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ONS finds substantial public sector pay premium

    The guys over at the ONS are on fire at the moment with the production of their new animated films to accompany bulletins. This week they’ve analysed differences between public and private sector pay, usefully controlling for a range of factors via regression analysis in order to determine whether there is an underlying public sector pay premium.

    They start by presenting the fact that “comparing mean gross hourly earnings excluding overtime, public sector workers earned on average 14.9% more than private sector workers in 2011,” before correctly explaining why average comparisons were largely meaningless. A vast array of information important to pay determination is lost in averaging: your age, skill, occupation type, whether you are full-time or part-time worker etc -  and there are important structural reasons to suspect that pay in the public sector would be different than the private.

    The video runs through this in detail, but to summarise:

    1) In the public sector, there is a higher percentage of people in ‘higher skilled’ jobs, and pay is usually positively correlated with skill level.

    2) The public sector has a higher percentage of older employees than the private sector, and as earnings tend to increase with age, we therefore might expect higher pay in the public sector.

    3) The pay distribution in the public sector tends to be more compressed than the private sector – that is, the private sector tends to have both more low paid employees and high paid employees.


    Regression analysis can be used to control for all these things. And doing so, the ONS concludes:

    “Using a regression model to account for gender, age, occupation, region that the job is located in, full time/part time, permanent/temporary, job tenure and including an adjustment to better reflect bonus payments, it has been estimated that the public sector earned 7.3% more per hour (excluding overtime) than the private sector in 2011.”

    So, there is a clear pay premium for being in the public sector. Importantly, however, this premium is different by region. In Northern Ireland, the premium is around 15%, but in the South East of England it is just 2%, and there is actually a private sector pay premium of 8% in London.

    The paper bizarrely attempts to explain away lots of the public sector pay premium by reasoning that big organisations tend to pay more than small organisations, and because most of the public sector is comprised of big organisations, the true pay differential is only 2.2%. This explanation isn’t very convincing, not least because it doesn’t explain the mechanism by which this is true. It hints at things like higher unionisation, for example. But if unionisation is the reason for higher wages, then why not just add unionisation as a variable? The idea that a highly unionised workforce is able to bargain for higher wages is hardly controversial….well, unless your boss is the taxpayer I suppose.

    There are of course problems with all analysis of this nature. It doesn’t include overtime, bonuses or pension provision, for example. But it is another piece of evidence which suggests public sector workers are well-compensated. This, and the huge regional disparities between public and private sector remuneration are surely key pieces of information in the continued debates about public sector pay freezes and localising public sector pay setting.

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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    Taylor Swift - About 2766 days ago

    Larger organisations are likely to pay more because workers in large organisations are likely to have higher responsibility levels. For instance, managers in larger organisations are likely to manage larger teams, and be responsible for larger budgets. Additionally, workers in larger organisations are likely to be more specialised, and therefore have a greater level of expertise.

    There is quite a lot of academic literature around this.

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