Pay gap between public and private sectors has increased

The Office for National Statistics has published a new estimate of the size of the hourly pay gap between the public and private sectors. It shows that, after correcting for factors such as the difference in skills, qualifications and ages of workers in each sector, the gap in favour of the public sector rose from 5.3% in 2007 to 7.8% in 2010. The methodology used is set out simply in a short video and the ONS is to be commended on the effort - though I wish they would do the same for the gender pay gap where official publications quote crude differences without any attempt to correct for similar factors.

The rise in the pay gap over this period may have a fair bit to do with the impact of the recession, which hit the private sector much harder than the public sector. The ONS points out that the gap may be exaggerated because the calculations do not include bonuses and perks such as company cars and health insurance which are commoner in the private sector. However this almost certainly fails to mitigate public sector workers' relative gains in pay. To the extent that these extras have almost certainly declined in importance over the recession it shows if anything that the public sector's advantage would be even more marked if these factors were included. And of course nothing is said about pension entitlements, where the recent debates have shown public sector employees to have a far better deal. Differences in working conditions, such as average hours, leave entitlements and job security (despite wild talk of cuts, redundancies are far lower in the public sector than the private sector, and that is almost certain to remain the case given the much greater ‘churn’ of employment in the market) further entrench public sector privilege.

So the overall verdict on this new estimate must be that it demonstrates once again that on average public sector workers fare better than private sector equivalents. However I would add the caveat that the position does need to be disaggregated if we are to draw policy conclusions from these comparisons.

The advantage of public sector workers is far stronger in some regions than in others: in the northeast or in the southwest their advantage is very marked, whereas in London it may be much smaller or even negative. Moreover the position varies with skill levels. Those with no qualifications do much better in public employment, whilst amongst the most highly qualified - degree level or above - it appears that pay falls well below the equivalent in the private sector. That is certainly true for the economists and statisticians who work for the ONS.

So in seeking reforms to public sector pay we should be aiming for a greater play of market forces, transfer of jobs into the private sector and decentralisation of pay-setting rather than a simple freeze of pay (a cut in real terms, of course) across the board. That may have to do for the time being, but it is not a recipe for a rational long-term approach to the vexed issue of public sector remuneration.

As ever, the government is moving in the wrong direction here. With regard to pensions, it wishes to have one public sector pension scheme (with one or two parameters varying) to cover every single public sector worker. Pensions, of course, take the pay gap to an astonishing size as they cost between 40% and 70% of salary (though most of this cost is not revealed). Private sector pension employer contributions are less than 10% of salary on average. The solution to this problem is to allow all public sector employers (schools, hospitals etc) to be free to set terms and conditions of employment but in a situation where they face the full costs of their decisions (ie they have to pay the full cost of accruing pension out of their budget). Academies do have freedom to set terms and conditions but that freedom will not be exercised when the combined contribution to the government pension scheme is half the full economic cost.

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