Assessing Ontario Government Employment and Wage Expense

Key Points

• Employee wages and salaries are a major expense category for the Ontario government. This commentary reviews past and current trends in public sector employment and wages, as well as recent developments in Ontario’s labour market, to assess the potential implications for the government’s compensation expense going forward.[1]

• Based on FAO estimates, the Ontario government employed approximately 650,000 people in 2018, accounting for approximately 11 per cent of the total number of salaried workers in Ontario.[2]

• In 2018, the FAO estimates that the Ontario government will spend approximately $41.4 billion on salaries and wages, accounting for about one-third of total program spending.

• Restraining the growth in employee compensation was a key element in the previous government’s plan to eliminate the deficit and was achieved by limiting increases in both public sector wages and employment.
  • The growth of public sector wage rates fell dramatically from 4.1 per cent per year before the 2008-09 recession to just 1.0 per cent per year on average over the 2010 to 2016 period.
  • Similarly, the growth in Ontario government employment slowed to an average of 1.1 per cent per year from 2010 to 2016, down from 2.4 per cent annual increases prior to the recession.
     
• As a result, the total wage and salary expense of the Ontario government increased by an average of 2.2 per cent per year from 2010 to 2016, down sharply from increases averaging 6.7 per cent over the 2001 to 2009 period.

• However, based on recent data, the growth in the Ontario government’s total wage expense has increased noticeably over the past two years, compared with the previous period of restraint. The FAO estimates that the Ontario government wage bill will increase at an average pace of over 4.4 per cent in 2017 and 2018, driven by sharp increases in both wage rates and employment growth.

• Going forward, a variety of factors will make restraining the pace of government wage growth more challenging.
  • Recent collective bargaining agreements in the Ontario public sector have provided for higher wage rates for public sector workers, averaging 1.9 per cent over the next several years.
  • In addition, Ontario’s historically low unemployment rate and an increasingly competitive labour market are contributing to more unfilled public sector positions, particularly in hospitals. To fill these vacant positions, government employers may be under further pressure to boost wages to compete for workers.
     

Provincial Government Is a Major Employer in Ontario

The FAO estimates that the number of public sector workers will increase to 650,000 in 2018, representing approximately 11 per cent of total employment of salaried workers in Ontario.

This includes 88,000 employees in public administration who are employed directly in Ontario government ministries,[3] plus 341,000 workers in the education sector and 221,000 workers in the hospital sector whose salaries are largely funded by provincial government transfer payments.

Accessible version

The estimate for the number of public sector workers depends on the definition of the public sector.  Depending on the definition used, the estimated number of public sector employees can range from 88,000 to 1.3 million (see Appendix: Defining the Ontario Public Sector).

For the purposes of this commentary, the FAO’s definition of Ontario’s public sector workers includes broader public sector organizations consolidated in the Public Accounts.[4] This includes the public administration sector, hospitals, school boards and colleges, but excludes other publicly funded organizations such as universities, doctors and social assistance agencies.

Earnings of Ontario Public Sector Workers

The average earnings for Ontario public sector workers is estimated to be $1,227 per week in 2018,[5] or roughly $63,800 annually. Among public sector workers, Ontario public administration employees have the highest average weekly pay at $1,598 per week, followed by hospital and education workers, at $1,158 and $1,176 per week, respectively.

Accessible version

Ontario Government Wages Expense

Based on the Ontario Public Accounts for 2016-17, the Ontario government spent $131.5 billion on program expenses.[6] Of this amount, $40.1 billion was spent directly on the salaries of an estimated 620,000 public sector workers. Direct spending on employee compensation is the second largest spending category for the Ontario government, representing approximately 33 per cent of total program spending.

Prior to 2016-17, the Ontario Public Accounts did not include the compensation expense of hospital, school boards and colleges in the government’s total wage bill. In addition, the government does not publish data on employment in the Ontario public sector at all. As a result, the FAO developed historical estimates of the number of public sector employees, as well as the government’s wage and salary expense using Statistics Canada data. These estimates provide a historical profile of key measures of the government’s budget over the past decade.[7] 

Public Sector Compensation Restraint

From 2010 to 2016, the previous Ontario government implemented a series of measures to restrain the growth in compensation expense, as part of its plan to reduce the budget deficit (see Appendix: Government Compensation Restraint Measures).

As a result, Ontario’s compensation expense grew at an annual average rate of 2.2 per cent over this period, well below the 6.7 per cent average annual growth recorded from 2001 to 2009. More recently, growth in Ontario’s employee compensation expense has accelerated sharply, averaging 4.4 per cent in 2017 and 2018.

Accessible version

Wage Rate Growth Fell Dramatically After 2010

The growth of public sector wage rates fell significantly, from 4.1 per cent on average before the recession to 1.0 per cent over the 2010 to 2016 period, below the average rate of price inflation.

Among public sector workers, those in the education sector experienced the biggest drop in earnings growth, falling from an average of 4.0 per cent per year prior to the recession to just 0.7 per cent per year from 2010 to 2016.

