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Why Canada's 'bloated' public sector is a good thing

These are stories Report on Business is following Monday, March 23, 2015.

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Public vs. private
Canada's small and medium-sized businesses complain that the public sector is "bloated."

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All I can say is, thank goodness for that.

The public sector is the only one creating jobs in this harsh environment.

And with unemployment spiking to 6.8 per cent, that's something Canada desperately needs.

In a provocative study released today, the Canadian Federation of Independent business says workers in the private sector earn $8,150 a year less than their public sector counterparts, and work six hours more per week.

That's for doing the same job, the small business association says, adding in a statement that it points to "a huge wage and benefits advantage for public sector workers over the rest of us."

The biggest beneficiaries, it says, are employees of the federal government and Canada Post.

"Public sector earnings have been allowed to drift well above market-tested norms, and cash-strapped governments are looking for ways to invest in infrastructure and other priorities," the group's chief economist, Ted Mallett, says in the statement.

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According to the study, which looks at 2010 pay levels, the gap is biggest in the federal government, where employees hold a salary premium of 13 per cent, which swells to 33.2 per cent when you factor in benefits.

For municipal employees, the premium is 8.9 per cent, or 22.3 per cent with benefits. And at the provincial level, it's 5.5 per cent, and 21.2 per cent.

Dan Kelly, the group's president, who isn't one to shy away from controversy or speak out for what he believes in, which is a good thing for his members, then tweeted that he would be discussing the report on a Toronto radio show, advising that he would talk about the report that revealed a "$20-billion overpayment to Canada's bloated public sector."

Okay, but …

Let's look at job creation in Canada, and the outlook for employment, both in general and because of the collapse in oil prices.

According to the latest report from Statistics Canada, we are now home to 1.3 million people who can't find work.

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The jobless rate rose in February to 6.8 per cent from January's 6.6 per cent, with notable increases in the oil-sensitive provinces of Alberta, Saskatchewan and Newfoundland and Labrador.

Has the private sector been on a hiring spree?

No. Private employers did add jobs over the course of the past year, but at a pace of just 0.2 per cent, or just shy of 28,000 positions.

The public sector, in turn, added 43,000 jobs, for an increase of 1.2 per cent.

In February alone, Canada lost 29,000 jobs among private employers and gained more than 24,000 on the public side.

And the outlook for hiring is bleak, as The Globe and Mail's Tavia Grant reports today.

According to the latest forecast from Toronto-Dominion Bank, just as an example, unemployment in Canada is going to hover stubbornly at just below 7 per cent at least through the end of next year.

Put simply, Canada needs well-paying, full-time jobs in a painfully slow post-crisis era.

In a report this month, deputy chief economist Benjamin Tal of CIBC World Markets warned that the bank's tracking of job quality shows it has been "on a clear downward trajectory" over the past quarter of a century.

"Since the late 1980s, the number of part-time jobs has risen much faster than the number of full-time jobs," Mr. Tal said.

"The damage caused to full-time employment during each recession was, in many ways, permanent," he added.

"That is, full-time job creation was unable to accelerate fast enough during the recovery to recover lost ground."

Having said that, the increase in full-time work has outpaced that of part-time by two one in the last year, at least.

This plays out in pay scales, too, as you'd imagine, helping to swell income inequality.

Wages in industries that already pay well have climbed at a pace almost twice that of low-paying sectors, Mr. Tal's report found.

"In other words, the fastest growing segment of the labour market is also the one with the weakest bargaining power."

Consider, too, the plight of Canada's young people, to whom we've arguably left this ugly legacy of the financial crisis.

Unemployment among youths aged 15 to 24 climbed in Canada by half a percentage point, to 13.3 per cent.

I'm not suggesting here that Canada's federal, provincial and municipal government and their broader public sectors blow their brains on their work forces.

But there's certainly something to be said for job creation in his era of high unemployment.

Consider the title of this research note from CIBC World Markets when Statistics Canada released its last report: "February Canadian employment little changed, but worst is yet to come."

Economy to take hit
Analysts are suddenly warning that Canada's economy could contract in the first quarter of the year.

That doesn't mean it will, only that it could. And if it does, it probably won't be by much.

But if that does happen, it would mark the first really big quarterly hit since the economy basically flatlined in the second quarter of 2011 and, before that, contracted in the Great Recession.

And whether it's above the zero mark or a shade below, it's shaping up to be a poor showing, regardless.

Forecasters have been cutting their outlook for economic growth in Canada this year amid the sustained slump in crude prices, and the latest economic readings drive home their concerns.

And we'll see all this play out in the Alberta and federal budgets – the oil-rich province unveils its fiscal projections Thursday, and the Canadian government at a later date – and no doubt in the election campaigns that loom.

Canada's economy expanded in the fourth quarter of last year at an annual pace of 2.4 per cent, and in December by 0.3 per cent.

There's just over a week to go in the current first quarter, and a couple of weeks until Statistics Canada reports on how the economy fared in January alone.

January may well show a contraction in the area of 0.1 per cent to 0.3 per cent, economists now believe, having seen a series of weak indicators from the factory floor to the shopping mall.

"February isn't likely to be much better, suggesting that Q1 growth will come in well below 1 per cent and a negative print cannot be ruled out," said senior economist Benjamin Reitzes of BMO Nesbitt Burns.

