Livio Di Matteo is a senior fellow at the Fraser Institute and professor of economics at Lakehead University. He is the author of the new study An Analysis of Public And Private Sector Employment Trends In Canada for the Fraser Institute.
Think back to the early 1990s, when federal and provincial governments faced a major fiscal crisis driven by massive red ink. Governments responded with sweeping action, including restraint and spending reforms, which helped position the country for stronger economic performance.
As part of their response, governments reduced transfers and payrolls, leaving a smaller share of Canadians employed in the public sector. Specifically, the public-sector share of employment (excluding the self employed) fell from 26.1 per cent in 1992 to 22.3 per cent in 2003.
However, that share has since increased again, 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 up to 2013, all provinces but Newfoundland and Labrador saw an increase in public-sector employment. Today, more than 3.6 million Canadians work for the public sector.
How did we get here?
From 2003 to 2013, employment in the public sector increased by 22.6 per cent, more than double the rate of increase in the private sector. During this period, public sector employment grew at a faster rate than the private sector in all, again, but Newfoundland and Labrador.
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). This 10-year increase coincides with a period of dramatic increases in provincial spending, rising government debt and sluggish growth.
There are important adverse 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 our public services.
If public-sector employment simply crowds out private-sector employment, this could push up unemployment rates. International empirical research has found some evidence of this crowding-out effect.
Preliminary statistical analyses for the provinces over the 1990 to 2013 period support these international findings and suggest that 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 growth rates.
The correlations observed in the Canadian data are not necessarily causal. A complete statistical analysis would require controlling for the government's budget balance, the state of the business cycle on public-sector employment and any complementarities between public- and private-sector employment.
Nevertheless, these trends and correlations help illuminate the impact of the employment balance on economic performance and the need for further research.
Public-sector employment 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 surfaced again. Perhaps surprisingly, the public-sector share of employment has largely remained stable.