Want higher pay? Join a union (or move to London): The public-private pay gap explained

This post was written by Owen on November 22, 2012
Posted Under: Economy,Trade Unions

Hey, you know that rightwing hobby horse about public sector pay in the UK being too high because wages are generally higher than in the private sector? (Incidentally, if your response here is “but I thought rightwingers were meant to be against levelling down?” then you may have forgotten how the right argued that cutting public sector pensions was justified because private sector pensions were so much worse. Expediency much?) Well, a report (PDF) on the pay gap has just been published by the Office for National Statistics, and – surprise surprise – it turns out things aren’t as cut and dried as various conservative commentators would have you believe. I’ll confess I haven’t had time to read the full report, but there’s plenty of interesting stuff just in the summary.

One significant point is that it seems that one of the left’s standard go-to responses on this issue – that those posts which are still in the public sector tend to be skilled jobs (since lots of the poorly-paid unskilled workers such as cleaners have been outsourced) – doesn’t actually hold up. The ONS controlled for different types of occupation in their analysis, and still found that public sector pay was higher on average.

If you look at the numbers a bit more closely, though, the picture becomes quite a bit more complicated. First, one of the major factors that’s correlated with high wages isn’t being in the public sector – it’s working for a big employer. So, a job in a hospital or the Civil Service will probably pay better than working in a corner shop, but you’d also (statistically) benefit from working at the likes of Vodafone or GlaxoSmithKline – it’s just that a huge number of jobs in the private sector are with small employers, while that doesn’t apply in the public sector. If you don’t control for the size of the employer, the public-private pay gap is about 7.3%. If you do, that gap shrinks to around 2.2% – less than one third the size of the difference in the unadjusted model.

An average pay difference of 2.2% could still be argued to be significant. But it’s only an average. If you break things down regionally, the pay gap is actually the other way round in London (by a decidedly hefty 7.9%) and the South East. Sure, public sector pay is better than private elsewhere in the country, but public sector pay is generally decided at a national level, and it’s worth bearing in mind just how low average incomes tend to be in the rest of the country, especially compared to those for London and the Home Counties (those figures are admittedly a few years old, but they’re also pre-2008 financial crisis). Oh, and no, public sector pay isn’t holding back growth by stopping the private sector from hiring people in the regions where the gap is relatively high (as supporters of regional public sector pay argue) – if that were the case, unemployment would be very low. As it is, it’s over 6% in every region of the UK (and over 9% in the North East and North West). This is a labour demand problem, not a labour supply problem.

Finally, there’s my favourite bit (at the bottom of page 3 of the report, for those of you reading along at home):

The pay gap also varies at different points of the pay distribution. Using the model including organisation size, at the 5th percentile, public sector employees earned 11.2% more than private sector employees in 2011. At the 95th percentile, public sector workers earned 10.3% less than private sector workers. This indicates that the overall estimated pay gaps of 7.3% (excluding organisation size) and 2.2% (including organisation size) are heavily influenced by those at the lower end of the pay distribution.

…or, to put it more simply and less diplomatically, the lowest-paid workers in the public sector are paid a lot better than their counterparts in the private sector, while the exact opposite is true of the highest-paid. Which if anything you’d think would be a point in the public sector’s favour; “Public sector employers persist in paying slightly-above-subsistence wages” isn’t exactly the most damning of headline findings. Which is probably worth remembering next time the Taxpayers’ Alliance and the tabloids start moaning about public sector fat cats.

The reason for this difference, of course, might have quite a lot to do with a factor which the ONS mentions briefly but for some reason doesn’t explicitly include in its analysis: trade union membership. The report mentions that the pay premium from large employers might be partly because you’re more likely to be unionised in a big workplace, but doesn’t mention the vast difference in membership levels between the public and private sector. In 2008 59% of public sector workers were in unions, compared to only 16.1% of those in the private sector, and wages for unionised workers are massively higher than for those not in unions. (8% higher in the private sector, and a whopping 18% higher in the public sector, according to government estimates (PDF) – the public-private divide here might well be because unions have more clout in pay negotiations when their rates of union membership are higher).

So yes, public sector workers are slightly better paid on average. But it’s partly because big employers tend to pay better, partly because incomes are so low for the lowest-paid private sector workers and those outside of London and the South East, and definitely because if you’re in the public sector you’re a lot more likely to be in a union. Pretty simple really.

Update: True to form, the Telegraph has got a grossly misleading story on this which just leads with a simple unweighted average and fails to mention the regional variation, differences in the size of employer, or that the highest-paid in the private sector earn far more than those in the public sector. It’s almost like they have an agenda or something.

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