Spring Budget Should Include a Public Sector Wage Rise

Main points

• The latest ONS estimates suggest the annual growth rate of average weekly earnings, including bonuses, was 5.7 per cent in the three months to January, while pay growth excluding bonuses was 6.5 per cent. NIESR’s wage tracker estimates that regular (excluding bonuses) and total average weekly earnings will have grown at 6.3 and 4.9 per cent, respectively, in the year to the first quarter of 2023.
• The disparity in public- and private-sector wage growth has fallen for a fourth consecutive month, though it remains high, with private sector regular pay growing by 7.0 per cent while regular pay in the public sector grew by 4.8 per cent.
• Real total pay in the United Kingdom fell by 3.2 per cent on the year in the three months to January, remaining among the largest falls in growth since comparable records began. Public-sector workers experienced an average fall of 4.0 per cent.
• Public-sector wage increases ought to feature in tomorrow’s Budget as the public-private wage gap remains wide. While such increases may have some adverse macroeconomic consequences in the short-run (increasing the government’s wage bill and contributing to the persistence of domestic inflationary pressures), these effects need to be considered against the potential output losses across both sectors that would be incurred if industrial action were to be prolonged or if there were to be a significant outflow of skilled public-sector workers.
• NIESR research suggests that public-sector wages gradually adjust to the equilibrium determined by private-sector wages in the long run. On the other hand, in the long run, private sector wages are determined independently by factors like productivity or demographic characteristics – so concerns about a private-public wage spiral are unlikely to materialise.

“Today’s figures suggest that economy-wide average weekly earnings, excluding bonuses, grew by 6.5 per cent in the three months to January, 0.2 percentage points lower than last month. This fall in AWE growth - after a year of sustained rises - can be attributed to a larger-than-expected decrease in private-sector regular AWE growth, which fell from 7.3 per cent in the fourth quarter of 2022 to 7.0 per cent in the three months to January. At the same time, we observed a larger-than-expected rise in public-sector regular AWE growth, which rose from 4.2 per cent in Q4 to 4.8 per cent in the three months to January. Ahead of the Chancellor’s Spring Budget tomorrow, it is important to note that public-sector wages need to ‘catch-up’ with private-sector wages as the gap between the two remains wide. If this gap cannot be closed, the government risks incurring further losses from prolonged industrial action or an outflow of skilled public sector workers.”

 Paula Bejarano Carbo,
Associate Economist, NIESR

See our previous tracker to follow the analysis.