From the TUC

The use and abuse of earnings data

09 Feb 2010, by Guest in Labour market

The detail of what has been happening to pay and the outlook for the coming year will be discussed in detail at the IDS/TUC pay conference on 16 February.

It is a strange logic that concludes that a financial crisis that started in the top echelons of banking should be resolved by freezing the pay of nurses, teachers and social workers. Yet since early last year a growing clamour of voices, led by much of the press and then followed by many shades of politicians, have called for public sector pay freezes to resolve financial instability caused by the economic crisis. As part of this process there has been a widespread misreading of the official earnings statistics to try to show that all public sector workers earn more than all private sector workers.

The premise of their argument is that in 2009 all private sector pay was frozen and that therefore public sector pay should be frozen so that the ‘pain’ is shared in 2010/11. Yet the truth is that all pay was not frozen in the private sector in 2009. IDS research shows that around one-third of companies had pay freezes – centred on manufacturing, construction and road and air transport. Elsewhere, in energy, finance, retailing and pharmaceutical there were rises for most people and the most common level of increase was around 2%.

Bonus bombshell

The view that the whole of pay in the private sector was frozen (and that pay cuts were common) gained prominence when the Office for National Statistics published average earning figures last Spring. These showed that earnings for the private sector dropped to -3.6% in February 2009 and journalists and economists drew the conclusion that this reflected the depth of impact of the recession. In reality this drop back into negative figures was predominantly caused by a huge fall in City bonuses, the effect of which was sufficiently large to drop the statistics for earnings into negative territory for two months.

This is not to say that a lot of workers in manufacturing and construction did not face pay freezes and substantial loss of earnings through loss of shift pay and through short-time working. But it is to argue that what really was going on was misinterpreted – and that tendency to re-arrange the facts continues.

Crazy conclusions

This occurred again in January when the new Average Weekly Earnings (AWE) were released for the first time, on 20 January 2010, replacing the old Average Earnings Index. The new AWE expresses change in weekly earnings as opposed to the old series which was expressed as an index. Thus it makes it easy for those with an untrained eye to jump to amazing conclusions.

After the release of the figures, the main point made by a number of newspapers was that earnings growth in the public sector was rising at 3.8% as opposed to -0.1 in the private sector. In fact earning grew by 2.8% in the public sector and were only at 3.8% if you include the earnings data from the nationalised banks (Northern Rock, Lloyds Banking Group and RBS). A closer look at the AWE shows that in the same month (November) earning in manufacturing were up 1.6% on a year earlier and were up 1.8% in distribution, retail and hospitality. Once again the negative figure for the overall private sector was caused by lower bonuses than a year previously in the finance sector.

When the AWE figures were released the Daily Telegraph claimed that the new data showed that public sector workers earn more than £2,000 a year more than private sector workers. It developed this interpretation by comparing the weekly earnings excluding bonuses, which is not really comparing like with like. If you take the more real comparison of total pay, the public sector lead is just £6 a week(£313 a year). The figures really do show a different picture. They show the private sector weekly average at £447 and the public sector average at £453. They also show a finance sector average of £598 – in what was a very bad year for them – and the distribution, retail and hospitality average of £303 a week.

Apples and oranges

There is a very important point to make about comparing average earnings in the public sector with the private sector. You are not comparing like with like. Neither the private sector nor the public sector are homogenous wholes with similar skills composition and earnings distribution. The language of ‘counterparts’, which often creeps into articles on the subject, should not be used as there are few. The public sector employs less than a fifth of the workforce and is around 70% female. It has a higher proportion of people in professional roles. On average, those in the public sector have higher qualifications than those in the private sector.

Also, in recent years, we have seen the lowest-paid jobs in the public sector transferred (outsourced) to the private sector. There has also been a growth in employment in lower paid occupations in the private sector in areas such as retail, fast food and hospitality. Workforce composition changes as affect the average of the earnings in each sector.

Bounce time

The recession led to much lower pay settlements in the private sector than in 2008. One third of firms had freezes. Many firms in the engineering and car manufacturing sectors had short-time working and loss of earnings. This is reflected in the new AWE figures which dropped back towards zero in the first half of 2009. Since then there has been a slow but steady return towards something like normal working. Indeed, Nissan is currently putting on new employees. The AWE figures might well show rather buoyant figures for manufacturing in the first half of 2010 because they will be compared to such dire circumstances in the first half of 2009.

But watch out for what happens to earning in the finance sector, when the figures for February and March are published in April and May. They are more than likely going to show that big bonuses have returned where they shrank back a year ago, and this will produce a statistical bounce which will push the private sector into stronger figures just at the moment when the arguments for cut backs and pay freezes in the public sector will be at their height.

GUEST POST: Alastair Hatchett is Head of Pay and HR Services at Incomes Data Services, having been the editor of the IDS Pay Report for 20 years until 2005. He leads several teams of researchers whose work on pay and HR studies is highly respected and widely quoted in management, union and government circles. He has been involved in a range of research projects over the past decade for the Low Pay Commission, the Pay Review Bodies, the CIPD, the EOC, Government Departments and a range of unions. He is a regular conference speaker on reward issues, the labour market and employment trends. He is a fellow of the Royal Society of Arts and the Royal Statistical Society. Alastair will be speaking at the IDS/TUC pay conference on 16 February.

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