Moving towards more efficient public sector pay
Matt Oakley 10:57am
Data issued yesterday by the Incomes Data Services indicated that average pay
settlements over the first quarter of 2011 in the public sector were close to 0 per cent. However, pay settlements in the private sector were closer to 3 per cent. Does this mean that Policy
Exchange were wrong in a recent report to conclude that public sector workers are overpaid compared to their private sector counterparts?
The basic answer is no. We highlighted that on a range of measures, workers in the public sector were overpaid compared to their comparators in the private sector. Even on our most conservative measure, which accounted for compositional differences in terms of age, location, hours, gender and qualifications, this gap was around 9 per cent. This means that even if these average pay settlements continued at 0 per cent and 3 per cent for the public and private sectors respectively for the next two years, there would still be a significant pay premium to working in the public sector. And this is even before we consider the much higher value of pensions, longer holidays and better working hours and conditions in the public sector.
So what should we make of these figures? We feel that they should be seen as good news for both the public and private sectors. A tick up in pay settlements in the private sector can only provide positive news on productivity and business prospects. And a key way to protect jobs in the public sector is through pay restraint: lower spending on public sector employment can come through less people or lower pay. This means that a moderation in pay settlements in the public sector should provide vital breathing space for departmental budgets and hopefully less need for job losses.
Does this mean that the pay freeze is a success? In broad terms yes: it is fulfilling its goal of reducing pay increases in the public sector. But we argue that it is too blunt a tool to really start to tackle the wider problems in the public sector. In particular, it treats all of the public sector the same no matter where they live or what their income (apart from the lowest paid who will see an increase of £250).
The matter of differences across the income distribution is key: one of the criticisms of our earlier report was that we did not look closely enough at how the gap varied across the income distribution. To tackle this we have done more work (wonks should follow this link to get an idea of what we have done). We found that compared to our average premium of around 9 per cent(even after controlling for compositional differences), those around the bottom 10 per cent of the pay distribution contend with a public sector premium of around 17.5 per cent. For those around the top 25 per cent of the pay distribution, the premium was about 4.5 per cent. Even at the top of the pay distribution, the public sector pay penalty that used to exist has now vanished.
This hints at how ineffective the pay freeze might be in the longer term. Those groups with the very largest pay premium will continue to get pay increases, while those with lower pay premiums will face the freeze. The freeze will also do nothing to tackle the disparities in pay gaps created by national pay bargaining and a lack of performance related pay, which mean that those living in cheaper areas and those with lower productivity see larger premiums. This is bad news for the public sector, where productivity and pay will continue to diverge, and for the private sector, where firms looking to locate in areas needing regeneration struggle with over-inflated wage costs.
To tackle these things, the government should begin to move negotiation of wages to a more local level and properly reward more productive workers with performance related pay. This would allow wages to better reflect costs of living in local areas and drive productivity in the public sector and the wider economy as wage costs in cheaper areas are brought down.
Matt Oakley is head of economics and social policy at Policy Exchange



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Chris lancashire
June 3rd, 2011 11:39am Report this commentMr Oakley clearly knows a lot about policy and very little about management. A blanket pay freeze is the only way to halt continued inflation of public sector wages and salaries. Once an exception is made (for no doubt excellent reasons) the dam bursts and every group of workers will claim their own special reasons for being exempted from the blanket - and weak management (which appears widespread) will endorse the claim.
Fine tuning to reduce disparities must wait for another day; this blanket ban needs to stay for two years - minimum.
Philip East
June 3rd, 2011 11:59am Report this commentThis report completely discredits Policy Exchange, they used to be quite respectable, not so much now.
Pettros
June 3rd, 2011 12:05pm Report this commentThe public sector will get round this by hiring consultants and agency staff.
I work as agency staff at a local council and recently saw my hourly rate double whilst permanent staff pay is frozen/reducing. There is a moratorium on hiring permanent staff so any resourcing gap is not filled by improving efficiency but by hiring more agency staff.....this is good news for certain elements of the private sector (i.e. my agency), not so sure about limiting public spending though.
