Are public-sector workers badly paid?

Pay for public workers was frozen in the years following the financial crisis, leading to a perception that they are hard done by. Do they get a bad deal? Simon Wilson reports.

Who gets paid more?

In raw terms, the pay of public- and private-sector workers is almost identical: on 2016-17 figures, average gross weekly earnings in the public sector were a couple of pounds more than £500 and in the private a few pounds less. Public-sector workers tend to work slightly fewer hours, though, meaning we would “expect” them to be paid less. However, they also tend to be more highly-educated and older, meaning that we would “expect” them to be paid more.

Then what’s the reality?

When pay is expressed as an hourly rate, public-sector workers, on average, get paid significantly more – 12% in 2016 in raw terms. But when this figure is controlled and adjusted (by the Institute for Fiscal Studies, a think tank, using official data) for differences in age, sex, education and experience levels of the different workforces, the gap is just 3% and falling.

The public sector’s small premium over private-sector workers has been falling (from a peak of 6% in hourly adjusted terms) since 2011, when the then coalition government began its post-crisis fiscal retrenchment. The process of austerity (a pay freeze in 2011-12 and 2012-13 and 1% annual rises since) in the public sector has had the effect of returning the broad parity to the sectors that existed prior to the financial crisis.

Just how hard did austerity bite?

In 2007, the year before the crisis began, average gross weekly wages in the respective sectors were almost identical. As the crisis took hold, private-sector wages fell sharply, by 9% in real terms between 2007-8 and 2013-14, since when they have partially stabilised (and on 2016-17 figures stood 5% below pre-crisis levels).

By contrast, public-sector wages held steady through the crisis, opening up a big gap over the private sector: they peaked in 2009-10, and didn’t start falling sharply until 2010-11. Public-sector wages then fell sharply and also bottomed out in 2013-14 (all figures taken from IFS analysis of official data). But they haven’t recovered much since then and in 2016-17 stood only a fraction higher than private-sector wages.

So all’s fair?

In a nutshell, private- and public-sector workers took pretty much the same hit to wages from the crisis, but the public sector’s hit came later and was more condensed, making it appear more “unfair”. Private-sector wages were recovering while the public sector’s were frozen, increasing the sense of unfairness and affecting morale. That is a worry given the variation in pay between different types of public-sector worker and given regional variations in pay.

For lower-educated workers, the benefit from being in the public sector is bigger than for higher-educated workers – and that benefit has actually widened since the crisis. For higher educated workers, the public-sector premium is smaller, and has got even smaller since the crisis – that is, the better-paid public workers have fared least well in recent years.

Why does this matter?

It implies that it will get harder for the public sector to recruit highly skilled and educated professionals, such as teachers, healthcare professionals and senior civil servants. It is likely to be especially hard in London and the southeast of England, the only two areas where the pay differential is reversed, and private-sector workers earn more than public ones (5% more in London on the hourly adjusted figure; 2.5% more in the southeast).

The government has begun to recognise this  with its across-the-board 1% pay rise, making higher but still below-inflation settlements in some sectors (2% for police and 1.7% for the prisons service), and promising as yet unspecified higher settlements in others. But it is under intense pressure to do more in next month’s Budget – and there are big sums involved. Some 5.1 million people work in the public sector, at a total cost of £181bn in 2016-17 – accounting for 23% of all government spending.

What about pensions?

Public-sector jobs are still typically more secure than those in the private sector, and are more likely to come with defined-benefit pensions. The coalition government cut the future value of public-sector pensions by replacing final-salary with career-average schemes, but the gap in provision remains massive. Some 88% of public-sector workers are members of a workplace scheme compared with 60% in the private sector (a massive leap from less than 40% in 2007, due to auto-enrollment).

Moreover, 83% of public-sector workers receive employer contributions worth at least 10% of earnings, compared to just 11% of workers in the private sector (a fall from 17% in 2007). In other words, public-sector pensions remain a major attraction for staff – and if public-sector pay is set back on an upward trajectory, we can expect the “pensions apartheid” issue to become under renewed scrutiny.