UK government policy on public sector wages is nonsense

The UK government is facing a ‘winter of discontent’ in public services. In response, he insists he cannot afford higher wages and seeks to limit civil servants’ right to strike. It can work politically. But this does not make economic sense. Public sector salaries should be set at the levels necessary to attract and motivate the required staff. A resurgence of inflation does not change this logic.

Since the Conservatives came to power in May 2010, the overall real average wage (including bonuses) had increased by 5.5% in the private sector in September 2022, but fell by 5.9% in the public sector. Surprisingly, between January 2021 and September 2022, the average real wage in the private sector fell by 1.5%, but in the public sector, the wage fell by 7.7%. In fact, all of the decline in real public sector wages since 2010 has occurred in the past two years.

Such a large reduction in real public sector wages could not have happened without high inflation. But would we have wanted to reduce real wages in the absence of a rise in the price level? The answer is yes. The United Kingdom suffered a sharp deterioration in its “terms of trade”. Thus, the prices of its imports have risen sharply in relation to those of its exports. The UK is poorer than it would have been had the rises in energy prices, above all, not occurred. Part of this real income adjustment should be based on wages. Thus, some decline in real incomes is neither surprising nor inappropriate. Inflation simply made implementation possible.

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Yet even if some fall in real incomes in the economy makes sense, why should the fall in the public sector be so much greater than that in the private sector?

One could argue that controlling public sector wages is an effective way to prevent a wage-price spiral, that the government can no longer afford to pay public sector workers, or that inflation is an opportunity to reduce wages. excessive levels of public sector pay, especially when taking into account benefits, including generous pensions.

None of these arguments have merit.

On the first, Ben Zaranko of the Institute for Fiscal Studies, notes that “it is difficult to see how an increase in public sector wages could directly contribute to a wage-price spiral”, given the absence of prices in the public sector. Nor, he notes, can we say that public sector wages are at the head of inflation, since they are far behind. Above all, wage policy will not bring inflation down. This requires macroeconomic measures.

Line graph of UK real average earnings, in pounds sterling per week in constant 2015 values ​​showing that public sector wages have collapsed over the past two years

Second, the government’s decision not to raise wages in line with private sector wages is not because it cannot afford to do so. Taxes could be raised if the will was there. It is in fact a political decision to make public sector employees pay for unfunded government promises.

On the last argument, as the IFS noted in its October 2022 Green Budget, the average salary in the public sector is higher than in the private sector, but this advantage disappears when taking into account the worker characteristics – age, experience, qualifications, etc. Account. Public sector workers are then paid slightly less than those in the private sector. In fact, the ratio is now worse for public sector workers than at any time in the past 30 years. Admittedly, if you also consider employers’ pension contributions, public sector employees were paid on average 6% more than those in the private sector in 2021. But this slight advantage is expected to erode further in 2022.

Line chart of annual % change in UK real average earnings showing that recent declines in real public sector earnings are extreme

Above all, the test for whether remuneration is appropriate is whether it maintains services at the levels promised by the government. It is clear that there are significant shortages of key personnel, as well as widespread concerns about their quality. Thus, data from NHS England “shows a vacancy rate of 11.9% as of September 30, 2022 within the group of registered nurses (47,496 vacancies). This is an increase from the same period the previous year, when the vacancy rate was 10.5% (39,931 vacancies). Still, data shows dramatic gaps in the recruitment of teachers in subjects such as physics or design and technology.

As Chris Cook argues, the government should consider whether public sector compensation is at a level that will support the delivery of needed services. The social fabric of the country is fraying. In particular, poor health affects labor supply. If the government is not prepared to raise the necessary taxes, it should be honest about it. Allowing inflation to reduce real wages, while expecting services to be maintained, let alone improved, is patently dishonest.

The government should keep salaries in line with those of the private sector, especially where it has significant recruitment and retention problems. If that means he has to reopen spending plans that no longer make sense in today’s sterling, so be it. What is happening now may be reasonable, but it is madness.

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