I admit to not knowing how much agency staff cost in comparison to permanent per annum. They may be considerabley cheaper.
Rhoda Klapp
June 3rd, 2011 12:15pm Report this commentI know little of how public sector pay works any more, but don't they typically get rises in April? Would the jan-mar rises not tend to be minimal every year? Let's get a better stat before we go too far down this road.
alexsandr
June 3rd, 2011 12:38pm Report this commenthas the fact that private sector workers face losing their jobs through their company going bustbeen factored in. Public undertakings dont go bust.
So senior managers in public sector jobs have a lot more job security than private sector.
Rhoda Klapp
June 3rd, 2011 12:38pm Report this commentAnd another thing. Don't you believe in the market up at Policy Exchange? The only criterion there is, in real life, is 'will you do the job for the money?' All else is flannel. If you can do better elsewhere, go on. If you can't, take the money and be glad. You'll get nowhere by comparing what people do, or how much they do it for. The market will take care of all that. You'll be going on about 'fairness' next.
Lonesome Dave
June 3rd, 2011 12:57pm Report this commentWell I'm sure that if our public sector friends are feeling so low in terms of morale, perceived reward and job satisfaction they can always leave their awful jobs and take a job in the private sector.
I do not anticipate a sudden surge....
Peter Hedges
June 3rd, 2011 12:59pm Report this commentI work in education and have recently been demoted following a staffing restructure designed to protect jobs. I can entirely understand why it is right that the bloated and inefficient sector is taking a hit. I feel as if I have paid my share of the "we're all in this together" ethos. If only they'd move on getting rid of the chaff as well as punishing the wheat!
Public sector pay will never be fair so long as national pay scales continue to exist. Quite why the unions feel it to be fair that a teacher in Newcastle should live in a much nicer house than his equivalent in Surrey, I'll never know. Quite why the idiot teacher who fails his students on a regular basis should be paid the same as a teacher who exceeds all expectations is beyond me. Still, that's the unions for you...
Every smack in the teeth for teachers pay and pensions suits me down to the ground. I am currently retraining and intend to escape from this disgrace of a sector within two years. Every time teaching becomes less attractive an option, my escape plan becomes more realistic. Bring on the axes and set me free!
Before you ask, I am a good teacher and could have had a very good career within the profession, had I not been worn down by the relentless decline in standards, the constant degradation of the profession and the inefficacy of those who call themselves my superiors. I was rapidly promoted and did my job well, for as long as it seemed productive to follow the party line. No more! I've a "can do" attitude and will soon be "doing" elsewhere. The jobsworths and bureaucratic obfuscators can carry on without me.
I'm not alone in my views but the unions and their shrill supporters shout louder still. Maggie should have crushed them back in the 80s. Will Cameron have the balls?
Hexhamgeezer
June 3rd, 2011 1:01pm Report this commentProductivity is the key issue from the lowest grade to highest executive - not wages. In general civil service and local authority productivity is appalling.
Large numbers of staff are incapable of carrying out the functions described in their job descriptions. Wage rises whether nationally or locally determined are irrelevant to the fundamental issue of ability (or capacity as it is sometimes euphemistically described). Performance related pay will not be applied or monitored properly just as policies like 'flexi-time' are used and abused.
A management culture which also benefits from high wages for weak productivity and overpromotion of mediocre staff is hardly likely to have the desire, or capacity, to implement effective reform. This Government is also not one with the appetite for the long hard slog which will be neccessary to radically overhaul the public sector.
To be fair to the CS it has been used for decades to soak up the unemployed and unemployable or to demonstrate the 'effectiveness' of social policy in other fields.
echo34
June 3rd, 2011 2:21pm Report this commentHands up who would like to step into the breach at their local job centre plus for £15000 a year?
