Was Osborne right on public sector pay?
George Osborne's claims on public sector pay in the Autumn statement do not stand up to scrutiny.
In his statement to parliament on 29 November, George Osborne said the following:
“We will set public sector pay awards at an average of 1% for each of the two years after the pay freeze ends.
“Many are helped by pay progression – the annual increases in salary grades that many people are entitled to, even when pay is frozen.
“It is one of the reasons why public sector pay has risen at twice the rate of private sector pay over the last four years.”
Was he right? In principle, there are three parts to this. First, has public sector pay indeed risen at twice the rate of private sector pay over the last four years? Second, have public sector workers enjoyed pay progression while their private sector counterparts have not? And third, are there any other factors that might account for the difference in the rates of growth of pay in the two sectors over the four years?
Of these three questions, the second cannot be answered, at least on the basis of publicly available data. While it is certainly true that many public sector workers do enjoy pay progression, the information needed to quantify its extent, in both the public and private sectors, does not exist. So we are left with just two questions: has public sector pay grown twice as fast as private sector pay – and are there any other obvious explanations for it?
Osborne’s basic premise
The latest data on average weekly pay from the Office for National Statistics is for September 2011. Compared with four years earlier, average weekly pay in the private sector had risen 6.2% whereas average weekly pay in the public sector had risen by 12.8%, that is, an excess of 6.6% . Osborne’s basic premise is therefore correct – public sector pay in fact rose more than twice as fast as pay in the private sector.
However, while we cannot identify how much of this excess is due to pay progression, we can identify a number of other contributory factors.
Bonuses and arrears
The first relates to bonuses and arrears. It is clear from the data that bonuses in the private sector were down sharply in January 2009 compared with a year earlier. Given what had happened to the economy and the financial sector in particular over the previous year, that is entirely understandable. But since this is exactly what is meant to happen with bonuses at times like this, it is absurd to use the collapse as a reason for holding down public sector pay.
Luckily, the ONS publishes alternative series for average weekly earnings which strips out the effect of both bonuses and pay arrears. On this basis, instead of rising just 6.2% over four years, private sector weekly earnings rose 7.8%. Over the same period, public sector earnings rose 12.6%. While the overall picture is the same, leaving out bonuses reduces the gap by nearly two percentage points.
The graph below plots these two series – that is, the annual percentage change in average weekly earnings in the two sectors (the solid lines) – on a quarterly basis back to the start of 2005. As can easily be seen, public sector earnings were rising faster than those in the private sector in 2005. Between 2006 and 2008 the picture was reversed. From late 2008, the private sector fell back again – for a period of about 18 months substantially so. Since mid 2010 the two sectors have been tracking one another fairly closely.
Annual percentage increase in average weekly pay: public and private sectors
Source: ONS. Dataset EARN01 updated November 2011, series KAJ2, KAJ5, KAK6, KAC4, KAC7 and KAD8. Seasonally adjusted. (http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/november-2011/table-earn01.xls). The series for the private sector including public financial services is the author’s calculation.
The changing public sector
Anything else? The hump in the public sector line – that is, the step up between April and July 2009 –suggests that something odd was going on. As indeed it was: for it was then, in July 2009, that earnings in the nationalised banks, RBS and Lloyds/HBOS, started being included in the public sector.Luckily again, the ONS also produces a public sector average earnings series which excludes financial services.
Since public sector financial services comprise slightly more than just these two banks, the dotted line prior to 2009 does not quite track the solid one. From July 2009, however, the difference is striking. In particular, the hump disappears (implying that it was caused by the fact that average earnings in banks are higher than across the rest of the public sector).
We can go just a little further. Although the ONS does not itself do so, it is possible to estimate what private sector average earnings would look like if RBS and Lloyds were still in with the private sector. As can be seen from the chart, although the effect on the private sector series is much less (reflecting the much greater size of the private sector), it is still appreciable.
Taking this into account, average weekly earnings in the private sector including RBS and Lloyds after July 2009 rose 8.4% over the four years. Over the same period, average weekly earnings in the public sector excluding financial services rose 11%. So there is still a gap but it is down to 2.6%. And according to the chart, it is still closing.
Averages hide a lot. For example, average earnings can fall if hours worked fall. The ongoing privatisation of mainly lower paid jobs on its own pushes up the public sector average and pushes down the private sector one. Over this period, the public sector has been reviewing pay and grading to ensure compliance with equal pay legislation. Mainly benefitting low paid women workers, this too has pushed up average pay, adding to the gap between the sectors.
Failure to take account of the effects of something as big as the nationalisation of RBS and Lloyds is certainly a gross error. Once that has been corrected however, the real story of the chart is not about the small difference between the two sectors but about the large difference between the paths of pay in each sector and the path followed by inflation, currently at 5%. The resulting fall in ‘real’ wages – that is wages after allowing for inflation – is a major reason why the economy is now so sluggish. Since the economy will not recover until pay picks up, bigger rises in both sectors, and especially in the private sector, are fast becoming a patriotic duty.