Last reviewed 13 November 2019
In this article, Tricia Palmer, HR consultant and leadership and personal coach, discusses recent trends in public sector pay and comments on the implications of pay freezes and the gender pay gap. She debates the comparisons between private and public sector pay and explores the Government’s ability to fund public sector pay awards.
Public sector pay has always been a source of contention with many commentators expressing views from overpaid “bureaucrats” and “fat cat” pay-offs to “underpaid hard-working public servants”. There are often comparisons with the private sector, either saying that public sector workers are over protected when the economy is struggling, or that we are not paying our hard-working public servants enough. Nevertheless, comparison with the private sector is often tricky due to the nature of respective workforces. Employees in the public sector are on average more qualified than those in the private sector, and many of the lower paid activities such as cleaning and security have been outsourced. Views on pay and the value of work are often judgemental and therefore it is difficult to have an impartial view of the true position. I have been an HR professional in the public sector for over 40 years now and have been party to pay discussions for most of that time. It is interesting to observe the trends from the 1980s and early 1990s where pay awards were in double figures to the more recent years of pay freezes. The bottom line for most people in the public sector is that they believe in what they do and truly want to make a difference, but they also believe they should be paid for the true value of their work.
UNISON 2019/20 Pay Claim
To begin to understand the implications of recent trends in public sector pay it is worth taking a look at the recent National Joint Council pay claim from the public sector union, UNISON. The UNISON pay claim is for £10 an hour at the minimum point and 10% on all other points. This may seem a huge claim, and against a back drop of austerity it would appear wholly unreasonable. However, as its claim states, in previous years where there have been low awards these are usually followed by a period of “catch-up”. No-one can deny that given the levels of inflation and the fact there have been several years of pay caps and pay freezes that public sector pay has fallen behind. UNISON claims that around a 26% pay increase is needed to catch up. It argues there are many benefits to raising the level of pay in the public sector, from ensuring that recruitment and retention of skilled employees is maintained to addressing the burden of low pay. Analysis by IPPR (Institute for Public Policy Research), which was sponsored by the GMB union, found that 43% of the cost of raising public sector pay would be returned to The Treasury through taxation and lower social security costs.
It is also claimed that pay in local government is the lowest in the public sector. Average local government pay, as reported by the LGA (Local Government Association), was 19% below that of the public sector as a whole, with variances such as 41.6% lower for solicitors to 5.8% lower for Policy Officers.
The unions also comment on the reduction in allowances, such as unsocial hours, car allowances and overtime and this is something I have personally seen over the years. This linked with the changes in pension schemes, capping of exit payments and reduced job security is making working in local government a less attractive option for many and having an impact on recruitment and retention. Therefore, the pay issue is not simply one of economics and equity, but impacts on the ability of councils to run effective and efficient services. During 2017/18, 78% of councils reported difficulties in recruitment and retention and an average vacancy rate of 8%, which is significantly higher than the public sector and the economy as a whole, and it is estimated that 30% of jobs have been lost in local government since 2010.
These variances in pay and vacancy rates can in part be explained by the funding arrangements for local government, which has seen significant central government funding reductions, estimated at 50% reductions since 2010. I make these comments not to be party political, but to explain context within which local government pay sits, and to understand the tensions between market forces, equality and economic pressures.
Private Sector v Public Sector Pay
Lord Lamont, Conservative Former Chancellor, sparked a debate in 2017 when he argued for continuing public sector pay restraint as he claimed that public sector pay was on average £5000 a year more than that in the private sector; however it is very difficult to make absolute comparisons across the sectors for a range of reasons. The Office for National Statistics published a report in November 2018 (Public and Private sector Pay in the UK, 2017), which concluded the following.
After controlling for various individual and job characteristics, on average there is a positive earnings (including pensions) differential in favour of the public sector.
The positive differential in favour of the public sector is mainly concentrated on low-skilled workers and on workers in smaller organisations when the organisation size is considered.
High-skilled employees in the public sector tend to have lower earnings than their counterparts employed in the knowledge-intensive services and primary sectors in the private sector.
