From the TUC

Is there really a public sector pay premium?

23 Nov 2012, by Guest in Public services

With a government determined to depress public sector wages through pay freezes or localising pay determination, the statistical evidence on public/private sector pay comparisons has never been more used and abused. UNISON’s view is that these attacks are willfully divisive and designed to distract attention from the government’s growth-strangling economic policy. We argue for a wages led recovery, which boosts demand in the economy and alleviates hardship particularly for the lowest paid, should be the way forward. 

I want to take a look at some of the tricks, over-sights and omissions so often made by those seeking to misrepresent the context of public sector pay for their own narrow political purposes. 

Average Earnings comparisons between the public and private sectors

The most commonly cited source of claims for a “Public Sector Pay Premium” is average earnings figures.  These are produced each month by the Office of National Statistics and provide a snapshot of average pay across different sectors of the economy in a particular month. 

pay graph by sector

These figures are regularly used without any context or analysis to give the impression of a “pay premium” in the public sector.  But is this justified?  Below are 5 issues that are often brushed under the carpet by commentators and those with an interest in presenting an inflated picture of public sector pay:

  1. Does it make logical sense?  Nobody tries to compare manufacturing earnings with the public sector to claim a “manufacturing sector pay premium”.  So why focus on the public sector?  People who perform different jobs in different sectors are going to be paid differently.  Why would we expect them to be paid the same?
  1. Outsourcing: A high proportion of the lowest paid public sector jobs have been outsourced.  So the cleaner and catering assistant in an NHS hospital is often categorised as a private sector worker.  As independent labour market analysts Income Data Services conclude:  “Outsourcing exaggerates the trend for the public sector workforce to be concentrated around the median, and the private sector to have a large proportion of low-paid employees.
  1. Qualifications: The public sector requires far more workers than the private sector to be professionally trained in roles relating to healthcare, education and the emergency services.  Given there are a higher proportion of workers with degrees and diplomas in the public sector it is unsurprising that this is reflected in average pay.  
  1. Reclassifications:  In recent months, pay growth rates have been significantly affected by the reclassification of English Further Education and Sixth Form College Corporations as private sector in June 2012. The Office of National Statistics estimates that the single month growth rate for the public sector would be between 0.6 and 0.8% lower and the private rate would be between 0.1 and 0.2% higher.  In the past there have been other reclassifications which have skewed the figures, such as the nationalisation of much of the banking sector in 2008.  It’s always worth looking at the ONS small-print to get an accurate picture of earnings across the sectors. 

“Like for Like” Pay comparisons between Public and private sector

There have been several reports in recent years which have claimed to control for the differences between the public and private sector workforces.  These “like for like” analyses claim to control for issues such as age, gender and qualifications.  But there are significant questions about the methodology used in these reports which are rarely highlighted in the mainstream media.  The Treasury, the Institute of Fiscal Studies and various right-wing think tanks have all used similar data in their attempts  to prove the existence  of “public sector pay premium”.  Below are five reasons to treat such comparisons with caution:

