NIESR Press Release: Public-private sector wage gaps intensify skill shortages

Published: 03rd March 2020

Pay in the public sector should not deviate much from private sector pay trends if public sector employers want to retain staff with the required skills, according to a new report by the National Institute of Economic and Social Research.

The report, commissioned by the Office of Manpower Economics, shows that the cap on public sector wage growth since 2010 had led to a pay gap of around 3½ per cent when compared with the private sector by the end of 2018. Although public sector wage restraint has been relaxed recently, a pick-up in private sector earnings growth at a time of historically high employment has left the wage gap largely unchanged.

Given the duration and magnitude of the current public-private sector wage gap there is a risk that skill shortages in certain areas of the public sector, such as the National Health Service, intensify as workers with transferable skills, like senior health administrators, seek employment in higher paid private sector jobs, the Report said.

It said past experience suggested this gap would reverse at some point in the near future. It added that with a public sector pay bill of around £180 billion, closing a public-private sector wage gap of around 3½ per cent would cost around £6 billion per annum, or a quarter of a percentage point of GDP:

Public sector wage setters therefore face a difficult trade-off between skill shortages as a result of pay differentials and the affordability of pay rises,” said Arno Hantzsche, co-author of the report and a Principal Economist at NIESR. “Fully eliminating existing pay differentials is therefore likely to involve difficult compromises.”

The report, co-authored by fellow NIESR economists Professor Peter Dolton of the University of Sussex and Amit Kara, shows that the wages of public sector employees and of those working in the private sectors tend to closely follow each other over the long run.

In the past, public sector wages set by Government have over time adjusted to wages in the private sector, often over a few years in order to maintain this relationship. There can be significant wage spillovers from the public sector to the private sector in the short run. As public sector pay increases, pay in the private sector tends to follow within a few months.

Wage spillovers tend to be somewhat more pronounced for private sector employers that are predominantly domestically-facing and characterised by low worker bargaining power, such as hospitality, wholesale and retail trade. Pay rises in the public sectors are also associated with significant employment inflows from other sector in the economy.

The authors said that although only a fifth of the UK workforce is employed in the public sector, interactions between public and private sector wages could have important macroeconomic implications. They said that wage negotiators as well as policymakers at the Bank of England and HM Treasury should pay close attention to pay dynamics in the public sector and wage spillovers into the private sector.



Notes for editors:

The report, titled “The dynamics of public and private sector wages, pay settlements and employment“ has been commissioned by the Office of Manpower Economics.

For a full copy of the report or to arrange interviews, please contact the NIESR Press Office: press [at]  / 020 7654 1954 / 07930 544 631 

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