15 March 2017

Public sector pay is falling – but it’s still too high


The Resolution Foundation brings us tidings of great joy today: public sector pay is falling.

The latest edition of the think tank’s Earnings Outlook, published today, reveals that “a combination of rising inflation and pay restraint means that average real pay is now falling in the public sector, and is expected to continue falling over the next three years”. It will be – on average, obviously – £1,700 per year lower in 2019-20 than it was at its peak in 2009-10.

This, they argue, is a dreadful and alarming thing, not least because it could result in “increasing recruitment strains” on the public sector.

But if there’s a problem with public sector pay, it’s surely that it’s not falling far enough nor fast enough.

To understand why, let’s look at a report from the Institute for Fiscal Studies from earlier in the week. It found that public sector wages – once we correct for seniority, education levels and so on – are between 3 and 6 per cent higher than in the private sector. So it seems just and righteous that a bit more trimming takes place.

Except that’s not quite the full story either. There are virtually no defined benefit pensions left in the private sector, while they’re still entirely common in the public. And from earlier work by the IFS, we know how valuable they are: it found that membership of such a DB scheme was worth 26 per cent of earnings, on average.

Pensions, of course, are simply deferred pay. So if we want to compare pay levels, we should compare current and deferred pay, not just that the amount hits the wage packet this week.

And it turns out, unsurprisingly, that differential pensions still make a large difference:

Incorporating the value of employer contributions to workplace-based pensions increases the size of the public sector pay differential. As measured by pay only, the public sector differential was at 7.1 per cent in 1997 and at 2.3 per cent in 2007. Including workplace pensions, the differential rose from 17.9 per cent in 1997 to 20.2 per cent in 2007.

“Between 2007 and 2012, as cuts to public service pensions came in, the public sector differential including pensions fell to 16.8 per cent, compared to an increase in the differential to 4.6 per cent for pay only.”

Public sector pay is therefore distinctly higher than that in the private sector, even after we have corrected for education levels and so on. (Note that the 26 per cent figure is the pay rise represented by a defined benefit pension vs no pension at all – the 16.8 per cent represents the value of the difference between public and private provision.)

But the picture gets even worse (of course it does) once you factor in job security.

There’s always a call from the Left that employment must be more secure, that there should be less ability for the boss to simply turf the labourer out on his ear – their argument being that workers value such security of tenure. This is also why union agreements call for limits on the ability to simply fire.

And there’s no job quite as secure as a public sector one, meaning that that is an extra value said employees gain. (They have, admittedly, been a bit less secure of late, but the general principle still holds.)

In other words, public sector workers are, as a class, in a vastly more enviable position than their private-sector counterparts. Over and above the obvious point of many of them not actually doing very much in the first place – or at the very least doing things which cost the country money rather than making it.

So our reaction to this news should be to do what the Resolution Foundation undoubtedly doesn’t want us to be doing: namely celebrating the cutting of public sector pay to something closer to the private sector, and hoping that the gap closes further and faster.

After all, if we think incentives matter, then what will make us all richer? Having the brighter people go into government, and spend their time codifying how people should deal with dog poo in forests, or having them out here doing something useful?

Tim Worstall is senior fellow at the Adam Smith Institute