Relatively low-paid employees have the largest earnings advantage from employment in the public sector; for high-paid employees, the gap still exists in favour of the public sector for those working in smaller organisations; however, employment in the large private sector organisations has a positive impact on the earnings of those employees.
The report issues a note of caution around these findings, as the composition of private and public sector workforces is different. They consist of different industries and consequently the occupations vary and the employees have different education, experience and skills levels. In general, there is a higher proportion of degree-level or higher employees in the public sector. The private sector has some of the lowest paid workers, but it also has some of the highest paid, while in the public sector salaries are more evenly spread. It is therefore difficult to make direct comparisons between the two sectors using a simple mean (or median) earnings, without considering a range of factors associated with a person’s earnings, such as job type, employee characteristics and job location.
It is also difficult to make straight comparisons as the analysis concentrates on gross pay and pensions. It does not take into account the total reward package, which can include other monetary benefits such as bonuses, and non-monetary benefits such as company cars, health insurance and workplace quality of life. Pensions are a significant benefit (and cost) in the public sector and therefore add to the reported levels of pay.
A report by the Office for National Statistics in 2016 showed that private sector pay outstripped public sector pay by 1% an hour once you take into account age, experience and occupation. If the organisation’s size is taken into account as a factor, the gap increases to 5.5% in favour of private sector pay. Ignoring those factors and looking at average pay on its own, public sector workers earned 13% more per hour than those in the private sector in 2016. The analysis shows, using direct comparisons, that public employees had out-earned their private sector counterparts by 4% per hour in 2010, before the introduction of the public sector pay freeze in 2011. From 2013, most public sector pay rises were then limited to 1%, until the two year pay award of 2018–2020, which was bottom loaded but averaged out at 2%. This trend shows that earnings in the public sector are starting to fall behind private sector pay awards, which are now averaging out at 2.5–3% per annum.
One of the reasons that public sector pay has become such a hot topic is because in the past it had been relatively well protected in the face of changing economic circumstances. The recent squeeze on public sector workers is in stark contrast to the years of the global financial crisis. Their pay was relatively protected after the crash while earnings in the private sector fell. Average weekly earnings for the public sector were £479 in 2011, up 9% from £439 in 2008. In the private sector, average weekly earnings were up just 3% over the same period to £448 in 2011, and that was before taking into account inflation. However, due to government-set pay restraint, public sector workers have been unable to catch up after pay freezes and low increases.
The Resolution Foundation think tank noted in 2016 that real growth was up by 1.6% for the private sector, but had fallen by 0.3% for the public sector. It commented that: “For public sector employers, that squeeze is causing serious problems when it comes to recruiting and retaining workers, as shown by the news that more nurses and midwives are now leaving the profession than joining it. That has knock-on costs for the public sector when hospitals and other places of work are forced to rely on agency staff to fill the gaps.”
Looking into what is pushing people to leave the public sector, the TUC argues that many workers simply cannot make ends meet any more. It points to polling of 21,000 health service members last year by the public sector union Unison, which found that one in 10 had pawned possessions to ease their cashflow problems, and a similar proportion had used payday loans. However, it is worth noting that going by simple sector-wide averages, those employed by the state are still earning more than those in the private sector. Public sector workers earn about £25,000 a year on average and for the private sector it is £22,500 (Institute for Fiscal Studies think tank, 2016).
Based on current plans and on forecasts from the Office for Budget Responsibility, the Government’s independent economic forecaster, the IFS, says private sector pay will rise six percentage points faster than public sector pay between 2016–17 and 2020–21. That would reduce the average difference between public and private sector pay to a level not seen in at least the last 20 years and to one that is “well below the level seen in the early 2000s”.
The difficulty here is one of economics and the Government will be wary of making any significant policy changes given that the public sector pay bill is about £180bn.
John Hawksworth, the chief economist of accountancy group PwC, said: “…So if you were to raise the public sector pay rise to 3% for the next three years, it would cost you an extra £10bn by 2020 compared with current plans”. He adds “… I guess there’s a clear case for doing it in terms of recruitment and retention and fairness … but on the other hand it is a significant amount and has to be weighed in the overall fiscal balance against other priorities.”
