The new Average Weekly Earnings (AWE) data were released on 20 January 2010, and were immediately misinterpreted by a host of journalists. The main point made by a number of newspapers was that earnings growth in the public sector was rising at 3.8 per cent as against -0.1 in the private sector, all in the year to November 2009.
In fact earnings in the public sector rose by 2.8 per cent and were only inflated to 3.8 per cent by the inclusion of earnings data from the nationalised banks (RBoS, Lloyds and Northern Rock).
The new AWE has three measures. It measures total pay, which includes bonuses, the key earnings measure for the private sector. It also measures regular pay, which excludes bonuses. And it also measures the bonuses to see the pattern of bonus payments. The reason the measure including bonuses is key to understanding private sector pay is that the bonus element of total earnings has become more significant and fluctuations have a bigger impact.
The three series show that the biggest impact of the recession has been on bonus payments, which have contracted considerably, especially so in the finance sector. As we knew already from the old Average Earnings Index data for the first part of 2009, the contraction of large City bonuses in the first quarter of 2009 was sufficiently large to send the earnings growth figures of the whole economy into negative territory in February 2009; down to -6.3 per cent on the new AWE series.
The Daily Telegraph claimed that the new data showed that public sector workers earn more than £2,000 a year more than private sector workers. It built this view by comparing the weekly earnings excluding bonuses, which is not really comparing like with like. However if you take the more real comparison of total pay the public sector lead at the average is just £6 a week (£313 a year). The figures he should have used show the private sector weekly average at £447 and the public sector average at £453 (excluding the nationalised banks, £459 if they are included). He did not show the finance sector average of £598 (in what was a bad year) and the retail and hospitality average of £303 a week.
In reality you cannot compare the average of the private sector and the average of the public sector, as you are not comparing like with like. Neither the private sector nor the public sector are homogenous wholes with similar skills composition and earnings distribution. The language of ‘counterparts’ should not be used as there are few. The public sector employs less than a fifth (around 23 per cent) of the workforce, is around 70 per cent female and has a substantial number of people in professional roles. On average, those in the public sector have higher qualifications than those in the private sector. Also, in recent years we have seen the lowest-paid jobs in the public sector transferred (outsourced) to the private sector, and also a growth in employment in lower paid occupations in the private sector in areas such as retail and hospitality. Workforce composition changes affect the average of the earnings of each sector.
A closer look at the AWE data shows that public sector earnings growth lagged behind the private sector until the recession hit hard in the final quarter of 2008. For example, in April 2008, average weekly pay in the private sector was £445, while in the public sector it was £434. During 2009 the public sector average led the private sector for a number of exceptional reasons. It would be reasonable to assume that the private sector will bounce back in 2010/11 and will restore the private sector lead once more.
The recession produced much lower pay settlements in the private sector in 2009 compared with 2008 and around one-third of firms had pay freezes, although in some cases lower bonuses were paid and progression payments continued.The AWE data shows very big reduction in levels of bonus payments across all industries which contributed to lower earnings growth in 2009 compared with 2008.
Manufacturing earnings were hit by loss of shift earnings, overtime and short-time working. In fact the return to something like normal working in manufacturing by November shows in the AWE figures as the rate of growth had fallen back to zero last summer but had moved back to 1.6 per cent by November. (In fact this had risen back to 2.9 per cent on the old AEI series, marginally higher than the public sector 2.5 per cent).
Earnings in the private sector were also reduced by the changing composition of the workforce, in particular the loss of full-time roles and the increase in part-time roles ( this trend also happened in the 1990 to 1993 recession). In this recession it would seem there has been a greater preparedness of employees made redundant to take jobs at lower skill levels and lower pay levels until the recovery takes hold. There has also been a shift in the gender make up of the labour market as more women have found work to bolster family earnings ( a trend also indentified in the USA).
As the economy recovers there will be something of a return to trend increases in both bonuses and pay settlements. Because any gains in bonuses, full time working and pay increases rather than freezes will be measured from a low base in 2009, average weekly earnings in the private sector in the coming period will look high and in all probability the rate of increase in the private sector will run faster than the public sector.
Alastair Hatchett is head of pay and HR services at Incomes Data Services
