that holding multiple jobs may negatively affect your hourly wage seeing as you cannot devote full attention to either job and also may be seen as less devoted by your employer. Under these presumptions we must control for multiple job holders also. It has been argued that any wage difference between sectors may simply be due to educational differences, so controlling for education is also necessary. The is the random error term. The initial wage premium for public sector workers was identified by estimating the basic equation:

The second regression is identical to the first however also includes variables capturing interaction effects. This regression hopes to capture the effects of being in a union, having more tenure, being male, and having university education, on being in the public sector and the resulting changes in wage:

The third regression is again based on the first, but this version controls for worker industry. There is a dummy variable included for each of the industry breakdowns under NAICS 2007 agreement.3 This allows us to see if some of the effect of being a public worker is dependent on the industry you work in. The comparison industry for the industry dummies is health care:

The fourth regression is very similar in nature to the first however instead of including dummy variables for different industry categories; we have 25 different occupational categories

NAICS (http://www.statcan.gc.ca/subjects-sujets/standard-norme/naics-scian/2007/list-liste-eng.htm)

as outlined by the NOC-S.4 This allows us more specifically to see if some of the effect of being a public worker is dependent on your occupation. The comparison group for the occupational dummies is Clerical/Supervisors:

Also when performing these regressions robust standard errors are used to allow for inference even in the presence of heteroskedacity. 4. Results Indeed there does seem to be a wage premium for public sector workers. In the first regression we estimate the effect of being a public sector worker on wage while holding constant union membership, job tenure, sex, holding multiple jobs and education. We infer that being a public sector worker increases your wage by 16.3%. The second regression provides results which contradict the earlier theories on why the public sector receives a wage premium. It appears that public sector workers do not benefit from a greater union bargaining power seeing as the interaction between union membership and public sector yields a -5.3% effect on wages. Also the other theory was that job tenure is important for public sector workers because it is an important wage determinant. This also seems to be false because the interaction between tenure and public sector yields a -0.3% effect on wages. Education also seems to have a greater effect on wages for public sector workers with a 2.8% increase for having a bachelors degree and a further 2.5% increase for having a graduate degree. Also public sector workers who are also men seem to be underpaid relative to their public sector counterparts losing 13.4%. All of these results are statistically significant at a 5 percent or higher, confidence level. In the third regression we see that perhaps that effect of being a public sector worker is not the same for all industries seeing as when we control for industry the wage premium falls from 16.3% 9 (first regression) to 11.1%. In the fourth regression we continue with a similar mode of thought. It appears that the wage premium may also vary based on occupation however not as significantly as when controlling for industry. When controlling for occupation the wage premium only falls 1.2% down to 15.1%. Independent Variables Public sector worker Union member Basic 0.163 (0.001) 0.094 (0.001) Interaction 0.266 (0.003) 0.107 (0.001) Industry 0.111 (0.002) 0.078 (0.001) Occupation 0.151 (0.002) 0.108 (0.002)

NOC-S (http://www.statcan.gc.ca/subjects-sujets/standard-norme/soc-cnp/2001/noc2001-cnp2001eng.htm)

Job tenure 1 year Male Holding multiple jobs Some high school High school grad Some post secondary Post secondary grad University: Bachelors degree University: Graduate degree Union on public Tenure on public Male on public Bachelors degree on public Graduate degree on public Agricultural ind. Forestry ind. Utilities ind. Construction ind. Manufacturing durables ind. Manufacturing nondurables ind. Wholesale ind. Retail ind. Transport ind. Finance ind. Professional ind. Management ind.

0.044 (0.000) 0.196 (0.001) -0.062 (0.002) .008 (.004) 0.151 (0.004) 0.133 (0.004) 0.310 (0.004) 0.482 (0.004) 0.591 (0.004)

0.044 (0.000) 0.229 (0.001) -0.060 (0.002) 0.010 (0.004) 0.154 (0.004) 0.138 (0.004) 0.313 (0.004) 0.474 (0.004) 0.584 (0.006) -0.053 (0.003) -0.003 (0.000) -0.134 (0.002) 0.028 (0.004) 0.0251 (0.006)

0.041 (0.000) 0.137 (0.001) -0.045 (0.002) 0.041 (0.004) 0.151 (0.004) 0.145 (0.004) 0.270 (0.003) 0.438 (0.004) 0.544 (0.004)

0.041 (0.000) 0.174 (0.001) -0.056 (0.002) 0.015 (0.004) 0.140 (0.004) 0.120 (0.004) 0.273 (0.004) 0.419 (0.004) 0.520 (0.004)

-0.220 (0.005) 0.312 (0.004) 0.180 (0.005) 0.155 (0.003) 0.050 (0.003) -0.036 (0.003) 0.046 (0.004) -0.241 (0.002) -0.008 (0.003) 0.070 (0.003) 0.168 (0.003) -0.161

Educational ind. Informational ind. Accommodation/Food ind. Other ind. Public service ind. Senior management Other management Professional Finance Natural Science Nursing Tech/health Religion Teacher/Professor Art Wholesale Sales Protection services Childcare Travel Contractor Construction Other trades Transport Assisting trades

(0.003) 0.005 (0.002) -0.066 (0.003) -0.299 (0.002) -0.094 (0.003) 0.072 (0.002) 0.414 (0.019) 0.342 (0.004) 0.289 (0.006) 0.036 (0.004) 0.240 (0.003) 0.261 (0.005) -0.003 (0.004) 0.064 (0.004) 0.071 (0.004) 0.018 (0.006) 0.113 (0.006) -0.251 (0.002) -0.075 (0.007) -0.208 (0.005) -0.263 (0.002) 0.244 (0.008) 0.111 (0.005) 0.102 (0.003) 0.000 (0.004) -0.071 (0.005)

Primary Assembly Manufacturing Residual wage 2.354 2.329 2.463 (0.004) (0.004) (0.004) Notes: Robust standard errors in parentheses

0.077 (0.007) -0.020 (0.004) -0.155 (0.007) 2.399 (0.004)

5. Conclusion The findings suggest that public sector workers are overpaid relative to their private sector counterparts. However popular explanations for why they are overpaid do not wash out. They are not paid more because of bargaining power, nor is job tenure more beneficial to them over the private sector. Having controlled for the highest level of educational attainment we also know that the premium is not paid due to higher education. In short, we know that they are overpaid but we do not know why. A plausible explanation may be that public sector managers are not as concerned with profit maximization as the private sector. The private sector has greater pressure on it to not overpay employees as shareholders and company owners want to maximize their wealth. In extreme circumstances they have to deal with the prospect of bankruptcy, a concern that the public sector doesnt have to deal with. Deficit just doesnt have the same ring to it as Bankruptcy. It seems possible that the lack of pressure to squeeze out the last drop from employees could be the underlying reason behind the public sector wage premium.