Time to pay heed to the public-private earnings gap

31 July 2005

Written by John Philpott, CIPD Chief Economist

This feature originally appeared in Whitehall and Westminster World, in July 2005.

The number of people employed in the public sector has risen relatively strongly since Gordon Brown took stewardship of HM Treasury – up by over 650,000 (11%) between 1998 and the start of 2005. During the same period private sector employment grew by only 4%. Meanwhile, as public sector employers have sought to compete for staff in a tight labour market, earnings in the sector have also increased relatively quickly – averaging growth of around 4.5% a year since the late 1990s compared with around 4% in the private sector.

The combination of more jobs and higher pay has correspondingly raised the annual public sector wage bill, which accounts for a large part of the substantial rise in public spending since 1999-2000. Having reached a low of 37.2% in that year, the share of public spending in national income rose above 40% in 2003-04 and is projected to reach 42% by 2006-07.

In an effort to ensure greater value for money from this spending – not to mention concern about mounting public borrowing – the government has started to rein back growth in public employment. Up to 100,000 civil service and other administrative posts are due to be cut between now and 2008 in an effort to achieve the £22 billion of efficiency savings identified by the Gershon review in 2004. The emerging pattern is already evident from Office for National Statistics (ONS) data. These show that public sector employment grew by 1.3% in the year to March 2005, down from 2.6% in the year to March 2004. The question now is whether the Chancellor should also take a tougher stance on growth in public sector pay?

For several decades the pay of public sector workers has followed a clear cyclical pattern – periods when public sector pay has fallen behind that in the private sector followed by periods of catch-up. The initial years of this century have been a classic catch-up period as the government has sought to make the public sector more attractive to potential recruits and those otherwise tempted to quit.

By the start of 2003 average public sector earnings (excluding bonuses) were rising at an annual rate of 5.1 per cent compared with 3.7% in the private sector. The relative boost to public sector pay in 2003 reflects in part multi-period pay deals agreed during 2001 and 2002 and weak trading conditions for many private sector businesses. By the start of 2004 earnings growth had slowed in both sectors but the public sector (4.3%) remained ahead of the private sector (3.7%). Since then earnings growth has picked-up in both sectors but remains relatively strong in the public sector, boosted in part by the short-run impact of pay restructuring linked to changes in working practices. By spring 2005 public sector earnings were still growing by 4.8% whereas private sector pay growth, which had reached 4.4% in autumn 2005, fell back below 4%.

With many parts of the private sector experiencing tougher times there would appear to be a prima facie case for slower growth in public sector pay. The counter argument is that public employees are relatively low paid and deserve a better deal. However, while it is evidently true that public sector workers are generally far from being the highest paid people in the land, the common perception that public employees are poorly paid relative to their job market peers needs some revision.

Official figures for relative levels of pay are obtained from the ONS' Annual Survey of Hours and Earnings (ASHE). The latest figures (for April 2004) for all employees show that private sector workers on average earn £27.60 more per week than their public sector counterparts. However, private sector earnings are more widely distributed, containing extremes of high pay and low pay. If one instead compares the median worker in both sectors those in the public sector do better by £12 per week or 3.5% (for full-time workers the weekly median pay gap is £45, £453 for public sector compared with £408 in the private sector). In percentage terms the median hourly pay gap in favour of the public sector is even wider (17%) due to lower average hours worked in the public sector.

It is only in the top 25 per cent of the earnings distribution that private sector workers are clearly better paid – fat cats enabling the private sector to be top dog. But even here a shift is occurring with some public sector jobs now offering six figure salaries to attract and retain senior staff. And at the other end of the pay spectrum the lowest paid public service workers are not in fact public employees but those working for private sector contractors (as highlighted by the recent pay dispute involving contract cleaning staff in the House of Commons). While the perception of public service workers as being low paid is generally correct the suggestion that these are typically public sector employees can therefore be misleading.

The favourable pay gap may explain in part why CIPD employee attitude surveys indicate that job satisfaction in the public sector – which plummeted relative to the private sector in the 1990s – appears to be on an upward trend. It may also provide some justification for government in taking a tougher stance on public sector pay and conditions, including pensions provision which has typically been more generous in the public sector and is now subject to reform.

In present circumstances, with pay and job prospects relatively weak in the private sector, this is unlikely to worsen recruitment and retention problems for public employers – which, according to CIPD research on employee absence, anyway probably owe more to non-monetary factors such as severe stress levels amongst public employees which underpins a relatively high rate of absence.

Taken together, this suggests that the appropriate policy response to tackling the difficulties faced by people providing Britain's vital public services should now be to improve the overall working conditions of those on the public payroll while using improvements in both the National Minimum Wage and in-work income supports to boost the living standards of private sector contract staff.

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