Meet local people, tingle with excitement when they threaten you for witholding their benefits.
Come on its easy! No different to the private sector.
REPay
June 3rd, 2011 2:49pm Report this commentThe other factor consider is absentism which is 600% higher in the public sector. I suspect this is the case because it may not matter whether you turn up or not.
Verity
June 3rd, 2011 4:06pm Report this comment1. Cut the public sector by 25%.
2. Cut the public sector by another 25%.
3. Dump the quangoes, without notice, including the 17 new ones the weak, needy Cameron has introduced. (But until you dump them, Cameron Chameleon, why not set up a quango for setting rules for behaviour for the PM when hosting foreign heads of government? Like your cring-making shirt and tie barbecue with the Obmama creepies; and your extemporary ping pong match with Ocreepy had the dogs in my town in Mexico crouching and covering their eyes with their paws.
Go away.
daniel maris
June 3rd, 2011 6:53pm Report this commentThis article is a melange of the divisive, the tendentious and the untrue.
I'm not sure I can even be bothered to look at the methodology since clearly there is an agenda there.
I will make a few observations though:
1. If local government workers are overpaid, why are there shortages of available staff in vital areas such as social workers.
2. What comparisons are being used? What is the comparator for a public sector social worker? Non public sector social work is far less stressful because it can be selective.
3. What is counting as public sector in this survey? Does it include or exclude the huge numbers of jobs where private contractors are the employers?
4. There are regional pay differences and these are achieved through different grading practices in effect.
5. A 0% pay freeze is a 5% pay cut when there is 5 % inflation. Owing to other cuts, increased charges and tax changes, disposal income is likely going down already about 10%-15% for most middle income families this year. THere will be another year or two of this. Many middle income people will probably be something like 30-40% poorer off while bankers and other lowlife continue to pay themselves huge, unregulated bonuses.
5. All the bankers who drove us to this near catastrophe in our economy received performance related pay. Is that an endorsement of performance related pay? Presumably Matt Oakley thinks PRP was having the desired effect.
6. Matt Oakley should get a proper job doing something useful: like social work with children, collecting waste, lighting the streets, checking on food safety, educating our children, providing libraries and so on...
Verity - We don't want to reside in some Godforsaken hellhole like Mexico thank you very much. Why don't you clean up Mexican society? It's got plenty of problems starting with a murder rate about 1000 times greater than ours and appallingly corrupt local government.
Hugh Janus
June 3rd, 2011 10:05pm Report this commentExcellent (if somewhat depressing) post by Peter Hedges.
I think I can answer the question at the end, where he asks whether Cameron has balls. On present performance the answer to that is a clear and unequivocal "NO"!! We have watched him roll over on the ridiculous increases demanded by the EU, and he shows no sign - apart from a few, tough-sounding press releases - of doing anything like fighting our corner when the next crazy increase comes along.
I'm sorry to say that I supported him at the last GE, but he has turned out to be a wishy-washy and completely spineless PM who, like his awful predecessor, wants to be all things to all men (sorry, persons). A huge disappointment in my view. Unless he wakes up, stops spinning and gets his act together I won't be making the same mistake twice.
wasthatthatguy
June 4th, 2011 11:13am Report this commentRe "To tackle these things, the government should begin to move negotiation of wages to a more local level and properly reward more productive workers with performance related pay."
Local power = Too much cronyism. Too much local corruption! Too many magistrates and judges who are local friends of local public sector employees, eg Local Authority social workers, legal services, planning, finance, etc Depts. In my opinion the proper central government should set the rates of pay of all public sector employees and how much money each LA has to spend and should ban any local person from being a local magistrate or a local judge! All magistrates and judges spending Monday to Friday sitting in courts at least 100 miles away from their homes. Travel to a different court each week. Stay in hotels Monday to Thursday nights. Bye bye friends of friends of Local Authority public sector employees. Bye bye local everything else of a public sector (corrupt) nature.
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