Michael Taft: Every now and then we get an outbreak of misinformed commentary and calculations on the income relationship between work and social welfare; stories about how life is better on the dole than in a job. The latest outbreak comes courtesy of Jobordole.com. It purports to present an objective calculation of how much you would get on the dole as opposed to work. Go on – have a go. Just remember, it is a deeply flawed, highly misleading set of calculations. You won’t get the actual facts – but then what’s new?
On the website, it highlights the Irish Independent story about how an employer purported to offer a ‘good’ wage (€28,000) but couldn’t get anyone to accept it because people could get more on the dole. When you click on this link you get shock-horror calculation for a one-income couple with one child earning €28,000:
‘You could get €342.60 per week on the dole with €190.62 in rent allowance for a total of €533.22. You get €497.41 net per week working.’
Notice the subtle word-play here. You ‘could get’ x on the dole. But you ‘get’ x working. In short, this calculation claims ‘you could get’ €1,862 more per year on the dole.
But this is highly misleading. Let’s go through the above calculation.
1. The income from work is €497 per week. But this site (and many other calculations I’ve come across) conveniently omits income from Family Income Supplement for a family with a child. For this household this would be worth an extra €1,020 a year. Okay, it’s only a €20 a week difference – but if you’re in a low-paid job, that €20 is extremely helpful. And, yes, there is a low take-up rate (estimates from 35 to 55 percent). Therefore, we will use the website’s subjunctive ‘could’ in a consistent manner.
So income from work ‘could be’ €517 per week (and this doesn’t count income from Child Benefit and Back-to-School Allowance, which this household would qualify for – but as a household on social welfare income would get this too, it doesn’t change the differential).
2. The income from social income is way off target. The basic rate for a couple with one child is correct: €342.60. However, a real sleight-of-hand is used to increase this amount to €533.22. How is this done? The website uses ‘hand waving assumptions’. What a great phrase. It assumes in the calculation that the person earning €28,000 and losing their job will obtain a Rent Supplement of €190.62. In reality, this assumption waves away the substantial majority of unemployed.
How many people on Jobseekers Allowance and Benefit get Rent Supplement? Not many. The latest Statistical Information on Social Welfare Services 2009 shows that:
• 6.7 percent of those on Jobseekers Benefit get Rent Supplement
• 13.5 percent of those on Jobseekers Allowance get Rent Supplement
The overwhelming majority of unemployed do not get rent support, but the artful ‘hand waving assumption’ gives the impression they do. To be fair, the website does link to the Department of Social Protection’s explanation of Rent Supplement. If you read it, you will see why so few unemployed get this support, it being so means-tested and conditional.
And here’s the kicker. The website uses a rent figure of €930 a month for this family of three. This is the maximum level of rent paid allowable under the Rent Supplement scheme in Dublin (households paying rent above this level may be denied any Supplement at all by the Department). However, according to the latest Daft Rental report, average rents for a two-bedroom let is €993. So renting an average two-bedroom in Dublin could mean no Rent Supplement at all. Outside of Dublin, a household paying this rent would be well above the thresholds: in Cork the maximum threshold is €705 per month; in Limerick €605 per month.
But there’s more. Let’s say you happen to be in the small minority of unemployed who do qualify for rent supplement. How much would you get? Of course, this all depends on where you live, how much rent you pay and the application of a complex means-test; no website could cover all these contingencies. So let’s just assume the average. We can get this again by referring to the Statistical Information report.
The average Rent Supplement payment is €106 per week, not the €191 per week assumed by Jobordole.com. And this was in 2009. Average Rent Supplement has been falling over the years. In 2006 it was €125 per week, falling each year since. So we can reasonably assume that Rent Supplement will be less in 2011 – especially as the Government announced a cut of €60 million in Rent Supplement.
So what have we got?
For the vast majority (90 percent) a household of three on €28,000 income from work ‘could’ be over €9,000 better off than on the dole.
For the 10 percent on Rent Supplement, on average a household in work ‘could’ be over €3,500 better off than on the dole.
Of course, this is a just a narrow accountancy view of how people act in the real world. The fact is that almost all people want to work. Even though Ireland suffered from one of the highest levels of low-pay during the Celtic Tiger boom (over 20 percent were officially categorised as low-paid), people took up jobs. Our four percent unemployment rate is a testament to that – even though social welfare rates were increasing above the rate of inflation. When the jobs were there people took them, even if the pay rates weren’t great and working conditions were poor. So why aren’t a large number of people working now? Guess.
But there is something more insidious. This type of exercise feeds into a politics that calls for reducing social welfare payments because low-pay is so low, because our in-work benefits are so poor, because the social wage (healthcare, pension supports, other in-kind supports) is so limited. Instead of addressing the real problems in our labour market and social protection infrastructure – we go after the poor. Again.
But, assuming the best in people, I’m not suggesting that the operators of this website are being intentionally misleading in pursuit of an ideological goal. However, they should now either redo their calculations to reflect something approximating reality (though it’s not as tabloid-sexy to show that income from work is higher than social welfare income). Or they should take down the site. As it is constituted now, it only degrades an already degraded debate.
