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Parisa Mahboubi is a senior policy analyst at the C.D. Howe Institute. Jacob Kim is a researcher at the C.D. Howe Institute.

In recent years, municipal employees’ wage growth has constantly outpaced other unionized sectors. Since wages, salaries and benefits make up more than half of the operating expenditure for most municipalities in Canada, ever-growing municipal wages are putting pressure on local public finances.

The evidence of fast-growing municipal employees’ wages can be found in the comprehensive data on collective bargaining covering 500 or more employees provided by Employment and Social Development Canada. Wage growth of municipal employees has significantly surpassed inflation in most years: municipal employees saw an average real wage growth of 0.53 per cent a year since 2011. In contrast, non-municipal public-sector workers saw, on average, a negative wage growth of 0.16 per cent during the same period, most likely due to government spending restraint. Clearly, that wage restraint hasn’t carried over to the municipal level. In comparison, the unionized private sector’s average wage growth has seen a paltry annual average of 0.24 per cent since 2011.

Wages and productivity should go hand in hand. When workers’ productivity increases, companies demand more workers. Higher demand for labour, therefore, pushes wages up. However, there is little evidence that increases in municipal employee wages reflect increases in productivity. Instead, the mechanism of collective bargaining between unions and some public employers to solve their disputes seems to influence wage growth. Municipalities are better off in terms of lowering their cost while even providing better services when they consider contracting services rather than banning strikes. For instance, a C.D. Howe report shows that waste contracting in Toronto in 2012, which led to an annual cost saving of $11.1-million, also led to improved service quality in terms of reduced complaints for missed pickups. On the other hand, the districts that are still managed by municipal employees have seen a high number of complaints for missed pickups.

This calls for more effective government policies aimed at governing labour disputes and controlling labour costs. Nobody – workers or politicians – wants emergency services to be affected by a labour disruption. As a result, Canadian governments have pre-emptively passed essential services legislation, removing or limiting the right to strike for some services, particularly those that may be called upon to deal with life-or-death situations, such as police or fire services. In turn, these municipal services (and others such as transit workers in Toronto) are covered by compulsory arbitration – a method that legally forces parties to refer the dispute to be solved by one or several persons – in order to avoid service disruptions.

An earlier C.D. Howe study, however, shows that labour legislation requiring compulsory arbitration of labour disputes in the public sector has caused a significant increase in wages.

Banning strikes and mandating arbitration leads to wages that are higher by about 2 per cent than otherwise. Why? Third-party arbitrators might place little weight on employers’ concerns for wage restraint. In an economic downturn, arbitrated settlements might be slow to reflect lowered wage and inflation expectations or major changes in work practices. In contrast, negotiated agreements are more likely to reflect changes in economic conditions as they occur.

These figures speak to the need to revisit labour laws and remove red tape to improve labour relations and the worker-employer power balance at the municipal level. Otherwise, greater increases in municipal wages will put yet more strain on public finances.