Public sector’s turn to face squeeze

Allister Heath
THERE is a simple reason why unemployment in Britain, while tragically elevated, has remained under control despite the recession: private sector workers have been on a pay freeze for well over a year. Many have even agreed to pay cuts, a revolutionary embrace of flexibility which has saved countless jobs and demolished the central Keynesian postulate that nominal wages can never fall.

Add to that accelerating inflation and real wages have fallen substantially across private Britain last year. It has been painful – and given that the economy is barely growing again, conditions are unlikely to improve any time soon.

The same is not true of the public sector, however, which has remained almost unaffected by the bitter crisis that has engulfed the rest of the country. The facts – revealed by the Office for National Statistics yesterday – speak for themselves. Average earnings (wages and bonuses) were £448 a week in the private sector in December, exactly the same as in December 2008. In fact, private sector remuneration has been static since October 2008. Yet public sector pay is now £457 a week, up from £442 a year ago. The most recent three-month average year-on-year pay rise was zero in the private sector, against 3.7 per cent in the state sector.

Public sector earnings overtook those in the private sector in January 2009 and the gap has since widened sharply. It is clear that none of this is sustainable at a time of an exploding national debt and a triple-digit budget deficit. Both Labour and the Tories have pledged to make deep real-term cuts to state spending if they are elected; and one way to minimise the pain to the consumer of public services will be to freeze public sector pay. There will be have to be at least two years of zero pay increases in the public sector, followed by at least three years of weak hikes (and even that will not eliminate the need for major cuts to virtually all government departments, such is the disastrous state of our public finances). None of this will be pleasant; but unless the public sector is prepared to make the same sacrifices as the private sector, the next government will be forced to make even harsher job and departmental cutbacks. The choice is one of two evils.

Yesterday’s figures provide other interesting facts about the state of the labour market. Average weekly hours worked in the three months to December 2009 were 31.5, much lower than anyone usually realises. This is because of the large and growing proportion of part-timers in the UK workforce; but it does destroy the myth that everyone in the UK is chained to their desks. Just 19.7 per cent of the population works more than 45 hours a week; 53.6 per cent work 31-45 hours, the figures show.

Another decent indicator is the total number of hours worked in the economy: this adjusts for the rise of part-time work and provides a much purer snapshot of the real demand for labour. On this measure, the recession did not stop in the fourth quarter: total hours worked per week dropped to 907.9m in the three months to December 2009, down 1.8m from the three months to September. Total weekly hours worked peaked at around 948m at the start of 2008, which means that the demand for labour has collapsed over four per cent since the start of the recession.

One thing is for sure: it would have been even worse without the private sector’s pay restraint and flexibility.