Private sector workers’ pay frozen – but not public sector

Allister Heath
ZERO per cent. Yes, that’s right, a big fat zero: that was the rate by which total pay went up in the private sector in the first three months of the year, compared with the first quarter of 2012.

The private sector is going through an actual, full-on pay freeze, with falling bonuses entirely cancelling out the meagre 0.8 per cent hike in regular pay. Some parts of the private sector are seeing substantial declines in pay. It’s a remarkable situation that, as far as I know, not a single economist predicted for this stage of the economic cycle.

Given that inflation is currently at 3.3 per cent on the retail price index measure, that means that the average private sector pay packet purchased substantially fewer goods and services in March than it did 12 months prior to that date. A 3.3 per cent real terms pay cut is hugely significant; there was a time when it would have been assumed impossible and unsustainable.

In the past, such a collapse and gulf between cost of living increases and wages would have triggered irresistible demands for more pay – but the labour market has become so flexible, staff so aware of the difficult situation and the competition for jobs presumably so fierce that pay pressures are actually abating, rather than increasing. Remarkably, we are nearing a non-Keynesian world where private sector wages might even sometimes fall in nominal terms.

The good news is that workers are repricing themselves into the labour market at an accelerating rate. Total hours worked per week were 950.3m for January to March 2013, up 2.4m from October to December 2012 and up 20.2m on a year earlier. This 2.1 per cent rise in the number of hours worked, during a time when the economy broadly stagnated, suggests a further drop in productivity on that measure – but the 3.3 per cent drop in real private sector wage costs means that the real cost of producing one unit of output actually went down. Long-term, that will be good for jobs.

Given all of that, it is bizarre in the extreme that pay in the public sector is still outpacing that in the private sector, especially given the supposed pay freeze. This story has been regularly reported in this newspaper, and George Osborne finally noticed at the Budget, but still not enough has changed. Total pay and regular pay in the public sector both rose by 1.4 per cent. While that is still a much lower rate than inflation – and implies a real terms wage cut of 1.9 per cent, it is not fair that austerity is worse for private sector workers than it is for those in the public sector.

There have of course been plenty of genuine instances of pay restraint in the public sector, but the reality is that average rates are still drifting up, presumably because large numbers of people keep being promoted. This has nothing to do with the nationalised banks, which actually drag down the average. The public sector workforce is no longer falling by as much either: it dropped 117,000 between December 2011 and December 2012; the number of people employed by the private sector increased by 708,000.

Overall, the economy is looking up a little, as a series of reports and surveys has demonstrated in recent days. Yesterday provided further confirmation – with the Bank of England hiking its growth forecast as part of Sir Mervyn King’s last Inflation Report – that we are seeing some sort of very modest turning point. Polls from YouGov and Ipsos Mori show that the public is becoming much more optimistic about its finances and the country’s economy.

But the fact that this is coinciding with collapsing real take-home pay is truly extraordinary.
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