THUNDER BAY, ON Jul 7, 2015/ Troy Media/ – Think back to the early 1990s, a period when Canada’s federal and provincial governments faced a major fiscal crisis driven by massive red ink at both the federal and provincial levels. Governments responded with sweeping action, including restraint and spending reforms, which helped position the country for stronger economic performance thereafter.
As part of their response, governments reduced transfers and their payrolls, resulting in a smaller share of Canadians employed in the public sector. Specifically, 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.
Public sector employment peaked in 2010
However, since then the share increased, peaking at 24.4 per cent in 2010 before dropping slightly to 24.1 per cent by 2013. The public sector now employs a bigger chunk of Canadians than it did in 2003. In fact, over the 10 years leading up to 2013, all provinces (except Newfoundland and Labrador) saw an increase in their share of public-sector employment. Today, over 3.6 million Canadians work for the public sector.
So how did we get here?
From 2003 to 2013, employment in Canada’s public sector increased by 22.6 per cent, more than double the rate of increase in the private sector (10.7 per cent). During this period, public-sector employment grew at a faster rate than the private sector in all the provinces except, again, Newfoundland and Labrador.
More to the story: Good news, bad news about public sector employment in Ontario by Livio di Matteo
By a considerable margin, this phenomenon was most pronounced in Ontario. From 2003 to 2013, public sector employment growth in Ontario (27.6 per cent) dramatically outpaced private sector employment growth (5.6 per cent) by a whopping 22 percentage points. Interestingly, Ontario’s 10-year increase in public sector employment coincides with a period of dramatic increases in provincial government spending, rising government debt, and sluggish economic growth.
There are important adverse economic and fiscal implications that may result from growing public-sector employment. Empirical research points to a so-called “crowding-out” effect where employment through public-sector job creation is offset by a reduction in private sector employment elsewhere in the economy. This is a concern because it’s the private sector – through investment and innovation – that ultimately generates the wealth and taxes needed to provide the public services that we all hold dear.
If public-sector employment simply crowds out private-sector employment, this could leave unemployment rates either unchanged or possibly higher. International empirical research has found some evidence of this crowding-out effect.
Preliminary statistical analyses for Canada’s provinces over the 1990 to 2013 period support these international findings and suggest larger public-sector employment shares are accompanied by lower rates of private-sector employment growth and higher unemployment rates. A larger public-sector employment share is also accompanied by a flat relationship with provincial rates of economic growth.
The correlations observed in the Canadian data are not necessarily causal relationships. Naturally, a complete statistical 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 private sector employment.
Large deficits back
Nevertheless, these trends and correlations help illuminate the impact of the public/private employment balance on economic performance and the need for further research to rigorously assess causation and confounding factors in these important economic relationships.
The public-sector share of employment in Canada today has recovered to levels not seen since the early 1990s, an era of persistent deficits and ballooning government debt. In the wake of the 2008/09 recession, large deficits have again surfaced at the federal and particularly provincial levels. Perhaps surprisingly, the public-sector share of employment has largely remained stable.
Livio Di Matteo is a senior fellow at the Fraser Institute and professor of economics at Lakehead University. He recently authored An Analysis of Public and Private Sector Employment Trends in Canada for the Fraser Institute.