And therein lies the conundrum of public sector pay, recruitment and retention, and equality and fairness versus affordability.
The Gender Pay Gap in Local Government
To understand how the gender pay gap plays out in local government and the impact of any pay freezes, it is worth revisiting some of the information around the gender pay gap requirements. Readers will be aware that the Government introduced a mandatory requirement for all organisations with 250 or more employees to submit certain data on their gender pay gap with a commitment to make the data available publicly from April 2018. These organisations were required to publish the following data:
the difference between the mean hourly rate of pay of male full-pay relevant employees and that of female full-pay relevant employees
the difference between the median hourly rate of pay of male full-pay relevant employees and that of female full-pay relevant employees
the difference between the mean bonus pay paid to male relevant employees and that paid to female relevant employees
the difference between the median bonus pay paid to male relevant employees and that paid to female relevant employees
the proportions of male and female relevant employees who were paid bonus pay
the proportions of male and female full-pay relevant employees in the lower, lower middle, upper middle and upper quarter.
The Local Government Association reviewed a total of 319 local authorities (with the remainder falling below the 250 employee threshold) and came to the following conclusions:
the mean gender pay gap in local government is 6.8% and the median gap is 5%
across the whole economy the mean gap is 12% and the median is 9.7%, so local government compares favourably
78% of all organisations paid men more than women, compared with 66% of local authorities
34% of all organisations had a majority of women in the highest quartile pay band, compared with 62% of local authorities
the civil service median gender pay gap was 12.7% in 2017 compared with 5.0% in local authorities
the median gender pay gap in 486 schools/multi-academy trusts was 27.2%, compared with 5.0% in local authorities
the median gender pay gap in 171 housing associations was 8.2%, compared with 5.0% in local authorities
on average, women were paid 6.8% less than men; the values varied between –14.1% (women were paid more than men) and 31.7%
women were, on average, paid less than men in 264 authorities; in 55 the reverse was true
the values varied between –50.3% (women were paid more than men) and 34.0%
women were, on average, paid less than men in 211 authorities; in 25 the pay gap was zero, and in 83 women were paid more than men
women comprised the majority in each band, but were least common in the highest pay quartile (53.9%).
It is worth noting here, that there are noticeable differences in the median pay gap when considering location and type of authority. London boroughs showed the lowest pay gap of 1.2% with counties topping at 13.1%. This influences some of the regional differences with London again at 1.2% and the north-east showing a gender pay gap of 8.5%. Unitaries are showing at 7.4% and the south-west at 6.7%. While it is accepted that the London region and London boroughs are synonymous in that location and type of authority is the same, this does not ring true for the other regions. This evidences that there are factors other than authority type and region at play in determining pay. One could hazard a guess that this could be something to do with the make up of the decision-makers in the different authorities, although it could also be influenced by the types of services that have been insourced/outsourced.
However, the figures for local government are generally better than the public sector as a whole, which reported that 9 out of 10 public sector bodies pay men more than women. “These figures show us what we expected — we still see an under-representation of women at the top and over-representation at the bottom,” said Sam Smethers, chief executive of the Fawcett Society. “The public sector matters for women because it is women who are overwhelmingly dependent on public services, so getting women into decision-making positions is key.”
The NHS showed some significant differences with the Queen Victoria Hospital NHS foundation trust in East Grinstead having the worst median pay gap, with women paid 59% of what men were paid. The explanation is that there is a high preponderance of consultants, who are more likely to be male. The average gap at the Department of Transport was reported as 23%, making it the only central government department with a median gender pay gap above the national average. This means that for every £1 earned by a man at the department, on average a woman earns 77p. Women are also under-represented in the top quartile at the department, which is 67% male. The department said that the gap was explained by a higher number of men in specialist transport roles and that it is making efforts to close the gap. The issue in most of the cases of significant differences are due to make up of the workforce, where women generally occupy the lower paid roles, despite strides being made in getting women into the more senior management roles.
