Public sector pay still needs reform

Allister Heath
TIMES are becoming tougher for the public sector, which started shedding jobs last year and whose members are now facing a two-year pay freeze and an increase in pension contributions. But while the pain will be very real, austerity in the public sector needs to be put into context.

Research from Policy Exchange reveals that pay in the public sector continued to pull away from that in the private sector last year. Public sector workers are now paid more than private sector workers on every measure one chooses: the mean (or average) salary in the public sector worker is 4 per cent higher, the median (or typical) pay packet is 16 per cent higher and median hourly pay is 35 per cent higher (because public sector workers work fewer hours on average).

The report’s own measure suggests that the annual pay premium in the public sector is 24 per cent and a massive 43 per cent once pensions are included. For the second year in a row, mean pay was higher in 2010 in the state sector than in the private sector. It is a remarkable, epoch-defining shift – and it comes even though public sector productivity dropped by 0.3 per cent per year between 1998 and 2007, while it increased in the private sector by 2.3 per cent per year. Only the best paid private sector workers still earn more than their public sector counterparts.

These figures do not adjust for skills or experience. But controlling for factors such as education, age and qualifications (all of which are higher in the public sector) can be misleading, as Ed Holmes and Matt Oakley, the report’s authors, argue cogently. The public sector’s overemphasis on formal training, propensity to value qualifications judged as unproductive in the private sector and tendency to exaggerate the importance of seniority, could all contribute to the appearance of a more skilled, sophisticated and experienced workforce than is in fact the case. Putting these caveats to one side, after taking into account differences like age, experience and qualifications, but ignoring productivity and the like, the hourly pay premium for a public sector worker hit 8.8 per cent as of December. Such figures are clearly an under-estimate of the size of the gulf – and pay is only one factor determining a worker’s rewards.

State employees tend to receive safer, index-linked pensions, enjoy lower working hours, longer holidays, higher job security (the majority of the job cuts planned will be achieved by not replacing retiring staff or through early retirement, except in sectors with low staff turnover such as the police). Job satisfaction may also be higher in the public sector: if so, this ought to mean lower wages as jobs that workers enjoy doing are paid less than those they hate.

The two-year pay freeze will reduce the differential by just 3.4 per cent. It would have to last until 2018 to eliminate it altogether, including pensions. This would be unfair: good staff would quit, bad staff would stay and effort would not be rewarded. Instead, the pay freeze on individual salaries should be replaced by a freeze in the total pay bill for public sector organisations. This would allow the deficit to be cut, good public sector workers to be paid more – and bad ones who are enjoying an easier, more comfortable life than their hard-pressed private sector counterparts to be paid less or removed. There is nothing wrong with high pay – but only when it is deserved and affordable.
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