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Is there really a public sector pay premium?

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Over the weekend Chancellor Philip Hammond was reported as saying that public sector workers are overpaid. On the Andrew Marr show on Sunday he was given multiple opportunities to deny the accusation. But while he did not repeat the tone-deaf claim, neither did he row back on it.

Instead, he made significant play of the “public sector pay premium”. This is the idea that public sector workers earn more, on average, than people in the private sector. Hammond also argued that public sector pensions are more generous, which justifies pay restraint in that sector.


But the picture is more complicated than it looks.

The Office of National Statistics (ONS) produces data on earnings in both sectors. This is published monthly in their Average Weekly Earnings (AWE) series. AWE shows that the public sector earns 9.5% more than the private sector. That looks pretty decisive. But as with all statistics, the devil is in the detail.

The jobs that make up private and public sector work are often different, so a simple comparison between the two is not necessarily informative. It can be like comparing apples and oranges. In order to have a fair comparison we need to compare similar jobs in each sector. This means we need to take account of different factors that might affect the result, such as type of employment, or the type of work performed.

For instance, if you control for industry you might find you get very different results. Because the public sector doesn’t include many people employed in (typically low-paid) hospitality sector, but the private sector has lots, that will skew the findings a bit. If you control for the type of work being performed the public sector pay premium is significantly reduced.

In fact, 2016 research by Income Data Services (IDS) found that it pay had reached parity between the two sectors. They found that the private sector average was brought down by very low pay in specific industries, although average public sector earnings are less than those in finance and business services, construction and manufacturing.

The Institute for Fiscal Studies (IFS) found a similar effect when they compared workers with similar characteristics. When the IFS looked at this they controlled for age and qualifications, among other factors.

Most people would expect NHS and school staff to paid more than those in retail and hospitality – so dividing them along public/private lines doesn’t really offer a useful comparison.

Public Sector pay is declining

At the same time, we have found that public sector pay is already beginning to lag behind the rest of the economy. When we looked at the trend in public sector pay compared to the rest of the economy we found pay in the economy as a whole should return to its pre-crisis level by 2021, whereas pay in the public sector will continue to decline and AWE will fall decisively behind the private sector and the economy average.

This doesn’t mean that the AWE figures are wrong, only that they present one particular interpretation of the huge amount of data potentially available on pay in the private and public sector.

(If you want more info on the debates about pay there is a really useful report by IDS from 2013 that goes into it in more detail.)


Philip Hammond is right, that on average pension provision is better in the public sector than the private sector. But this misses several key facts.

Firstly, pensions are future income. They support workers in retirement but as the chancellor himself acknowledged they don’t pay the rent or feed the kids today.

Secondly, pensions are deferred income. For a workplace pension, workers forgo receiving their full wage today in order to get it at a later date, and their employer contributes an additional amount to top this up. The employee contribution from workplace pensions has increased since 2010, meaning that on top of having their pay cut in real terms, workers are giving up a bigger slice of today’s income to their pension. For example, the majority of midwives saw their contribution rise from 6.5 per cent to 9.3 per cent from 2012 to 2015.

The pensions that public sector workers will receive have also been cut in recent years, meaning that workers will have to work longer, contribute more and then will receive less when they eventually retire.

Race to the bottom

Finally, we should remember that if public sector pensions are still better than many in the private sector that is a reason to improve provision in the private sector. The answer is not to race to the bottom, seeing who can slash pay and provision the most. That way everyone loses.

And it’s is worth remembering that public vs private sector pay is important, but it’s not the only issue at stake. The TUC isn’t only concerned about low-pay, we want fair pay. Workers across the public sector, from nurses, to crown prosecutors, firefighters to nuclear engineers have seen their real pay fall for years. They’ve earned a pay rise on their own merits, through their hard work and dedication.

It is vital that the chancellor gives them this.

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