Public sector workers growing fast
After a period of retrenchment in the 1990s, the public sector now employs a bigger chunk of the Canadian population than it did in 2003.
As noted in a recent Fraser Institute study, the public-sector share of employment in Canada (excluding the self-employed) fell from 26.1 per cent in 1992 to 22.3 per cent in 2003. In 2004, that share began to increase, peaking at 24.4 per cent in 2010 before dropping slightly to 24.1 per cent by 2013, the latest year of comparable data. Indeed, 3.6 million Canadians now work for the public sector — an increase of nearly 32 per cent since 1990.
Subsequently, the public-sector share of employment today has recovered to levels not seen since the early 1990s, an era of large government deficits and debt, followed by fiscal restraint — a reaction to the fiscal crisis brought about by massive red ink at both the federal and provincial levels.
Today, in the wake of the 2008-09 fiscal crisis and recession, deficits have again surfaced at the federal and provincial levels, requiring some measures of fiscal restraint. But the public-sector share of employment has largely remained stable. In fact, all provinces (except Newfoundland and Labrador) saw an increase in their share of public-sector employment over the 10 years leading up to 2013.
So how did we get here?
From 2003 to 2013, Canada’s publicsector employment growth rate (22.6 per cent) was twice as fast as the private-sector rate (10.7 per cent). During this period, the growth rate of privatesector employment was greater than the public-sector rate in only one province — Newfoundland & Labrador, 14 per cent compared to 11.8 per cent. In Ontario, the public-sector employment growth rate (27.6 per cent) topped the private-sector rate (5.6 per cent) by a whopping 22 percentage points.
While public-sector expenditure and employment may serve as a complement to private-sector activity, by providing social and physical infra- structure, there may also be adverse effects. The balance between public- and private-sector employment is crucial given the importance of private-sector-wealth generation as the resource foundation for public-sector service provision and subsequent employment-generation.
An important dimension of this relationship is that public-sector employment growth may also crowd out private-sector employment, leaving unemployment rates either unchanged or possibly higher. International empirical work for the OECD as well as developing countries has found some evidence of this crowding-out effect.
While correlation is not causation, simple exploratory correlations suggest that for Canada’s provinces over the 1990 to 2013 period, larger publicsector employment shares are accompanied by lower rates of private-sector employment growth and higher unemployment rates. As well, a larger public-sector employment share is accompanied by a flat relationship with per capita GDP growth rates.
Naturally, a complete analysis requires controlling for the government’s budget balance, the state of the business cycle on public-sector employment, and any potential complementarities between public- and privatesector employment. Nevertheless, these trends and correlations are of interest in understanding the importance of the public/private employment balance on economic performance and the need for further work that rigorously assesses causation and confounding factors in these important economic relationships.
Public-sector employment may also crowd out privatesector employment