Pay Equity Ruling is Fundamentally Flawed

By Dexter Samida, MA, Research Economist, Economic Freedom Project, Fraser Institute, and
Kelly Torrance, BA Philosophy, University of British Columbia

In a landmark pay equity ruling in early August, a Canadian Human Rights Tribunal ordered the federal government to pay 200,000 former and current federal employees (mostly female), back pay with interest. The compensation package could cost taxpayers as much as $5 billion.

This case was not about equal pay for the same job, but rather equal pay for work of “equal value.” Equal value is determined by a committee of managers and employees, using a scale that includes skill, effort, responsibility, and working conditions. The issue is whether the wage a person is paid can be objectively compared to the wage another person receives if the two are doing different jobs. Equal pay for work of equal value laws force employers to somehow compare the wages for different jobs without reference to the supply and demand of workers. But it isn’t clear that even people who do the same work ought to be paid the same. Let’s examine the concept of pay equity from an economic perspective and look at productivity, supply and demand, and cost minimization.

Pay equity is a meaningless concept to an economist. The idea of “value” based on objective characteristics such as skill, responsibility, etc., is somewhat puzzling. In the real world, far away from the subjective visions of the tribunal, people are paid based on the revenue they add to the company. A firm wishing to maximize its profits hires workers up to the point that the incremental value added is equal to the wage they must pay for an incremental unit of labour.

The issue is whether the wage a person is paid can be objectively compared to the wage another person receives if the two are doing different jobs.

Pay equity also ignores the rules of supply and demand, which normally determine wages. For example, in the world of academia, professors need to have certain levels of education and publishing credentials in order to achieve tenure. In the eyes of the tribunal, professors in different departments would have jobs of similar “value” owing to their similar backgrounds. Since their jobs have similar value they should be paid equally, shouldn’t they? Well, in the real world, this is not the case. Computer science professors are in greater demand and lesser supply and thus command higher salaries than, say, English professors. The wage disparity between these two fields has nothing to do with their gender mix; it has to do with the simple principle of supply and demand.

So how should government employees’ salaries be decided? In the private sector, the emphasis is on profitability, but unfortunately, this test cannot be used in the public sector. Instead of trying to compare jobs of different descriptions on the basis of “value,” the government should attempt to minimize costs. Cost minimization would imply a salary that attracts the right skill level while balancing the costs of higher salaries with the costs of turnover.

Media outlets have declared this latest ruling a victory for working women, but the imposition of higher wages for clerical, secretarial, and other positions will have the unintended consequence of reducing the number of such (now high priced) jobs available. The recent Canadian Human Rights Tribunal’s pay equity ruling will likely affect federally regulated businesses, such as Bell Canada, Air Canada, Canada Post, banks, and others. This will have the long-term effect of creating more unemployment for women. We can expect the consequences of this decision to be far-reaching and very expensive for the taxpayer.

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Last Modified: Wednesday, October 20, 1999.