The Office for Nuclear Regulation reported the worst median hourly pay gap among government agencies at 55%, followed by the Civil Aviation Authority, which reported a 42% gender pay gap. The figures also revealed every university in the Russell Group in England and Wales pays women less than men based on median hourly pay. Durham University had the largest gender pay gap in the group at 29.3%. Six others reported median pay gaps that are worse than the national average.
It is clear that the public sector still has a long way to go to address the pay gap and the picture is not any better in the private sector. A Guardian analysis of the 2018 figures showed that the average gap is of over 10% with some notable companies showing large gaps:
Coast, women’s clothing retailer, at 40%
Carnival, FTSE100 company, at 38%
Marie Stopes at 37%
Sunday Times publisher News UK at 22%
Unicredit at 52%
Google at 16%
Facebook at 10% in what they pay male and female employees.
It is interesting to note that after a second year of reporting in 2019, the gender pay gap has barely moved. An article in the Financial Times earlier this year commented on the figures submitted by 10,428 employers. It noted that the median pay gap this year was 11.9%, compared to 11.8% last year, and there are still no sectors in the UK economy where women are paid the same as men.
The data shows that the pay gap still persists in all 20 sectors of the economy, with none paying women more than men on average. Of the employers that reported both last year and this year, 48% (4595) narrowed their gender pay gap while 44% (4230) widened it by an average of 3%. There were also 8% (773) of organisations that claimed to register no change at all in their pay gap. Of those, 476 claimed to have a median pay gap of 0%.
The article said “Several employers saw large swings in their pay gaps between 2018 and 2019. One of the largest improvements was registered by Monzo bank, which reduced the gap from 48% to 14%. Monzo said its staff had more than trebled over the reporting period, from 90 to more than 300, with some women joining the bank in senior positions, and several being promoted. Companies where the pay gap increased pointed to changing staff levels, and the promotion of more men than women in the upper middle and top quartile of their workforce. Ashfords, a law firm whose pay gap went up from 15.8% to 39.4%, said the figures were driven by a large number of junior women joining the company, which offset the effect of women being promoted to senior positions. The data shows that women in the public sector fared worse than those in private companies, with the public sector pay gap increasing slightly from 16% in 2018 to 16.7% this year. The pay gap in the private sector held steady at 11%.”
Pay Freezes and the Impact on Women
As we know, in the vast majority of public services, women make up the majority of the workforce (65% overall, but 77% in health and 78% in local government, for example). It is therefore worth considering the real impact of pay freezes on women. The public sector union, UNISON, stated that pay freezes and benefit changes have had a greater impact on women: “The Government claims to be fair and family-friendly, but the spending cuts which have already taken place and those which are planned are hitting women hardest… almost a quarter of working women are in public sector jobs. This means that job cuts and pay freezes in the public sector are affecting more women than men, with hundreds of thousands more jobs set to go in future. And all this is happening at a time when 1.1 million women are out of work.”
Anna Bird, acting chief executive of the Fawcett Society, stated: “Women have not faced a greater threat to their financial security and rights in living memory. Decades of steady, albeit slow, progress on equality for women is being dismantled, as cuts to women’s jobs and the benefits and services they rely on turn back time on women’s equality.”
Benefits make up, on average, one fifth of women’s income, compared to one tenth of men’s. Child benefit has been frozen since 2010 and the changes in working tax credits have particularly hit lone parents, of which 90% are women. It is alleged that around three-quarters of the welfare savings already implemented have affected women.
So, at every level it can be seen that pay freezes and welfare reforms are having a disproportionate effect on women.
Public Sector Funding and Pay Awards
The affordability of pay awards is a major factor in public sector funding. Local government in particular has faced severe budget reductions over the years and increasing demands for services, and in the next financial year the majority are only setting aside a maximum of 2% funding for pay awards (against a union claim of 10%). The provisional local government settlement is likely to be delayed due to the election, although ministers have said that a provisional settlement will be available before Christmas, so budget allocations for 2020/21 are by no means certain. Therefore, it is argued by many commentators that the only way to fund increased pay in the public sector is to lose jobs.
