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The Public-Private Pay Differential updated (2015)

by | Jan 25, 2015 | General News

The Institute for Fiscal Studies (IFS) reports that the public-private pay differential is now broadly back to pre-crisis levels with pensions remaining a big difference between the sectors.

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.

Since 2010, public sector pay has been held back such that the gap that opened up during the crisis has been closed.

The level of pay in the public sector is now at broadly the same level as it was pre crisis, relative to the level in the private sector.

There are significant differences in the patterns of pay between public and private sector, but more important than any of these are the different levels of pension provision.

The large majority of public sector workers are members of defined benefit pension schemes. Only about 12% of private sector workers are currently members of such schemes. On average across public sector workers, this pension was worth about 19% of pay in 2011.

The report detailed the following broad findings:

  • While the public-private pay gap is now back at pre-crisis levels, forecasts from the Office for Budget Responsibility imply public sector pay will 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. At the same time, the spending plans set out in the Budget imply substantial further cuts in public sector employment.
  • There are significant differences in the composition of the public and private sector workforces. After accounting for differences in age, region and education, in 2013–14, the IFS finds that for women, public sector pay is on average about 8% higher than in the private sector. Overall, there is no significant difference between public and private sector pay for men.
  • The IFS also finds some evidence that the size of the public-private sector pay gap has implications for the ability of the public sector to attract and retain workers with particular qualities. Public sector workers with the highest pay premium over the private sector (low-educated men) also have significantly higher levels of early life skills (as measured by their numeracy and literacy at age 10). In other words, among those with low levels of education the public sector tends to attract those with higher innate abilities. While it might be the case that low-educated men need higher ability levels in public sector occupations than in the private sector, it is not clear why this would be the case for men but not for women.
  • Focusing on headline pay alone can lead to missing out an important part of remuneration: employer provided pensions. Without recent reforms, the IFS estimates the value of employer contributions to public sector pensions would have risen from almost 25% of salary in 1997 to almost 35% in 2011, due to factors such as increased life expectancy and the increasing gap between RPI and CPI measures of inflation. Reforms introduced by the Labour and the coalition governments which substantially reduced this, particularly the move to index current and future public service pensions to the CPI, meant average pension accrual in the public sector fell to 19% in 2011.
  • While most public sector workers are members of a defined benefit pension scheme, the proportion of private sector workers in such a scheme fell from 38% in 1997 to just 12% in 2012. 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.
  • 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.

 

Sources: http://www.ifs.org.uk (Press release: 2014/10/10)

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