Public-vs-Private

UK GROWTH PROSPECTS DAMAGED BY NATIONAL PAY BARGAINING

National pay bargaining is widening the north-south divide and harming the UK’s growth prospects. That is the central conclusion of research by Matthew Oakley of thinktank Policy Exchange, presented at the Royal Economic Society’s 2013 annual conference.

The study analyses data from the Annual Population Survey to argue that rebalancing the pay and pensions of public sector workers so that they are in line with that of equivalent workers in the private sector would:

  • Free up to £6.3 billion a year in public spending to invest in low growth areas.
  • Improve public services, since previous evidence shows that because local schools and hospitals struggle to recruit and retain the right staff in high-cost areas, this can lead to a drop in educational quality in schools and a rise in deaths in hospitals.

The study claims that the root cause of these problems is the system of national pay bargaining in the public sector, which means that public sector pay does not accurately reflect differences in living costs or local job markets. Because of this, large pay differences have developed between equivalent workers in the public and private sector. For example:

  • Public sector workers at the bottom of the income distribution are regularly paid over 15% more per hour than their equivalents in the private sector (South Yorkshire: 17%; Outer London: 22%; Wales: 17%)
  • Public sector workers at the top of the income distribution are regularly paid less than their private sector equivalents (East of England: 14%; Inner London: 30%; West Yorkshire: 7%).

By combining pay differences with an estimate of the differences in pension generosity, the study assesses the overall impact on public spending if public sector workers were paid the same as their equivalents in the private sector. Overall, it argues that removing both under- and over-payments for public sector employees would lead to a £6.3 billion saving in public spending. This varies across different areas:

  • In the East Midlands, public sector employees receive nearly £800 million more than their private sector equivalents.
  • In Wales, the overpayment stands at around £1.2 billion.
  • In the South East, the public sector receives £1.4 billion too little compared with their private sector equivalents.

Matthew Oakley, author of the report, concludes:

‘The current system of national pay bargaining is bad for the economy and bad for public services.

Paying public sector workers in line with equivalents in the private sector would free up £6.3 billion a year, which could be spent on boosting growth and employing more people in areas hard hit by the recession.’

More…

National pay bargaining is widening the north-south divide and harming UK growth prospects.

Mind the Gap, a paper from thinktank Policy Exchange, uses the Annual Population Survey[1] to provide evidence that the way in which we remunerate public sector employees leads to significant pay differentials between workers in the public and private sector. These differentials mean that:

  • Rebalancing the pay and pensions of public sector workers so that they are in line with that of equivalent workers in the private sector would free up £6.3 billion a year in public spending to invest in low growth areas.
  • It would also improve public services since previous evidence shows that because local schools and hospitals struggle to recruit and retain the right staff in high cost areas, this can lead to a drop in educational attainment in schools and a rise in deaths in hospitals.[2]

The root cause of these problems is the system of national pay bargaining in the public sector, which means that public sector pay does not reflect differences in living costs or local labour markets. Because of this, large pay differentials have developed between equivalent[3] workers in the public and private sector. For example:

  • Public sector workers at the bottom of the income distribution are regularly paid over 15% more per hour than equivalents in the private sector (South Yorkshire: 17%; Outer London: 22%; Wales: 17%)[4]
  • Public sector workers at the top of the income distribution are regularly paid less than their private sector equivalents (East of England: 14%; Inner London: 30%; West Yorkshire: 7%).

Once combined with an estimate of the differences in pension generosity[5], the scale of these differentials becomes clear. Doing so makes it possible to assess the overall impact on public spending if public sector workers were paid the same as their equivalents in the public sector. Overall, removing both under- and over-payments for public sector employees would lead to a £6.3 billion saving in public spending. This varies across different areas:

  • In the East Midlands, public sector employees receive nearly £800 million more than their private sector equivalents.
  • In Wales, the overpayment stands at around £1.2 billion.
  • In the South East, the public sector receives £1.4 billion too little compared to private sector equivalents.

ENDS


Contact:

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

[1] Office for National Statistics. Social Survey Division, Annual Population Survey, January 2010 -September 2011 [computer files]. Colchester, Essex: UK Data Archive [distributor], February 2012. SN: 6950, SN: 7004, SN: 6897, SN: 6801.
[2] Propper, C., and Van Reenen, J., (2010), ‘Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance’. Journal of Political Economy Vol. 118, No. 2 (April 2010), pp. 222-273; Propper C, Britton B, Does Wage Regulation Harm Kids? Evidence from English Schools, Centre for Market and Public Organisation, Bristol University 2012.
[3] After controlling for differences in age, qualification, gender, job tenure and hours worked.
[4] Figures quoted are for males. Female figures are similar.
[5] Disney, R., Emmerson, C., & Tetlow, G., (2009). ‘What is a public sector pension worth?’ The Economic Journal, 119 (November), F517–F535.

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