Public-sector employment (1)

Cahier spécial : Average public-sector (1)

Labour market characteristics and regulation

The second section of this study measures key characteristics and regulations that affect labour market performance in each of the 60 jurisdictions:

(1) average public-sector employment as a percentage of total employment;

(2) average minimum wage as a percentage of wages and salaries;

(3) average unionized employment as a percentage of total employment; and

(4) an empirical comparison of labour relations laws.

There is substantial evidence, as we will show in this section, that each of these characteristics influences the performance of labour markets. It is not surprising, therefore, to find that jurisdictions with unfavourable labour market characteristics and regulations also have a labour market that performs poorly.

Characteristic 1 Public-sector employment

The split between private-sector and public-sector employment is an important aspect of labour market performance as the incentives, productivity, and performance of labour in the private sector are different from that in the public sector.

One key difference between the public and private sectors is their objectives. In a critical study published in the prestigious Journal of Economic Literature, professors Megginson and Netter (2001) found that a key difference between the two sectors is that governments are preoccupied with fulfilling social goals and objectives rather than pursuing economic or business objectives.

·       In the public sector, political pressures often result in resources going to projects that are not in the best interest of most workers.

·       In addition, Megginson and Netter found that government businesses tend to develop with less capital and thus are more labour-intensive than their counterparts in the private sector.

·       Ehrlich et al. (1994) also found evidence that government entities tend to develop with less capital, which, in turn, leads to lower productivity.

Another important difference

·       one that particularly affects firms’ incentives and consumer prices

·       is that government entities tend to operate in a monopoly environment that precludes competition, whereas the businesses of the private sector normally operate in highly competitive markets.

Monopolistic environment

The monopolistic environment within which the public sector generally operates results in significantly diminished pressure to serve consumers, react to market demands, and offer competitive prices.

In fact, the general characteristics of a monopoly

·         are poor customer service,

·         lower quality products,

·         and higher prices.

Budget constraints

Another difference between the two sectors is budget constraints, which Harvard economist Jonas Kornai (1992) identified as one of the major and unchangeable differences between private-sector business enterprises and government.

Government’s budget constraints are “soft,” since it is impossible for the government to go bankrupt, whereas budget constraints in the private sector are “hard,” since losses lead to a decrease in capital and ultimately to bankruptcy.

The real risks of failure and bankruptcy force the private sector to react to consumers’ demands and preferences and to allocate capital efficiently to maximize returns.

The public sector, with a softer budget and no risk of bankruptcy,
faces no such competitive pressure.

Poorer economic performance

Research shows that a larger public sector leads to poorer outcomes in the labour market and, more broadly, to poorer economic performance.

·         On average, the creation of 100 public-sector jobs may have eliminated about 150 private-sector jobs and increased by about 33 the number of unemployed workers.

·         They also found evidence that an increase in the size of government leads to an increase in unemployment rate.

Average provincialstate and local government employment

Tables des matières:

1)      Measuring Labour Markets in Canada and the United States 2011 Edition

2)      Public-sector employment (1)

3)      Minimum wages (2)

4)      Unionization (3)

5)      Labour relations laws and conclusion (4)

Source : Measuring Labour Markets in Canada and the United States 2011 Edition, by Amela Karabegović, Alex Gainer, and Niels Veldhui, Fraser Institute, September 2011