  1. The ONS does not confirm a “public sector pay premium”: The Office of National Statistics rejects the concept of a “public sector pay premium”.  Indeed, neither of the recent ONS papers on the 2010 and 2011 “pay gaps” even mention the word “premium”. The far less catchy summary is that the gap appears:  “… after accounting for gender, age, occupation, the region that the job is located in, and factoring in qualifications”.  What those with a political axe to grind failed to report was the sentence which immediately followed: “However, the pay gap may also be explained by other characteristics that were not included in the regression model because they are not collected. . .”
  1. Labour Force Survey a poor source of pay data? The research which the government relies on to make claims for a public sector pay premium comes from the Institute of Fiscal Studies (IFS). The IFS analysis is mostly based on the Labour Force Survey (LFS), produced by the Office of National Statistics.  This is widely seen as a poor source for pay data.  Almost a third of responses are from a proxy, who often lack information about individual circumstances. According to Income Data services, an indication of the scale of problems with LFS data is that it over-estimates the size of the public sector by about one million.
  1. ASHE categories don’t guarantee “like for like” comparison.  The other data source sometimes used for these “like for like” comparisons is the Annual Survey of Hours and Earnings (ASHE), also produced by the Office of National statistics.  Making comparisons between the occupational categories used in ASHE is a fraught business.  In a 2011 report right-wing think tank Policy Exchange used ASHE figures to highlight differences in pay in the ‘primary and nursery teaching professional’ category.  Median annual pay for this employee group is £33,140 in the public sector and only £21,159 in the private sector. But in the public sector these workers are largely primary school teachers whilst in the private sector they are nursery  teachers, usually  employed in private nurseries. To claim a “public sector pay premium” on the basis of these figures is misleading.   
  1. Bonuses.  Both the LFS and ASHE use data from a period in the year which misses out on the main bonus period in the private sector (January to March).  Useful for anyone seeking to exaggerate a “public sector pay premium”.  Though, to be fair, the most recent ONS paper seeks to take greater account of this problem. 
  1. Length of service.  The public sector also has a much higher proportion of older employees.  Why does this matter?  Earnings tend to increase with age and experience and so this skews the figures.  People who go into public service jobs tend to stay in those jobs much longer than people in the private sector.  Many public sector workers see their jobs as a vocation to which they will dedicate their lives.  It is not uncommon for teachers, doctors, nurses and social workers to stay in the same job for their whole working lives.  Do they receive a small premium for this long-term dedication?  Almost certainly yes.  But is that unfair, unexpected  or undeserved?

Finally, just to demonstrate how complicated this issue can be it’s worth remembering that, because of the time-lag, much of the evidence for a public sector pay premium presented so far does not take into account the full extent of the public sector pay freeze and cap.  It may not be long before the unreliable and often arbitrary data used to show a “public sector pay premium” starts to show a “public sector pay deficit.”  Indeed, according to some studies, there are groups within the public sector where this is already the case. 

If this continues, I look forward to Policy Exchange, The Taxpayers’ Alliance and Tory Ministers arguing for an urgent pay rise for public sector workers.  We couldn’t tolerate any difference between private and public sector pay, could we?

GUEST POST: Gavin Edwards is National Officer for Bargaining Support at the trade union UNISON, providing information and bargaining advice to UNISON’s national, regional and branch negotiators.

6 Responses to Is there really a public sector pay premium?

  1. Jonathan Green
    Nov 23rd 2012, 12:21 pm

    The debate on public v private sector pay usually generates heat but not much light. Gavin’s post does a good job tackling many of the common myths, but there are some important additional points that could be made.

    There have been several ONS reports on pay differences between the public and private sectors, the latest report includes an important change; they now take account of organisational size. Public sector organisations tend to be larger than private sector organisations and larger organisations tend to pay more. By including this data in the regression analysis, ONS calculate that the average difference between the public and private sectors comes down to just 2.2%.

    However there are still some gaps in the ONS analysis, which they patiently explain, and help to account for the pay difference, but no doubt this will not stop the data being misused.

  2. Luis Enrique
    Nov 23rd 2012, 2:18 pm

    IFS researchers are “attempting to prove” something – or just asking the question and reporting what they find? I think you’d be better advised to explain why you think they are wrong rather than impugn their motives.

  3. Tony
    Nov 25th 2012, 2:34 pm

    It is more important that we explain why a public sector wage premium exists (as the article above does in parts) than to deny it exists (when there is so much empirical data to demonstrate beyond question that it is a reality)- not least when there is so much exploitation of part time and women workers in the private sector.

  4. Raymond Dance
    Jan 7th 2013, 9:58 am

    All of this conveniently ignores the fact that the overall public sector wage bill is still rising at a terrifying rate despite the 370,000 jobs that have gone since 2010. At approaching £250 billion pa, pay now accounts for a third of all public spending.

    Sorry guys, it just ain’t affordable.