Slí Eile: In a recent paper to the Statistical and Social Inquiry Society of Ireland, Statisticians at the CSO have presented further analysis of differences in earnings for employees in the public and private sectors (note that nobody is attempting to compare all types of income including shares, rent etc for all types of households). The paper is entitled "Investigating the Public-Private Wage Gap in Ireland using data from the National Employment Survey 2007" and may be downloaded here
The CSO paper may be viewed as a dampener on the claims by various commentators, including some economists at the ESRI, that the gap in pay 'comparing like with like' is over 20% using 2006 data. The data sources are the same (in CSO and ESRI papers) but the modelling and the exclusion of various sub-groups makes a big difference to the results - really big as the latest CSO paper shows. Readers will recall that the ESRI confidently announced a premium as if there were one way only of estimating and modelling pay in each sector. The ESRI paper entitled "Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland" (Kelly et al. 2009) can be downloaded here.
They confidently concluded that:
The results indicate that the public sector pay premium increased dramatically from 9.7 to 21.6 per cent between 2003 and 2006. Furthermore, we found that by 2006 senior public service workers earned almost 8 per cent more than their private sector counterparts, while those in lower-level grades earned between 22 and 31 per cent more.
The CSO paper does not overturn the key ESRI claims. It confirms that:
* There is, indeed, a positive premium to public sector workers in all these various studies and regression specifications; and
* The premium in favour of workers in the public sector is higher at the lower end of the pay scale
Where the CSO paper differs is that:
* Different model specifications give different (and significantly different) results
* If enterprise size is included along with a focus on 25-59 yr olds permanent employee and particular occupational groups excluded you can get a very significantly reduced premium.
CSO is not convinced about the propensity score matching methodology beloved of the ESRI researchers. They state that:
'Due to the lack of systematic guidelines on the selection of a comparison group, this study does not use propensity score matching to estimate the public-private pay gap. We have found that the estimated premium using propensity score matching is highly sensitive to the criteria used to discard sub-samples without a common support.'
The bottom line in the CSO paper is as follows: 'we advise caution in attempting to estimate one definitive “answer” for the average premium'
Perhaps the most telling finding of the entire paper was the following (I have added bold):
Furthermore, in the Irish context, there are a number of occupations within the public sector that really have no comparable occupation in the private sector, and vice versa (most noticeably Gardaí, Prison Officers, and members of the Defence Forces). To highlight the consequences of ignoring this lack of comparability in some occupation sectors, this study also estimated the public-private wage gap on a sub-sample excluding personal and protective services employees.
The impact of excluding this sector was to dramatically reduce the average public-private wage gap, especially for males (from 7.2% to 2.7% using OLS). The size of this reduction was even larger when the analysis was conducted using weighted data.
Table 3 is the key table. It shows a premium of 2.7% for males when personal and protective service employees are excluded. This is hardly anywhere near John O'Hagan's presumption of a 20% cut (surely linked to the ESRI factoid). For women the premium was just over 11%. In other words to compare employees in public and private sectors a number of significant complicating factors cut across a crude comparison:
* Enterprise size (disputed by ESRI)
* Gender differences within each sector (with greater inequality in the private sector)
* Particular differences applying to groups such as Garda, prison officers.
Aside from all this various types of income are not factored in. Essentially, rental income, income on shares, dividends and other property are not included as are 'irregular bonses' - a major difference in some private sector occupations and sectors. Also worthy of note is the fact that 'irregular bonsuses' or 'benefits in kind' are not included.
In the CSO published supplementary analysis of data from the 2007 National Employment Survey (download here) P21
Earnings are 'defined as gross earnings (before the deduction of tax, PRSI, superannuation) payable by organisations to its employees. It includes normal wages, salaries and overtime, taxable allowances, regular bonuses and commissions, holiday and sick pay. It does not include irregular bonuses and commissions, employer’s PRSI, redundancy payments and back pay.'
CSO state that 'A regular bonus is defined as a bonus received every pay period although the amount may vary from period to period.'
