PUBLIC SECTOR
Think tank calls for end of national pay bargaining in public sector
National wage bargaining in the public sector needs to be phased out and replaced with “fundamentally more efficient” local wage negotiations, says a new report from think tank Policy Exchange.
The report concludes that national pay setting has resulted in wasteful overpayment in some areas and underpayment and staff shortages in others. Figures gathered by Policy Exchange suggest that public sector workers now enjoy better pay than private sector workers, as well as better pensions, shorter hours, and earlier retirement. While the “public sector wage premium” is small in the South East and London, it is higher in Scotland, Wales the North east and North west, where public sector workers enjoy a premium of as much as 20%.
Andrew Lilico, Policy Exchange’s chief economist and co-author of the report, said: “Most countries getting their debts under control are using a mix of wage freezes, cuts and also addressing pensions liabilities – which in almost all cases has been met with fierce trade union opposition. It’s likely the same will be the case here – though the reality is that phasing out national pay bargaining, and replacing it with local wage bargaining, would be fundamentally more efficient.”
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Freeze public sector paybill
The report recommends that the new coalition government should freeze the public sector paybill in cash terms until 2014/15. This would represent a real terms cut of 14.6%, saving £26 billion per year by the final year.
Neil O’Brien, Director of Policy Exchange, said: “The previous government’s projections already implied a real terms cut in pay. To get things back under control, we should freeze the public sector pay bill in cash terms for the next four years, taking the pay bill back to where it was in 2003 in real terms.”
Key findings from report
On an hourly basis, the “typical public sector worker” is now 30% better paid than the “typical worker in the private sector”.
But this pay advantage is not evenly distributed. It is higher in lower grades, with the bottom 10% of public sector workers now 25% better paid than their private sector equivalents.
Public sector employees also have “better pensions” - the difference is worth an extra 15% of their salary.
Over their lifetimes, people in the private sector work 23% more hours (equivalent to 9.2 years of a public sector employee’s working life) – where their public sector counterpart will either be on “sick leave, holiday, strike or in retirement”.
Public sector wage growth has been higher than private sector across the overwhelming majority of occupations covered by the study. In three-quarters of categories where there are "equivalents", public sector wages have grown faster. However, wage growth has been particularly high in some sectors, such as health.
A low paid worker in a lower income region, in a sector where the pay premium is higher will enjoy a “huge premium” over his or her peers in the private sector.
Wage drift is an important part of public sector pay growth, adding between 30% and 40% to the “headline” increase in a normal year.
Wage drift would accelerate if a freeze in the headline rate is announced, and “some other countries have announced promotion freezes to counteract this”.
A final word
“People used to say that public sector workers had great pensions to make up for their low salaries. That’s now out of date, as public sector workers have much better pay, as well as better pensions and conditions. People in the public sector are better paid and have pensions worth more - while enjoying shorter hours, more time off, and earlier retirement. There is scope to make savings without being unfair." - Andrew Lilico, chief economist, Policy Exchange.
Want to know more?
Title: Controlling Public Spending: Pay, staffing and conditions in the public sector, by Ed Holmes and Andrew Lilico, Policy Exchange, June 2010.
Availability: For a full copy of the report or further information, contact Amy Fisher on tel: 07799 624 594 or email: amy.fisher@policyexchange.org.uk.
Policy Exchange is an independent think tank “whose mission is to develop and promote new policy ideas which will foster a free society based on strong communities, personal freedom, limited government, national self-confidence and an enterprise culture.” To find out more visit www.policyexchange.org.uk.