04 November 2012

Pay Paradox

David Smith in the Economic Outlook column of the Sunday Times (£) asks:
Public sector pay has risen nearly twice as fast as in the private sector in this supposed time of cuts. How can that be?
Despite the freeze on public sector pay average pay has risen from £448 to £491 since April 2009, while the private sector average has gone from £446 to £469, a rise of 9.6% compared with 5.2%. How come? David Smith looks for the answer in flexibility and unionisation, but misses the obvious cause of this statistical puzzle.

The number of employees in the public sector has fallen by 648,000 (including the 198,000 college staff now counted as private sector). The private sector has added 1 million jobs.
The strong growth in private sector employment in the past three years has a lot to do with wage flexibility...the lack of pay flexibility in the public sector - and the large increase in the wage bill - has been the prime reason for the big public sector job losses.
Does he have the causality the wrong way round? The higher average pay could be a consequence of the lower number of employees. The cuts have fallen disproportionately on the low paid, rather than managers in the public sector. Every employee earning less than the average who leaves the public sector nudges the average upwards. Salary bands, which he mentions, also play a part as fewer new staff are recruited and so fewer are on the lower steps of the salary ladder. By contrast the private sector has been recruiting but recruiting more at the bottom end and so pushing down on the average.

It is a pity he didn't consider whether the statistics were comparing like with like between 2009 and today. This kind of story can turn into conventional wisdom and become lodged in the political discourse. It needs to be challenged from the start. Careless use of statistics can lead to poor policy.

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