Bloated public sector wages?: Mythbusters 101 sequel

Sli Eile: In a previous post, Mythbusters 101: Wages in the Irish Public Sector, I examined the available evidence in regard to public sector wages and how they compare to corresponding employee wages in the private sector. The ‘political’ context is clear:

Some well-paid economists and media commentators are concerned about average wages being considerably higher in the public sector than in the private sector – even when other factors are allowed for (gender, education, experience, union membership etc); and

Something needs to be done by Government – they argue – to close the gap by reducing public sector wages (further) and boost competitiveness in the traded sector as Ireland seeks to ‘price itself’ back into world markets (scrambling to compete, also, against the negative impact of falling world trade and demand as well as Euro appreciation against Sterling and other currencies).

So, there you have it. But, their focus is narrow and their implied or explicit solution ‘rich’ especially considering where people are coming from. Lets dig a little deeper.

What sorts of factors has driven salaries in the Irish public sector in recent decades? Lets be honest. Along with a rising economic tide, rising house prices abetted and fuelled by various types of tax cuts made a huge contribution to wage increases in the public and private sectors. Although the information is dated (and not explicitly sourced in official statistics), the following table taken from IMPACT/CPSU illustrates the general point:

COMPARISON OF HOUSE PRICES, SALARY AND GDP

1974 TO 2006

Source: Submission by the CPSU and IMPACT to the Benchmarking Body for the Clerical Officer Grade in the Civil Service, Health Service and Local Authority Sector, July 2006. note that the figures shown for GDP, above, differ from those subsequently published by the CSO.

Another way of looking at this from the point of view of low-paid public sector workers is to say that, over time, we see two parallel developments:

Senior manager premia growing within the public (and private) sectors; and

Strong ‘negative premia’ for some private sector workers in vulnerable sectors (hotels, catering, retail etc) where the international race to the bottom applies – this has the effect of dragging down average employee wages in the private sector compared to their better paid and more strongly unionised peers in the public sector. (see for details on the CSO website for average weekly earnings in 2007 in accommodation and catering at €446 per week compared to €856 in the ‘Real estate, renting of Machinery’ sector).

What the Kelly et al (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland) and Boyle et al (Public-Private Wage Differentials in Ireland) papers do not address is the much wider issue of:

How do all incomes compare between those working in the public sector and those outside the public sector? In other words, what picture emerges if we were able to account for all types of income including those of the self-employed, investors etc.?

The dispersion of wages in the public sector is different (more compressed) to that in the private sector.

So, ask a question that lends itself to an answer which available data can provide and is part of the conventional response to the current economic crisis:

Cut public sector wages to align more with private

Cut all wages at the same time

Increase profitability

Increase competitiveness

Provide for some trickle-down once public finances, world markets etc recover

The plebs will buy into this since ‘there is no alternative’.

To sum up – yes wages are higher in the public sector than in the private because if you compare salaried employees in the sectors the impact of trade union membership and stable employment contracts has given an advantage to workers in the public service. However, when account is taken of profits and other sources of income the picture is probably very different. Two questions arise here:

Is total household income averaged out for those households where none of its members are working in the public service higher than in other households? (does anyone reading this know of research in Ireland on this issue?)

How have the major aggregates for income fared over the last decade?

The second question is easier to approach. CSO publish national accounts data which show aggregate data for various types of non-wage income (Table 12 in National Income and Expenditure Tables, 1995-2007). Undistributed profits of companies grew from 18 to 20% of total output (Net National Product at Factor Cost) between 2000 and 2006 (it feel to 13% in 2001). Over the same period, ‘remuneration of employees’ increased its share from 63 to 64%. Lets say all employees, on average, were just about keeping pace with other sectors in the economy (CSO data also reveal that ‘sole independent traders’ did not fare as well as wage-employees with average annual increases of 7.7% per annum compared to 10.4% for the latter – Table 12.1). However, we still don’t know how individuals or households compare when all types of income are taken into account. It may be objected that two other factors arise when comparing those in the public and private sectors:

Most (but certainly not all) public sector jobs are secure compared to jobs in the non-public sector;

The present economic value of future pension income for public sector workers compares favourably with that of most private sector employees. The Review Body on Higher Remuneration in the Public Sector in its 2007 discounted average private sector salaries by 15 per cent to account for average differences in regard to pension provision between the public and private sectors.

The first objection is valid and it is hard to put a ‘value’ on this. When economic times are tough the economic value of a public sector job certainly rises, dramatically, compared to most jobs in the private sector. This can give rise to considerable and understandable resentment among private sector workers and their families. The second objection lends itself to a more complex discussion about pensions. The fact is that about one half of private sector employees are not in any occupational pension scheme themselves. However, the proportions among private sector workers participating in some scheme differ dramatically between high and low-income workers. Colm McCarthy has cited data to show that the bottom income decile of persons in employment have a 10% take-up of pension schemes compared to 90% for top income decile (a handy statistic to remember!) – reference 2004, persons aged 20-69 sourced by McCarthy from Pension Board data.

You can take the view that ‘everyone must share the pain’ and everyone must take a cut especially public service workers. However, this line of reasoning leaves out the Elephant in the parlour which is other types of income that are less visible, frequently outside the scope of taxable income and reckoning and absent from the focus of media attention. The other problem with the ‘everyone must share the pain’ line is that those who promote this are in the top income deciles drawing, not infrequently, multiple incomes from academic salaries (€100K p.a. plus) consultancy and investment income (although the latter has probably taken a hammering of late).

Sharing the pain when you are on the breadline is quite another reality.

Next Mythbusters will focus on social welfare rates – the likely target of adverse media and political attention as Budget 2010 approaches. Are rates, here, high by international standards (extending beyond Derry and Newry, that is)?

Posted in: Politics • Labour market

Tagged with: public sector • Wages