A Union Cure Worse than the Income Inequality Disease?

Lau - Union

The historic election of an NDP majority government in Alberta on May 5 was cause for celebration among left wing organizations across Canada, no doubt including the Ottawa-based Canadian Centre for Policy Alternatives. Only days before the election, the CCPA published a report claiming that more, bigger, and stronger unions are needed in Canada to strengthen the middle class and reduce income inequality. Alberta NDP Premier-elect Rachel Notley could be the answer to their prayers. She had a long career as a labour lawyer prior to entering politics in 2008, working for several public sector unions in Alberta and British Columbia. During the election campaign, she courted unionized civil servants by promising increased hiring and spending in education and healthcare.

That augurs well for the objectives of the CCPA, which said in its report that “the hollowing out of Canada’s middle class, particularly its upper middle class, is closely associated with the decline of unionization in Canada – especially in the private sector.” Furthermore, according to the CCPA, “a union card is not only a ticket into Canada’s middle class, it’s the key to upward mobility within the middle and upper class.” That’s because unionized workers – especially in the public sector – get higher wages, better pensions and benefits, and better job security. Call it the union advantage.

Unfortunately, the union advantage is often a significant disadvantage for employers – who are mostly the taxpayers. In 2012, according to Statistics Canada, the national public sector unionization rate was 71.4 percent, over four times as high as the unionization rate in the private sector. Between 1997 and 2012, the percentage of all unionized workers employed by government rose from 51.6 percent to 57.4 percent.

High unionization rates are a driving factor behind the inflated costs of government services. According to a recent study by the Canadian Federation of Independent Business, on average federal government employees earn a 33.2 percent premium over comparable private sector workers (after taking wages and benefits into account), provincial government employees earn a 21.2 percent premium, and municipal government employees earn a 22.3 percent premium. The CFIB’s study shows that if government employees in Canada received the same wages and benefits as private sector workers, taxpayers would have saved at least $20 billion in 2010.

Similarly, a series of Fraser Institute reports released earlier this year found that the wage premiums alone for government workers are 11.5 percent in Ontario, 6.7 percent in British Columbia, 6.9 percent in Alberta, and 10.8 percent in Quebec. In each of these provinces, the Fraser Institute also found that public sector workers invariably retired years earlier than their private sector counterparts, had higher absenteeism rates, were much more likely to have pensions (almost all defined benefit), and were far less likely to lose their jobs.

The taxpayer-funded income premium enjoyed by unionized public sector workers cannot be sustained forever by the relatively poorer private sector workers. But closing the gap by unionizing more private sector workers, as the CCPA suggests, is not economically sustainable either. The Montreal Economic Institute has noted that jurisdictions with higher union densities tend to have higher unemployment rates, lower capital investment, and poorer economic growth. One of the consequences of this would be, ironically, lower tax revenues to sustain civil servants.

Recent economic evidence seems to confirm the findings of the Montreal Economic Institute. As the CCPA’s paper shows, 1980 to 1995 was a period characterized by relatively high union density and relatively low income inequality compared to the 1995 to 2010 period, when union density declined and income inequality rose. Hence their conclusion that more unionization is needed to reduce inequality and improve the standard of living for more Canadians.

However, data from Employment and Social Development Canada shows that from 1980 to 1995, the average family-adjusted after-tax income decreased by 2.3 percent for Canada’s poorest quintile, 1.9 percent for the richest quintile, and 5.6 percent for everyone in the middle. From 1995 to 2010, the period with lower union density, incomes increased by 24.8 percent for the poorest quintile, 41.1 percent for the richest quintile, and 29.5 percent for the middle classes. In other words, everyone got richer when unionization declined – and the rich prospered the most.

Some have argued that class envy, stoked for years by the left and its allies in public sector unions, was a strong influence in the Alberta election. Both the Progressive Conservatives and the NDP promised higher income taxes on the rich, but the latter outbid the PCs by promising corporate tax hikes too. Class envy has also been manifest at the federal level, where the NDP and Liberals have assailed Conservative promises of family income splitting and higher contribution levels in Tax Free Savings Accounts as giveaways to the rich.

That Albertans decided to exchange the Alberta Advantage for the Union Disadvantage suggests that many voters currently envy the rich more than they do unionized public servants. It will be interesting to see if the idea that soaking the rich and growing the unions to reduce income inequality resonates with voters across Canada in the fall federal election.

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Matthew Lau is a finance and economics student at the University of Toronto.

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