Tuesday, 25 July 2017

Is There a Public Sector Pay Premium?

The issue of public sector pay went centre-stage recently in the debate over whether to lift the public sector pay cap. Presumably one of the key factors, alongside where the revenue to pay for any uplift would come from, would be whether public sector salaries had fallen behind those in the private sector which could make it harder to recruit, retain and motivate staff.
The problem is how to measure any public sector pay gap. Because public sector jobs often have different characteristics from those in the private sector (there are relatively more graduate jobs in the public sector for example) a simple comparison of average pay between the public and private sector can be misleading.  The difficulty is what to net out when doing comparisons. Education ? Almost certainly because of different entry requirements. Age? Almost certainly because longer work experience tends to be reflected in higher pay and any differences in experience between the public and private sectors needs to be netted out in making comparisons. What about job characteristics? Here economists are divided. Some argue that people choose jobs on the basis of its features (eg unionised work) and this choice partly depends on wages and not the other way round. Others argue that there is a going rate for a particular kind of job and so job characteristics should be controlled for.  In the end what matters is whether this makes any difference to the conclusions regarding the public sector pay gap. And the answer is yes it does.

The solid blue line in the graph below shows estimates of the average (mean) public sector hourly pay gap over time measured 3 ways a) the raw percentage difference between public and private without netting out anything  b) the gap net of experience, education and gender c) the gap  net of experience education, gender and a control for whether the job is manual or not
The Public Sector Pay Gap Measured 3 Ways
(Technical note the blue line in panel 3 is the estimate from an OLS regression of log hourly wages on public sector work net of a quartic in experience interacted with each of 7 qualification dummy variables, plus controls for gender and manual work. The dotted lines are the 95% confidence intervals around the estimates. The regression is run for each year. All data are taken from 4 quarters of the UK Labour Force Survey in each year).

Whichever way pay is measured there is a common pattern. Public sector pay has been falling since 2011 and is now - in relative terms -  the lowest it has been compared to wages in the private sector for 25 years. If we believe the 2nd panel there was still an average public sector premium of around 3% in 2016 (the latest full run of data we have). If we believe panel 3, average public sector pay is now lower than that in the private sector and has been since 2015.

Another feature of the public sector pay debate is that the pay gap varies across different areas of the UK.
Public Sector Pay Gap Across the UK
The graph shows the evolution of the public sector pay gap as measured according to the 2nd methodology (net of experience, education and gender). Even on this conservative estimate it is clear that the public sector pay gap in London and the South-East of England is much lower than in the rest of the UK. Indeed according to this estimate average pay in the public sector in London and the South East is lower than in the private sector and has been falling further - to around 5% below the private sector average - since 2011. In contrast public sector pay in the rest of the UK, whilst falling in relative terms, is still around 7 % above that of the average private sector wage.


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