Wednesday, 24 March 2010

Public sector pay versus public sector jobs

We can be certain that the Chancellor’s budget speech on 24th March will talk much about the public sector budget deficit but say little specific about what should be done to remedy it. In the debate about what to do about the sorry state of the UK’s public finances, the issue of public sector pay almost always crops up. While the Government is in favour of tight public sector pay restraint others talk about a pay freeze or even a pay reduction. Typically public sector workers will object to this saying why should they have a pay freeze when the bankers have got away with millions of pounds of bonuses after having been bailed out by the Government. However, this is a somewhat pointless argument since the total number of bankers who benefited from such bonuses is relatively small and in reality a report by the Institute of Fiscal Studies suggested that pay in the private sector actually fell in early 2009 by some 2-3% as a consequence of economic recession. One might ask whether public sector pay should reflect the financial and economic condition of the public sector in the same way as seems to have happened in the private sector.

Another issue is the link between public sector pay and public sector jobs. Whichever party wins the general election it is inevitable that, sooner or later, there will be substantial reductions in public expenditure and in public sector jobs. In this situation, it seems almost inevitable that there will be a trade off between pay increases for public sector workers and loss of jobs in the public sector. While the precise nature of this linkage is unclear, a high level analysis of the latest data on public sector pay and employment suggests some interesting results. If we assume that three quarters of the costs of any public sector pay increases would be funded through job losses and all of the savings from a public sector pay reduction would be used to protect existing jobs then my rough calculations suggest the following:-

• Compared to the level of job losses under a pay freeze, a 2% across the board public sector pay increase could result in the loss of an additional 83,000 public sector jobs (42,000 jobs lost for a 1% pay increase) compared to the level of job losses under a pay freeze.
• Compared to the level of job losses under a pay freeze, a 2% across the board reduction in public sector pay levels could result in the saving of 110,000 public sector jobs (55,000 jobs for a 1% pay reduction).

Clearly, these are crude calculations and also involve some broad based assumptions. Nevertheless, the magnitude of the results deserves some reflection.

Having a pay freeze or pay reduction could have a major impact on public sector employment levels at a time of high unemployment and a lack of alternative jobs. However, many will argue that having such a pay reduction or pay freeze will mean they will have a reduction in their personal standard of living. This is indeed true but that is what economic recession is about. A reduction in GDP of a country inevitably means that there will be a reduction in living standards and the only issue is how that reduction is to be shared out among different parts of society. In these circumstances both public and private sector employees will have to share the consequences.

However there could also be wider economic benefits from having a pay freeze/pay reduction policy. Public servants who lose their jobs are certain to make drastic reductions in their personal expenditure which would have a detrimental effect on their local economy. On the other hand, public servants who received a pay increase would be more than likely to save a large part of their increase thus providing no economic stimulus.

However, it is likely that public sector trade unions would fiercely resist such proposals since part of the raison d’ĂȘtre of trade unions is to boost members earnings. Given the close links between the present Government and the Trade Unions (and the history of the 1978/79 Winter of Discontent) this could explain why the Government seems luke warm about the idea of a public sector pay freeze.

Will the Chancellor mention the idea of a public sector pay freeze in his speech? Not a chance – too many public sector workers are core Labour supporters. However, the individual public sector employee faced with a choice between a tiny pay increase and keeping their job may well choose the latter course of action.

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