James Heywood is the Head of Welfare and Opportunity at the Centre for Policy Studies.
We may be eight months into this pandemic, but we have barely begun to see its full impact on the labour market. The unemployment rate, which has already risen from 3.9 to 4.8 per cent compared to a year ago, is expected by the Bank of England to rise as high as 7.5 per cent, and other forecasts put it much higher still. Wages fell over the summer and wage growth is expected to remain subdued for some time.
The figures from the Office for National Statistics (ONS) show the worst month for wages was June, with a decline across the economy as a whole of 1.6 per cent compared to 12 months before. Within those June figures, however, there is a huge disparity between the public and private sectors; earnings in the private sector were down nearly 3 per cent, while the public sector actually saw growth of 4.5 per cent.
In fact, pay growth in the public sector is now higher than it has been for over a decade. Private sector wages have improved a little since June, but even that bounce back in the late summer as restrictions were lifted was far outpaced by earnings growth in the public sector. A recent survey of employers found that more than half of private sector employers expect to freeze pay over the next 12 months, compared to average expected rises in basic pay of two per cent by public sector employers.
The setting of public sector wage rates has to take into account what is going on in the rest of the labour market. With the labour market tightening in recent years and wages picking up, the Government has found it necessary to ease up on public pay policy to keep pace with the private sector and prevent problems with recruitment and retention. It is right that pay policy should reflect what is happening elsewhere in the labour market. Now that the private sector is suffering a sudden shock, it is reasonable, fair and prudent to adjust pay policy in the public sector.
Public sector workers, on average, receive a pay premium compared to their private sector counterparts, even once factors such as types of role and levels of qualification have been accounted for. This gap is wider still once the generosity of pension provision in the public sector is factored in. In the public sector 86 per cent of workers receive implicit employer pension contributions worth 10 per cent of earnings or more, compared to just 10 per cent of private sector workers. Employees in many areas of the public sector also benefit from incremental pay rises in addition to the uprating of basic pay levels, meaning their pay increases automatically unless they are already at the top of their pay band.
The ONS have modelled the differential in earnings taking all these factors into account, including pensions. While public sector pay restraint after 2010 has narrowed the gap somewhat, the ONS estimate that the public sector earnings premium in 2019 was still seven per cent. This gap has only narrowed by three percentage points since 2011, and has been rising since 2017. Now that private sector earnings are stagnating, it may quickly widen again significantly unless the Government alters pay policy.
The Centre for Policy Studies published a paper yesterday which looks at comparisons of pay in the public and private sectors and explores the Chancellor’s options for pay restraint. Limiting average pay uprating to one per cent each year for the next three years could deliver a reduction in annual expenditure of nearly £6 billion and ensure private sector workers are not being left behind unfairly. Not only is it unfair on workers facing pay cuts and the threat of redundancy to continue widening the gap between public and private sector remuneration, it also distorts the labour market.
We should be clear: this is not a simple argument about public sector ‘fat cats’ or top civil servants with gold-plated pensions, and we should not pretend otherwise. Most of the public sector workers we are talking about, including no doubt some of the people reading this, do not earn huge salaries, and some work in high pressure or dangerous jobs.
The Government will need to think carefully about how any change to pay policy is presented, and the approach should be nuanced and flexible. Pay restraint is not about a political assault on the public sector – not only would that be unfair, especially after the year our NHS has experienced, it would also be terrible politics. It is simply about making a reasoned case that pay policy should reflect developments in the wider labour market and should be fair to all workers and all taxpayers across the UK.