In contrast, private sector wages increased by an average of 1.9 per cent per year from 2010 to 2016.

Public Sector Employment Growth Eased After the Recession

Slower growth in public sector employment also contributed to the slower growth in Ontario’s employee compensation expenses.

Public sector employment grew by 1.1 per cent per year from 2010 to 2016, less than half the 2.4 per cent rate prior to the recession. In contrast, private sector employment grew by 1.8 per cent per year over this period.

Within the public sector, public administration employment (essentially the OPS) experienced the most significant restraint. Employment in this sector fell by an average of 0.4 per cent per year over the 2010 to 2016 period, reflecting the previous government’s efforts to reduce the size of the Ontario Public Service.

By comparison, hospital and education employment continued to grow, albeit at a slower rate than prior to the recession. From 2010 to 2016, hospital employment increased by 1.2 per cent annually, down from 2.4 per cent annual growth before the recession. Similarly, employment in the education sector grew by 1.5 per cent annually from 2010 to 2016, down from the pre-recession growth rate of 2.5 per cent per year.

Despite slower growth over the 2010 to 2016 period, public sector employment growth has generally kept pace with population growth, at 1.0 per cent per year over this period.

Compensation Expense Accelerated in 2017 and 2018

The growth in the government’s compensation expense has accelerated notably over the past two years, with average increases of 4.4 per cent per year in 2017 and 2018.

This acceleration was driven by a doubling in the growth of public sector wage rates, which are estimated to have increased by 2.1 per cent per year, on average in 2017 and 2018.

Government employment growth also accelerated noticeably from an average of 1.1 per cent over the 2010 to 2016 period to 2.3 per cent in 2017 and 2018. This is equivalent to over 29,000 new public sector jobs created over the last two years.

Outlook for Public Sector Wage Rates

Recent collective bargaining agreements will also result in an acceleration in public sector wage growth over the coming years. Collective agreements reached in 2017 provided for wage increases of 1.9 per cent per year on average over the next two to four years.[8] This is the highest rate of increase since 2010.

Accessible version

These higher public sector wage settlements will bring government wage agreements closer into alignment with private sector collective agreements, where recent settlements have provided for 2.1 per cent average increases.  

In 2018, the collective agreements for over 146,000 provincial public sector employees will be expiring.[9] The relatively strong recent performance of Ontario’s labour market could increase pressure on the government for higher wage increases going forward.[10]

Reflecting Ontario’s increasingly competitive labour market, job vacancy rates (the ratio of job postings to total employment) have also been rising. In the public sector, the job vacancy rate increased from 1.1 per cent in 2015 to 1.5 per cent in 2017. However, within the public sector, the vacancy rate for hospital jobs has increased more dramatically, rising from 1.9 per cent in 2015 to 2.8 per cent in 2017, suggesting that hospitals may be experiencing increasing difficulty hiring new workers.

Given Ontario’s tight labour markets, public sector employers will likely need to continue offering higher wages to compete for available workers.

Accessible version

Luan Ngo
Director
lngo@fao-on.org

David West
Chief Economist
dwest@fao-on.org 

With contributions from Jeffrey Novak.

Financial Accountability Office of Ontario
2 Bloor Street West, Suite 900
Toronto, Ontario M4W 3E2

Media queries, contact: Kismet Baun, 416.254.9232 or email kbaun@fao-on.org.

The background data and calculations used in this report are available upon request.

About the FAO

Established by the Financial Accountability Officer Act, 2013, the Financial Accountability Office (FAO) provides independent analysis on the state of the Province’s finances, trends in the provincial economy and related matters important to the Legislative Assembly of Ontario. Visit our website at http://www.fao-on.org/en/ and follow us on Twitter at https://twitter.com/InfoFAO.

Appendices

Defining the Ontario Public Sector

Estimating Ontario government employment or employee compensation expense depends on the scope of the definition of the provincial public sector. The scope of the Ontario public sector can range from a narrow definition, which only includes employees in the Ontario Public Service (i.e. the public administration sector), to the broadest definition, which also includes employees in hospitals, school boards, colleges, and other provincially funded entities, including universities, doctors, various health care institutions and social service agencies.[11]

For purposes of this commentary, the FAO has adopted a definition of the Ontario public sector roughly consistent with the list of public sector organizations consolidated in the Public Accounts of Ontario. This definition — which includes employment in the provincial public administration, hospitals, school boards and colleges — largely reflects public sector employment over which the government has more direct control.

As a result, employment in other publicly funded entities such as universities, doctors and social assistance agencies are excluded from this analysis.  

Government Compensation Restraint Measures

Beginning in 2009, the previous Ontario government implemented a number of initiatives to limit wage increases and reduce employment in the public sector. These measures included reducing the size of the Ontario Public Service (OPS), freezing OPS wages and directing bargaining agents to seek net zero collective agreements.

In addition, the government limited the growth rates of transfer payments to public entities, such as hospitals, forcing these entities to limit their compensation expenses. For more details, see Ontario Health Sector — An Updated Assessment of Ontario Health Spending.