Pay restraint cuts public sector wage differential

9 Oct 14
The gap between public and private sector pay that opened up during the recession has been closed as a result of Chancellor George Osborne’s restrictions, the Institute for Fiscal Studies has found.

By Mark Smulian | 10 October 2014 

The gap between public and private sector pay that opened up during the recession has been closed as a result of Chancellor George Osborne’s restrictions, the Institute for Fiscal Studies has found.

Payslip

However, the think-tank added that public sector pensions remained far more generous and this differential must be taken into account in pay comparisons.

In the immediate aftermath of the recession, the real level of pay in the private sector fell much faster than that in the public sector, with the gap peaking at more than 9% for women in 2011 and nearly 2% for men.

However, restrictions on public sector pay – a two-year freeze and then increases limited at 1% – had closed the gap. 

In 2013/14, public sector pay was on average about 8% higher for women than in the private sector, while there was no significant difference between the pay rates for men.

This is now at broadly the same level as it was pre-crisis relative to the private sector.

The IFS said that while the pay gap had closed, the Office for Budget Responsibility had implied that public sector pay would continue to grow less quickly than private sector pay over the next parliament.

‘This has the potential to create problems in recruiting and retaining staff of appropriate quality,’ the IFS warned.

People with low wages and low levels of qualifications do better in the public sector, but higher earners and those with higher qualifications tend to earn more in the private sector.

There were also significant regional defences, with the public sector pay premium highest in Wales, Northern Ireland and south west England, and close to zero or negative in London and the south east.

However, the IFS found the most important difference between the two sectors was in pensions, where those in the public sector accrued pension rights equivalent to 19% of pay on average in 2011.

A large majority of public sector workers are members of defined benefit pension schemes, but only about 12% of their private sector counterparts now belonged to one.

‘This large difference in coverage of relatively generous schemes is one reason why – averaged across all employees – incorporating the value of employer provided pensions significantly increases the estimate of the public-private pay differential,’ the IFS said.

‘When considering appropriate levels of public pay, it is important to consider the value of public pensions, in particular because over the last 15 years, pensions have been the primary driver of changes in the gap in remuneration between the public and private sector.’

IFS economist Jonathan Cribb, who conducted the research on which the findings are based, said: ‘There is substantial variation in the estimated differential between public and private sector pay for different types of workers and across different parts of the country.

‘This might suggest differentiating pay awards going forward. But the uncomfortable truth is that it is lower paid workers, women and those in poorer regions who do best in the public sector relative to the private sector.

‘The biggest difference between public and private sectors remains the value of employer contributions to public service pensions. Pay and pensions need to be considered together.’

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