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Public Sector Wages

Recently the federal government announced it would return about $20B in funding to Canada’s health care system. Most of this is likely to go to increasing the wages of the various professionals in the health care system. Doctors in New Brunswick want more; paramedics in Calgary want more; everyone in the health system wants more. It is hard to know if their demands or reasonable or not.

In the private sector, wages and salaries are set mostly by the law of supply and demand. If an employer wants a certain kind of worker, the employer has to pay a certain price for that worker. Otherwise that worker can go somewhere else to get the going rate.

Private employers also recognize that if they pay too much, market forces—namely the employer’s products and services becoming too expensive—will eventually lower the wage of these workers. These forces are part of the magic of a working free market.

When we look at the public sector, however, free market principles apply little to establish a wage equilibrium for an occupation. For example, a nurse cannot offer her talents and training to the private sector, where there are few positions available for nurses. Instead, we have come to some kind of understanding of what a nurse or any other public sector position is worth—and usually public sector unions play a big part in creating this understanding.

But this understanding is not a free market solution: we really have no idea whether we are paying too little or too much. Therefore I propose we create a new yardstick to determine the wages of public sector employees: the rate of public employee attrition.

A little employee attrition is actually a good thing. It allows new energy, new skills, and new ideas into an organization. It also allows employees are not satisfied with their work to move on to bigger and better occupations—and the employer is not saddled with a somewhat unproductive employee.

Too much attrition is not a good thing. Too much experience and workplace stability can be lost as well as mentoring opportunities for the new employees. Therefore a public sector institution should strive to keep attrition at a certain rate—not too high and not too low. If the attrition rate becomes too high, wages should automatically be raised to entice current employees to stay. In other words, if public sector employees want a raise, they have wait for a certain number of them to move to greener pastures.

The attrition yardstick has another very important feature. Most managers will actually have to manage well to keep their employee costs lower. If they cannot keep employees happy, good employees will leave to other public sector institutions that are better managed or to the private sector, and the wages of the less productive employees will rise. In other words, we would now have a mechanism to know if public sector managers are actually worth the money we are paying them.

Maybe a version of the free market can work in the public sector after all. We only need a little imagination.

Copyright 2000 by Dave Volek

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© 2009 Dave Volek. All Rights Reserved.