A useful addition to the analysis is the work by John Geary of UCD and Anthony Murphy of University of Oxford. In a comment in a long thread on their research on irisheconomy.ie here
we get a glimpse of an alternative view. The main article appeared in the current issue of Industrial Relations News. (Cutting public sector pay: an alternative view - …THE JOB DESCRIPTORS USED BY CSO ARE NOT RICH AND REFINED ENOUGH…). They state that:
The risk of imposing wage cuts across the board in the public sector is that it will result in industrial strife with huge costs both in terms of the country’s economic fortunes and social cohesion. There is no single, best measure of the public sector wage premium. The estimated premium varies over time and across occupations. It also varies across the income distribution and at the upper end of the distribution, is often a discount. It is also difficult to find good “like-for-like” comparison groups for some public sector occupations. Thus, the basis on which public sector pay might be cut is not as sound as some people claim on the basis of headline figures.
It can be concluded that any generalised claims based on crude comparisons and 'one methodology-fits-all' are suspect especially when you know that a particular agenda is at stake.
13 comments:
Not only is the enterprise size premium suspect in and of itself (because public and private sector enterprise become large for totally different reasons) but in this case the underpinning data is also completely worthless.
For example all 34084 primary teachers were counted as a single enterprise, while all 17168 secondary teachers were similarly determined to be part of the same individual enterprise, despite being directly employed by hundreds of different schools under a variety of management/ownership models.
It would be akin to saying the thousands of private sector electricians spread over hundreds of companies and contractors are all part of the same enterprise.
So whatever ever about disputes as to the best methodology, if you base your argument on worthless data, you've lost the argument before you've begun. Garbage in, garbage out.
"For example all 34084 primary teachers were counted as a single enterprise, while all 17168 secondary teachers were similarly determined to be part of the same individual enterprise, despite being directly employed by hundreds of different schools under a variety of management/ownership models."
A bad example, I would have thought. In the case of teachers individual employers have no discretion or flexibility over what a teacher is paid: that is set centrally for all teachers in the State-funded schools in the State. Furthermore, the method of payment is directly from the Department of Education and Science into the individual teacher's bank accounts [modulo, for possibly, those in VEC schools].
@Proposition Joe
Are you suggesting that enterprise size should not be included as an explanatory variable in modelling differences in pay between different categories of employees?
@Tomboktu
"In the case of teachers individual employers have no discretion or flexibility over what a teacher is paid: that is set centrally for all teachers in the State-funded schools in the State."
Which is why I chose the electricians as the counter-example, with their centrally-bargined Registered Employment Agreement.
@Slí
The key point is whether an explanatory variable _means the same thing_ in the private and public sectors.
Take for example, having qualifications that are relevant to the job. This has obvious value regardless of the sector, and thus should be rewarded with higher pay whether public or private.
The enterprise size is however different, as it comes about for quite different reasons across the two sectors. In the private sector a large enterprise would usually have started small but grew due to its commercial success. Higher wages give workers in these enterprises a share in the success.
Whereas large public sector enterprises usually come about due to monopolistic service provision and/or bureaucratic resource-grabs.
Sli Eile - thanks for bring this to our attention. Understandably, there will be debates over the use of the 'enterprise size' variable. One can find justification in the literature for both positions. Even different researchers in the ESRI do not agree on the issue (with the Boyle study including size and the Kelly studies, excluding). That issue is not going to be resolved anytime soon.
The CSO study, therefore, should be commended for presenting both sets of data (the size factor representing a 5% difference).
One of a number of things strike me: that the more egalitarian wage strucure in the public sector (the premium heavily weighted towards lower income - a negative premium at the higher end; less of gender pay-gap) is an economic strength, particular during a recession. More income in the hands of low/average decile groups can be an effective stabiliser and help maintain domestic demand. Greater inequality, however, makes it harder for an economy to generate such demand and, therefore, results in reduced output.
@Proposition Joe In referring to enterprise size you make the interesting comment 'The key point is whether an explanatory variable _means the same thing_ in the private and public sectors.'
I take your point. Clearly it doesn't mean the same thing. In fact, the meainginful size level if vastly more than the size of the 'establishment' or 'firm' in which a public sector works ('school', 'education at primary level', 'education sector' 'all public servants'. Salaries are set centrally and many salaries are pegged to a central set of salary scales by means of equivalence.
