Wage Rates Depend On Productivity

“Can the private sector still afford the public sector?” is a question I saw recently in a newspaper editorial.  It’s a good question.

The editorial dealt with a situation regarding executive pay at Waterfront Toronto a publicly funded development agency.  Whenever public officials receive more pay or benefits, there is a question of fairness.  When someone questions price, they are really questioning value.  Pay attention to value and price will find its own level.

Can the private sector still afford the public sector, should automatically ask, what do you mean by afford?

Affordability can be interpreted in two ways.

  1. Does the private sector have the resources to continue to pay for the public sector?  Probably yes, but no longer certainly yes.
  2. Does the private sector get full value for their spending on the public sector?  Not at all clear. Does the public sector prioritize?  Public service has no hard and fast budget limit so they tend not to prioritize aggressively.  When priorities become confused perceived value falls.

Many people see public service pay and benefits being too high.  The current wisdom is about 30% more than the private sector and there is a reason they feel concern. Productivity.

Is a teacher more productive now than 50 years ago?  Probably not.  Class sizes are smaller and the students seem to be less able to cope.  Graduation rate and post-secondary attendance are not a good measure of success.  Perhaps if there were uniform final exams to leave high school we could sort that out.  The same sort of analysis could apply to any other public sector job.  Some would do very well, others not so much.

In the private sector increasing pay relates more closely to productivity.  Most productivity improvements arise from capital spending.  The workers end up with higher wages per unit of time, while at the same time, the customers end up with lower cost per unit.  When sufficient productivity cannot be met in a particular industry, because of competition, then wages must fall as they have in the automotive manufacturing industry.  That is Keynesian.

Keynesian models require that wages be perfectly flexible.  Public sector wages are not flexible downwards as they are in industry.  Unions and no cash limit permit that.  Things you permit continue.

Further, there is a tendency to pay wages on some sort of society wide comparable.  If a police officer makes X then so must a firefighter.  Civil service clerks are some percentage of that.  At no point is productivity considered.  Relative pay is the centerpiece.  That rule applies in the executive suite of businesses and there is concern about executive pay there too.  It is not just the public sector.

Wages not tied to productivity will always be questioned.

I know of a business that in the past 40 years has increased sales by at least 50 times.  They have one more employee now than they had 40 years ago.  Labour as a share of finished product is negligible.  In inflation adjusted dollars, the workers earn nearly double what they did.

Lower unit cost and higher pay per worker does not happen in the public sector because no one assesses the composition of unit costs.  If they did, they could explain why their pay scales are reasonable and likely could predict how they will move in future.

Customers pay attention to price per unit and they don’t care much how it came to be that way.  If higher wages and higher productivity reduce their unit cost, they are good to go.

Price does not matter, value received in exchange does.

Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

Contact: don@moneyfyi.com  

This entry was posted in Insight to Business, Our Societal Issues and tagged , , , . Bookmark the permalink.

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