Press Release

Strong case for easing pay restraint on high skill public sector workers

Date: 20 September 2017
Publisher: The IFS

Although average weekly public sector pay has fallen by 4% in real terms since 2009–10, the fact that private sector pay has done similarly badly since 2008 means that the gap between public and private sector pay is just getting back to its pre-recession level. This means that further public pay restraint would take public pay to historically low levels relative to that in the private sector. This would in turn make it harder to recruit, retain and motivate high quality staff, with knock-on effects on the quality of schools, hospitals and other public services.

On average the issue is clearer for higher paid and better educated public sector workers than it is for lower paid workers. Relative to the private sector these higher paid groups have fared least well. The least skilled and lowest paid public sector workers still – again on average – have wages which are a little higher relative to those in the private sector than they were in 2007–08. Of course, there are examples of less well paid occupations that are struggling with recruitment and staff quality problems, such as within prisons, where higher pay could mitigate some of the current problems.

But increasing pay is expensive. The government spends £181 billion per year employing 5.1 million public sector workers. So even small percentage increases in pay would imply large increases in the cost of employing these workers. Compared to increasing pay scales by 1% per year, increasing pay in line with either inflation or private sector earnings for the next two years would cost around £6 billion per year by 2019–20.

These are the main findings from new research published today by the Institute for Fiscal Studies, with funding from the Economic and Social Research Council.

Key findings:

- After controlling for differences in workers’ characteristics such as education and experience, there is little difference between the pay of public and private sector workers. Continued public sector pay restraint would likely push pay in public sector relative to the private sector to historically low levels.

- Compared to private sector pay, public sector pay is lowest for highly educated workers. For the almost two-thirds of public sector workers who have completed higher education, pay is slightly lower compared to the private sector than it was prior to the recession. This group has also seen particularly large increases in the contributions they have to make to their workplace pensions. Public sector pay is also lowest compared to private sector pay in London and the South East.

- It is therefore among better paid and higher educated public sector workers – such as teachers or senior civil servants – and those working in London and the South East, that we might expect greater recruitment and retention issues and a more pressing need for pay increases.

- Public sector workers continue to receive considerably more valuable workplace pensions than the private sector on average. In 2016, 83% of public sector workers received an employer contribution to their pension worth 10% or more of their salary, compared to only 11% of private sector workers.

- Relaxing the pay cap and increasing public sector pay in line with inflation or private sector pay would cost public sector employers around £3 billion a year in 2018–19, rising to around £6 billion a year in 2019–20. Because of the relative sizes of the workforces, the cost of increasing pay for police or HM Forces is much smaller than increasing pay in the NHS, schools or the civil service.          

Jonathan Cribb, a Senior Research Economist at the IFS, and author of the report, said,

“The government is considering lifting the public sector pay cap for at least some workers. If it decides to maintain the 1% cap, we should expect increasing difficulties in recruiting, retaining and motivating high quality public sector staff, reducing the quality and quantity of public services. But increasing pay for these workers implies substantial extra costs to public sector employers. The Treasury could provide extra funds for this by raising taxes, cutting other spending or borrowing more. Asking the NHS, for example, to fund higher pay increases from within existing budgets would be very challenging.”

Notes to editors:

  1. This work has been produced with funding provided by the Economic and Social Research Council for support through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant reference ES/M010147/1).