Public sector pay and pensions
Antoine Bozio and Richard Disney
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Reducing the public sector pay bill
General
Government
remuneration
bill, £168 bn
in 2009
Pay
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Number of
workers
5.5 million
in 2009
Cost per
head
£28,500 in
2009
Hours
Bonuses
Pension
Reducing the public sector pay bill
General
Government
remuneration
bill, £168 bn
in 2009
Number of
workers
5.5 million
in 2009
Cost per
head
£28,500 in
2009
Freeze
recruit
ment
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Redundancies
Early
retirement
Growth in the general government pay bill
Cost per head (real terms)
6%
Headcounts
Total (real terms)
4%
2%
0%
-2%
-4%
Sources: ONS, Blue Book 2009; OBR fiscal forecasts, Nov 2010; authors’ computation.
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2014-15
2012-13
2010-11
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-6%
1980
Percentage change from previous year
8%
Growth in the general government pay bill
Cost per head (real terms)
6%
Headcounts
Total (real terms)
4%
2%
0%
-2%
-4%
Sources: ONS, Blue Book 2009; OBR fiscal forecasts, Nov 2010; authors’ computation.
© Institute for Fiscal Studies
2014-15
2012-13
2010-11
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-6%
1980
Percentage change from previous year
8%
Growth in the general government pay bill
Cost per head (real terms)
6%
Headcounts
Total (real terms)
4%
2%
0%
-2%
-4%
Sources: ONS, Blue Book 2009; OBR fiscal forecasts, Nov 2010; authors’ computation.
© Institute for Fiscal Studies
2014-15
2012-13
2010-11
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-6%
1980
Percentage change from previous year
8%
Growth in the general government pay bill
Cost per head (real terms)
6%
Headcounts
Total (real terms)
4%
2%
0%
-2%
-4%
Sources: ONS, Blue Book 2009; OBR fiscal forecasts, Nov 2010; authors’ computation.
© Institute for Fiscal Studies
2014-15
2012-13
2010-11
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-6%
1980
Percentage change from previous year
8%
Impact of public sector pay freeze
• Fall in public sector wages relative to private sector wages
– 2-year pay freeze: 6.6 ppt
– 3-year pay freeze: 9.1 ppt
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Estimating public sector wage differential in the
UK, 2009 and 2010
Mean difference
in wages
Men
Women
All
+21%
+28%
+25%
Source: Authors’ calculations using data from the Labour Force Survey, 2009–2010
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Estimating public sector wage differential in the
UK, 2009 and 2010
Men
Women
All
Mean difference
in wages
+21%
+28%
+25%
Controlling for
education, age
and qualification
+5%
+10%
+7.5%
Source: Authors’ calculations using data from the Labour Force Survey, 2009–2010
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Public-private wage differential controlling for
observed characteristics
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Source: Authors’ calculations using data from the Labour Force Survey, 1995–2010
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Women
Men
Public sector pay premium, in percentage
Estimating public sector wage premium by region
35%
30%
Raw differential (men)
Estimated differential (men)
25%
20%
15%
10%
5%
0%
Wales, South-West East of
North of
Scotland,
England and England
Northern
Midlands
Ireland
Source: Authors’ calculations using data from the Labour Force Survey, 2009–2010
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London
South-East
Pay policy
• At the macro level 2-year pay freeze seems reasonable
• But issues at the regional level
– No significant public pay premium in London and the South East
• Issues with partial pay freeze
– Pay-freeze only for workers earning more than £21,000
• Top-down approach of pay freeze is problematic
– Still high vacancy rates for some occupations
– Scrapping bonuses?
• Pay drift
– Pay freeze will save less than expected when recruitment is frozen
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Annual change in employment
Potential job losses in some departments
1.0%
-1.0%
-3.0%
-5.0%
-7.0%
-9.0%
2011–12
2012–13
2013–14
2014–15
Total
(OBR)
Health
Education Defence
Home
Office
Notes: We use the projection of the departmental RDEL from the Spending Review and assume the same pay bill
growth per head for each department as the OBR does for the general government sector as a whole. Departments
wishing to cut employment by less than these numbers suggest would need to cut other budgets by more than the
pay budget. Negative numbers indicate job losses.
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Justice
Annual change in employment
Freezing recruitment and using natural exit
0%
-2%
-4%
-6%
-8%
-10%
Transition rate to retirement and
private employment
Home Office
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Police
Justice Prison officers
Cutting non pay spending in the police?
Cutting capital expenditure?
• Not allowed
Cutting non-pay current
spending?
• Reducing petrol use?
Cutting non-pay earnings?
• Reduce over-time?
• Cut bonuses?
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Redundancies and early retirement
Redundancies?
You are fired!
• Non-voluntary redundancies
illegal for some groups
• Costly severance packages
Early retirement?
• Even more costly
• Long-term impact on
employment rate
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Public sector pensions
• Lord Hutton’s commission
– Interim report published in October 2010
• Public sector pensions are affordable in the long-term
– Forecast decline from 1.8% to 1.4% of national income
– Due to past reforms (change in indexation, change in normal pension
age for new entrants)
• But, what if early retirement is used to reduce public sector
workforce?
Generosity of public sector pensions
• Announced increase in
employee contributions
– Focus on those accruing
more generous pensions?
• Final salary scheme
provide unwelcome
incentives
Mean value of total pension
Percentage of current earnings
• Pensions are more
generous in public sector
30
2001
25
2005
20
15
10
5
0
All
Sources: R. Crawford, C.
Emmerson and G. Tetlow (2010)
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Public
sector
Private
sector
Conclusion
• 2-year freeze of public sector pay seems justified
– But, issue for London and the South East
• Reduction in public sector employment
– Feasible with recruitment freeze in areas with large turnover rate and
limited cut in spending
– Very difficult for the Home Office and Justice
• Public sector pensions are more generous
– Justifies increase in employee contributions
• Still a strong case for public sector reform
– More regional considerations
– Incentives in public sector pay and pensions
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