However, Richard Murphy in his article, We can afford public sector pay rises and don’t need to increase tax to pay for them (2017) begs to differ. Murphy, Professor of Practice in International Political Economy at City University, cites three reasons why we do not need to increase tax to fund pay awards.
Tax is paid on these awards — as we pay on average 39% tax overall so any public sector award would cost 61%, as the 39% tax is returned to the Government.
It is likely that the majority of people spend their additional income, and they will pay tax on that spending.
Increased income and spending boosts economic confidence, which encourages investment and growth, which in turn returns tax.
It is accepted that there may be a time lag in having to fund the awards and the return to the Government through taxes, so how does the Government fund the debt without raising taxes? Murphy has an interesting, and in my view logical solution to this, and I show significant excerpts of his reasoning below as it is the clearest explanation of the national debt I have seen
All Government spending is paid for out of newly created money… When the Government spends, it does in effect borrow the cash from the Bank of England. This is a straightforward thing to do. What it means is that the Bank of England extends it the credit. And what that means is that the Bank of England simply marks in its ledger (using a computer keyboard) that the Government now owes it more money. It does not go and see if it has the cash in question, it does not need to…
And there is nothing unusual about this. If you extend an overdraft, exactly the same thing happens. The bank you borrow from does not first of all check it has someone else’s money to lend to you; it does instead simply create the money you borrow by marking up your account. That is how banking works…. Of course, money creation can’t go on forever though, and it doesn’t. In the case of your bank borrowing the money that the bank created for you is cancelled and disappears forever when you repay the loan. It’s as simple as that. Your promise to pay made the money….
In the case of the Government, the money that the Bank of England creates for it so that it can spend it is cancelled in a different way; tax paid does that. So, tax does not pay for Government spending in that case. What it does is cancel the money created to pay for that spending.
This is important for two reasons. First, it means extra tax is not needed to pay for the public sector pay rise because it cannot pay for it; it’s always going to be paid for by the Government borrowing more. But second, because the new money that pays for the pay rise is now available to be taxed — precisely because the pay rise did itself make it available for that purpose. The pay rise does itself create the new money needed to pay for the tax payment to cancel the money that was created to make the additional payment to public servants in the first place. And yes that’s a circular argument because that is the way the world is.
… First, note that Government borrowing is normal and has to happen. It is the only way it creates our money. If money is a promise to pay (and it is, because it cannot be anything else) then unless the Government spends ahead of taxing and so owes the economy, there is no money in circulation. Cancelling the national debt would, then, cancel all Government created money — the pound in your pocket. That is a pretty uncomfortable prospect. So we need Government debt. And a growing economy — whether growing through real economic activity increasing or because of the inflation we need — needs more money. But there is slightly more to it than that. Growing debt is a function of that growing economy. What it simply says is that the Government is injecting more money into the economy and has simply not yet reclaimed it. That’s all the national debt is.
This view is backed by the Institute for Public Policy who claim that any pay award would be returned to the Government almost immediately. The think tank’s analysis, titled Uncapped potential: the fiscal and economic impact of lifting the public sector pay cap, said that increasing public sector pay to match the Consumer Price Index (CPI) would cost the Government £5.8bn and boost the gross domestic product (GDP) by £800m in 2019/20. A “catch-up” scenario, bringing public sector pay in line with private sector earnings, was expected to cost £12.7bn. However, the report said that much of these costs would be returned through higher taxation on workers and decreased spending on benefits.
So — can we afford a public sector pay rise in line with inflation and an amount to “catch-up”? My contention is we cannot afford not to.
Pay Claim 2019/20, UNISON
Calls for public sector pay, 2017, article, Institute of Public Policy Research (IPPR)
Report on Gender Pay Gap, 2019, Local Government Association
Public and Private Sector Pay in the UK, 2017, Office for National Statistics
We can afford public sector pay rises and don’t need to increase tax to pay for them, 2017, Richard Murphy