However, this has more parallels with wage determination in large private sector corporations than in small or medium sized enterprises.
The main issue about public-private sector pay comparisons is that some jobs in the private sector and some jobs in the public sector are absolutely unique to that sector. No amount of double-digit occupational coded propensity score matching can make a silk purse out of a sow's ear.
Regarding the inclusion of enterprise size - this is disputed territory. The CSO paper shows regressions both with and without. CSO doesn't take a position on which is the most appropriate.
Informative piece on salaries by Aidan O'Regan
http://aregan.wordpress.com/2009/11/13/public-sector-annual-earnings-the-facts/
@Prop Joe
There is a danger of confusing an indicator with the trait being measured itself. E.g.
"Take for example, having qualifications that are relevant to the job. This has obvious value regardless of the sector, and thus should be rewarded with higher pay whether public or private."
I presume what you mean here is that individuals with qualifications will on the average be more competent in their job than those without.
The important point though, is that individuals should be paid on merit - i.e. their _own_ ability to execute. A qualifications act as a signal to potential employers who have not witnessed an employees work first hand, that they have competence in a given area. Once they are in the job though, promotions, pay rises and bonuses will largely be determined on merit. At least this is my experience of how it works in the private sector.
Saying that workers with relevant qualifications should be paid more _just_ for having those qualifications is a bit like a 5'4'' Dutch man demanding to be taller than his 6'3'' Irish colleague on the basis that the Dutch have a larger average height.
@Mack
I totally agree on the merit argument for determining _individual_ pay rises.
However that is simply not how it works in the public service, despite some window-dressing in the form of PMDS.
Neither is it really practical to measure the individual effectiveness of large numbers of public servants versus masses of private sector workers for the purpose of estimating pay differentials.
So we're left with comparing the variables we can actually measure, and determining which of these broadly-speaking add some value to a worker's bargaining position in _both_ sectors (all other things being equal).
Experience and qualifications are examples of such broad-brush comparators that are good indicators of likely effectiveness across both sectors.
Enterprise size is not such a valid comparison point in my opinion, as explained above.
Prop Joe,
"In the private sector a large enterprise would usually have started small but grew due to its commercial success. Higher wages give workers in these enterprises a share in the success."
I think the question as to why companies become big is an interesting one. The story you propose seems to be this: small companies grow big because their employees (including management) are better (more productive) than their competitors. Presumably your view is they also stay big for the same reason. And in both cases the employees therefore deserve their "big firm premium".
It would be amazing if this story didn't have considerable truth in it, but there are other possible explanations. One would be that many big firms are enjoying the fruits of a little bit (or indeed a big bit) of monopoly power, and this is why such firms, and their employees, enjoy premiums. If these employees moved to firms not enjoying these monopoly rents they wouldn't enjoy such pay premiums - their pay is not determined by their productivity (or at least their individual productivity is not determined by their individual attributes) but by the powerful position of the firm within the marketplace.
This would mean that at least part of the public sector premium was in fact a "big firm premium", both derived (in part) from monopoly rents.
Michael,
"the more egalitarian wage strucure in the public sector...is an economic strength, particular during a recession. More income in the hands of low/average decile groups can be an effective stabiliser and help maintain domestic demand."
An egalitarian wage structure may be good for consumer demand (though by the same token not for investment demand). But so too would tax cuts for private sector workers (or a flat "rebate" cheque to every household if you prefer). And increased public investment would both help fight the recession and increase lon-run productivity. The point is every billion spent on public sector pay is a billion not spent on the above.
In any case you could still have an egalitarian wage structure within the public sector while eliminating or reversing any public sector premium over the private sector. And indeed by divertin money from the public sector pay bill to other uses you could also combat inequality outside the public sector.
@James
Are monopolistic practices really that big an issue in the Irish private sector in recent years, given all that pesky competition legislation forced upon us by the EU?
Maybe I'm showing my bias here, but the most glaring example of monopolistic gouging that I can think of would be the pre-privatization Aer Lingus fare pricing policy. A ticket to Manchester used to cost four times the fare to Heathrow, despite the fuel and landing-charge costs on the latter route being substantially higher. A complete mystery, until one noticed that Aer Lingus had the Manchester route all to themselves at the time.
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