Public sector pay policy: costs and consequences Jonathan Cribb Presentation at Office for Manpower Economics research conference Thursday 21st September 2017 For more details, see accompanying briefing note: Cribb, J. (2017) “Public sector pay: still time for restraint?” https://www.ifs.org.uk/uploads/publications/bns/BN216.pdf Slide Title 1 Presentation template 2

Introduction Government seems to be considering relaxing public sector pay restraint, for at least some workers Examining the difference between public and private sector pay can help guide government in setting public sector pay What trade offs does the government face when setting public sector pay? How much would higher public sector pay increase the cost of employing workers for public sector employers? Public sector pay policy: costs and consequences

Mean weekly pay in the public and private sectors Source: Author’s calculations using ONS average weekly earnings series KAC4 and KAD8 (public sector excluding financial institutions). Inflation adjusted for using Consumer Prices Index. Public sector pay policy: costs and consequences

Estimating the differential between public and private sector pay Some differences between public and private sector weekly pay reflect differences in hours and in workers’ characteristics Estimate the difference between usual hourly pay in each sector, controlling for workers’ characteristics, using Labour Force Survey Control in X for: Age (in quadratic) Education (7 categories based on qualifications) Experience (quadratic; separate for low/mid/high education) Dummy variables for region; dummy variables for quarter of year Sex, interacted with all the variables described above Public sector pay policy: costs and consequences

Differential between public and private sector pay Note: A positive difference means that public sector pay is higher than private sector on average. Source: Author’s calculations using the Labour Force Survey. Projections based on author’s calculations using OBR Economic and Fiscal Outlook March 2017 and the Consumer Price Index. Public sector pay policy: costs and consequences

Estimated pay differential: split by education group Note: Error bars show the 95% confidence intervals. “High educated” are those who have completed higher education. “Mid educated” are those who have with A levels or equivalents. Low educated are those who have completed at most GCSEs or equivalents, or have no qualifications. Source: Author’s calculations using the Labour Force Survey. Public sector pay policy: costs and consequences

Estimated public pay differential: quantile regression results Public sector pay policy: costs and consequences Note: Dotted lines are 95% confidence intervals. Source: Author’s calculations using the Labour Force Survey.

Estimated public pay differential: quantile regression results Public sector pay policy: costs and consequences Note: Dotted lines are 95% confidence intervals. Source: Author’s calculations using the Labour Force Survey.

Estimated public pay differential: quantile regression results Public sector pay policy: costs and consequences Note: Dotted lines are 95% confidence intervals. Source: Author’s calculations using the Labour Force Survey.

Estimated pay differential: differences by region Public sector pay policy: costs and consequences Note: Years are pooled together to ensure sample size. Years are financial years. Source: Author’s calculations using the Labour Force Survey.

Estimated pay differential: differences by region Public sector pay policy: costs and consequences Note: Years are pooled together to ensure sample size. Years are financial years. Source: Author’s calculations using the Labour Force Survey.

Estimated pay differential: differences by region Public sector pay policy: costs and consequences Note: Years are pooled together to ensure sample size. Years are financial years. Source: Author’s calculations using the Labour Force Survey.

Estimated pay differential: differences by region Note: Error bars show the 95% confidence intervals. Years are pooled together to ensure sample size. Years are financial years. Source: Author’s calculations using the Labour Force Survey. Public sector pay policy: costs and consequences

Public sector workers receive much larger pension contributions on average Source: Author’s calculations using the ONS Pensions Tables from the Annual Survey of Hours and Earnings, 2007 and 2016 Public sector pay policy: costs and consequences

Pensions in the public and private sectors Public sector pension reforms reduce value of public sector pensions CPI indexation of pensions; introduction of career average schemes and gradual retirement of those with “unreformed” pensions Increase in employee contributions since 2010-11, particularly for higher earners NHS employee on £25,000: 6.5% cont. in 2010-11, 7.1% in 2016-17 NHS employee on £50,000: 7.5% cont. in 2010-11, 12.5% in 2016-17 Private sector pensions boosted by automatic enrolment Automatic enrolment (since 2012) boosted pension participation in private sector Mostly with very low employer contributions, though some with significantly more (see Cribb and Emmerson 2016) Public sector pay policy: costs and consequences

Public sector earnings growth per year: Cost to public sector employers of increasing pay compared to pay scales rising by 1% p.a. Annual cost to public sector employers (£ billion) Public sector earnings growth per year: CPI inflation Private sector earnings growth 1.7% (award for prison service in Sept 2017) Cost per year in 2018–19 3.5 2.9 1.3 Approximate split: NHS Education Public administration Police (including civilians) HM Forces Other Cost per year in 2019–20 Notes: Cost of increase in pay is split across parts of the public sector in line with the proportion of government employees working in each part. Source: Author’s calculations using ONS series NMXS (total compensation of general government employees), ONS Public sector employment statistics, OBR Economic and Fiscal Outlook March 2017 and ONS Consumer Price Index. Public sector pay policy: costs and consequences

Public sector earnings growth per year: Cost to public sector employers of increasing pay compared to pay scales rising by 1% p.a. Annual cost to public sector employers (£ billion) Public sector earnings growth per year: CPI inflation Private sector earnings growth 1.7% (award for prison service in Sept 2017) Cost per year in 2018–19 3.5 2.9 1.3 Approximate split: NHS 1.1 0.9 0.4 Education 1.0 Public administration 0.7 0.6 0.3 Police (including civilians) 0.2 0.1 HM Forces 0.0 Other Cost per year in 2019–20 Notes: Cost of increase in pay is split across parts of the public sector in line with the proportion of government employees working in each part. Source: Author’s calculations using ONS series NMXS (total compensation of general government employees), ONS Public sector employment statistics, OBR Economic and Fiscal Outlook March 2017 and ONS Consumer Price Index. Public sector pay policy: costs and consequences

Public sector earnings growth per year: Cost to public sector employers of increasing pay compared to pay scales rising by 1% p.a. Annual cost to public sector employers (£ billion) Public sector earnings growth per year: CPI inflation Private sector earnings growth 1.7% (award for prison service in Sept 2017) Cost per year in 2018–19 3.5 2.9 1.3 Approximate split: NHS 1.1 0.9 0.4 Education 1.0 Public administration 0.7 0.6 0.3 Police (including civilians) 0.2 0.1 HM Forces 0.0 Other Cost per year in 2019–20 5.8 6.4 2.6 Notes: Cost of increase in pay is split across parts of the public sector in line with the proportion of government employees working in each part. Source: Author’s calculations using ONS series NMXS (total compensation of general government employees), ONS Public sector employment statistics, OBR Economic and Fiscal Outlook March 2017 and ONS Consumer Price Index. Public sector pay policy: costs and consequences

Conclusions Combined with evidence of recruitment, retention and motivation problems, differential between public and private sector pay implies there is a good case for easing pay restraint in public sector Case more clear for the better paid, higher educated (or in London/ South East) where pay differentials are below pre-crisis levels However: Workplace pensions remain far more valuable in public sector than private sector We have not examined non-pay elements of jobs (except pensions). Deterioration in working conditions make some lower paid jobs less attractive (e.g. in prisons)? Increasing pay is expensive. What are the effects on public service quality if Treasury does not provide extra funds to pay for higher pay? Public sector pay policy: costs and consequences