Which means, based on showings so far, there's potential for an outright contraction, let alone a weak reading.

Other observers agree the first quarter is looking lame: Manufacturing sales slumped 1.7 per cent in January, retails sales also fell by 1.7 per cent, and exports tumbled 2.8 per cent to bring the trade deficit to a swollen $2.5-billion, the second-biggest on record.

The Bank of Canada has projected annualized growth of 1.5 per cent in the first three months of the year, but that's looking optimistic now.

"This would be consistent with Bank of Canada Governor Poloz's statement that the impact of the oil price decline could be more 'front-loaded' than anticipated in the January monetary policy report," chief economist David Watt of HSBC Bank Canada said of the recent indicators.

"In fact, in our view, the risks to our Q1 GDP forecast of 0.8 per cent also seem tilted to the downside, with a chance that Q1 GDP could contract slightly."

Friday's retail sales report was the latest surprise, and suggested that "weak income growth may be providing some negative offset to savings at the pumps," said Toronto-Dominion Bank economist Dina Ignjatovic.

"This poses some downside risk to our consumer spending and overall growth outlook for the first quarter."

Much depends, of course, on how February and March look.

But Emanuella Enenajor, the Canada and U.S. economist for Bank of America Merrill Lynch, recently laid out five scenarios, the most optimistic showing annualized growth of 1.1 per cent for the first three months of the year, and the most pessimistic suggesting a contraction of 0.5 per cent.

In each case, Ms. Enenajor assumes the economy slipped in January by 0.1 per cent.

In her most optimistic scenario, February and March each show growth of 0.2 per cent. The scarier scenario sees shrinkage in both months, to the tune of 0.2 per cent.

Her base-case scenario is a loss of 0.1 per cent in January, but that both February and March eke out growth of 0.1 per cent, suggesting annualized expansion for the quarter of 0.7 per cent.

The other two scenarios see a gain of 0.3 per cent, and a slight contraction of 0.1 per cent.

Any way you cut it, the first quarter is coming in weak, and some observers believe Bank of Canada Governor Stephen Poloz could still follow his surprise January rate cut with another.

"Weaker growth in 1Q relative to their forecast of 1.5 per cent means that unless growth beats expectations in subsequent quarters, the timing of the closing of the output gap will be pushed out further," Ms. Enenajor said in her report.

"Will the BoC cut rates in April or wait until later this year as markets now expect? We think that their surprise January decision should be a lesson to expect the unexpected."

Cliffs to quit Ring of Fire
U.S. mining giant Cliffs Natural Resources Inc. is set to leave Ontario's Ring of Fire after it found a buyer for its chromite assets in the area, The Globe and Mail's Bertrand Marotte and Rachelle Younglai report.

Noront Resources Ltd. said today it has a $20-million (U.S.) agreement with Cleveland-based Cliffs to acquire the shares of two indirect wholly owned subsidiaries, which hold mining claims in the Ring of Fire, about 500 kilometres northeast of Thunder Bay.

To finance the transaction, Noront is borrowing $22.5-million from Franco Nevada Corp. In return, Franco Nevada will receive royalties on several chromite deposits.

The Ring of Fire is years away from development and some observers say it may never be economical to mine the chromite deposits. And plans for infrastructure, road and rail development are moving at a snail's pace. Chromite is a mineral used in making steel.

Toronto, Montreal hold firm
Toronto and Montreal are holding their own in a global ranking of financial centres, though Calgary and, to a lesser extent, Vancouver are slipping.

Who knows, maybe next year Toronto will crack the top 10 now that it's a trading hub for China's currency.

Toronto ranks No. 11 in the annual Global Financial Centres Index, which is sponsored by the Qatar Financial Centre Authority and was released today by Z/Yen Group.

It follows New York, as No. 1, London, Hong Kong, Singapore, Tokyo, Zurich, Seoul, San Francisco, Chicago and Boston.

Toronto's No. 11 spot is the same as last year. So, Too, is Montreal's No. 18 spot.

But Vancouver has slipped a notch, to No. 15 from last year's 14, and Calgary has tumbled to No. 33 from No. 7 among the 82 centres ranked.

"We are doing more business with Toronto and Montreal now than we were doing last year – their regulatory system is fairly relaxed compared with here," said an unidentified New York investment banker quoted in the report.

The top four spots, by the way, haven't changed.

But, noted Mark Yeandle, the report's author, "the average rating of the top five Asian centres is now higher than the average rating of the top five Asian centres."

As The Globe and Mail's Iain Marlow reports, this comes just as Canada and China inaugurate a Canadian offshore trading hub for the yuan today.

Change in the Wind
Under new ownership and armed with a fresh swath of cellular airwaves, Wind Mobile Corp. is now bringing on new leadership, too, replacing its CEO and naming three additional board members including a new chairman, The Globe and Mail's Christine Dobby reports.

The company announced today that Alek Krstajic, the former head of Public Mobile and long-time Canadian telecom executive, will take over as chief executive from Pietro Cordova.

Meanwhile, Robert MacLellan, a former executive with Toronto-Dominion Bank and current chairman of the board at Northleaf Capital Partners and Yellow Pages Ltd., is moving into the role of chairman of the board as Wind's founder Tony Lacavera becomes honourary chairman.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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