Showing posts with label mythbusters. Show all posts
Showing posts with label mythbusters. Show all posts
Tuesday, 15 March 2011
Tuesday, 9 November 2010
Public sector workers - some awkward facts
Peter Connell: Never let the facts get in the way of a good story. Surely a good epithet for much of what masquerades as analysis of our current crisis. And there’s no more eloquent commentator than Senator Eoghan Harris. Harris is passionate about ideas. From intellectual powerhouse of the Workers' Party to speech writer for David Trimble and public advocate for Bertie Ahern, ideas are his stock in trade.
And his latest big idea is to see high public sector wages as the obstacle to resolving our current economic crisis. Public sector pay and pensions is ‘the fattest of fat cats’. His solution, as outlined in last Sunday’s piece, is to bring public sector wages and penions back to their 2003 level. Harris dismisses Fintan O’Toole’s recently publish book Enough is Enough on the grounds that in offering solutions to the crisis the author fails to address the ‘scandal’ of high public sector pay. What we need, according to Harris are facts, or ‘awkward facts’ as he calls them. But all he offers are pronouncements and second hand, second rate analysis. Such as ‘Irish teachers are the best paid in Europe’. Of course this simply isn’t true. Harris doesn’t quote the source of his statement, he doesn’t do primary research. The awkward facts are available from the OECD (2008 data). Since 2008 teachers have had a 2.5% pay increase in October 2008 followed by pay cuts of, on average, 12-15%% (pension levy in March 2009 and pay cut in January 2010). So, if we examine the data published by the OECD, and assuming a modest 3% increase for teachers in other countries since 2008, we find that the starting salary for a primary school teacher in Ireland is below that of Luxemburg, Germany, Switzerland, Denmark, Netherlands, Spain, Norway, Scotland, England and Finland. At the top of a long incremental scale Irish national school teachers are well paid but less well paid than those in Luxemburg, Germany, Switzerland, Austria and Portugal. Exactly the same pattern is true of second level teachers. When I last checked my atlas all of these were European countries.
Harris’s ‘research’ also claims that Irish secondary school teachers ‘take the most holidays [in Europe]’. Again, let’s consult the OECD for some awkward facts regarding actual teaching hours. According to Chart D4 in Education at a Glance 2010, at lower secondary level Irish teachers spend 720 hours in class each year, above the OECD average of 703 and above that of 17 other European countries. His snide remarks about teacher’s holidays simply expose his bias.
When it comes to public sector pay Senator Harris is equally sloppy in his research. The public sector pay bill has increased significantly since 2003 but that’s more a reflection of increased public sector numbers than any pay bonanza for your average public sector worker. Let’s look at some more awkward facts. Our starting point is June 2003 when the first phase of the infamous benchmarking award was paid. Let’s say our employee is awarded a 10% increase under benchmarking. Between June 2003 and October 2008 (s)he enjoyed ten pay increases, three arising from benchmarking, three from the Sustaining Progress agreement and three from Towards 2016. The total percentage increase up to that point was 27%, when inflation over the same period was just over 20%. So, a 7% increase in real gross income. Not bad, but not a bonanza. Since October 2008 pay cuts amounting to about 13% have been imposed. Add in deflation of -5.5% and we find that the average public sector worker in 2010 has a gross salary 14% higher than in 2003 while inflation over the same period was 15%. So, in terms of gross income public sector workers are right back to where they were in 2003. Add in recently imposed income and health levies and Harris’s notion of the average public sector worker being a ‘fat cat’ is simply indefensible. He rightly feels empathy with private sector workers who have lost their jobs. He singularly fails to relate to the experience of low and middle income public sector workers who, like their private sector colleagues, are seeing their living standards assailed on all sides.
Harris claims that ‘the Government could find the €6bn it needs by simply cutting back public pay and pensions to 2003 levels’. The public sector pay and pensions bill is about €21.8 billion. To save a net €6 billion the gross bill would have to be cut by at least €8.5 billion or by almost 40%. The reason is that public servants pay PAYE, health levies, income levies, PRSI and make pension contributions to the State. Cut their pay and you cut all these sources of income to the State. Cuts don’t translate into savings. It’s a mistake repeated by most commentators. It’s simple maths. Senator Harris should try it some time.
And his latest big idea is to see high public sector wages as the obstacle to resolving our current economic crisis. Public sector pay and pensions is ‘the fattest of fat cats’. His solution, as outlined in last Sunday’s piece, is to bring public sector wages and penions back to their 2003 level. Harris dismisses Fintan O’Toole’s recently publish book Enough is Enough on the grounds that in offering solutions to the crisis the author fails to address the ‘scandal’ of high public sector pay. What we need, according to Harris are facts, or ‘awkward facts’ as he calls them. But all he offers are pronouncements and second hand, second rate analysis. Such as ‘Irish teachers are the best paid in Europe’. Of course this simply isn’t true. Harris doesn’t quote the source of his statement, he doesn’t do primary research. The awkward facts are available from the OECD (2008 data). Since 2008 teachers have had a 2.5% pay increase in October 2008 followed by pay cuts of, on average, 12-15%% (pension levy in March 2009 and pay cut in January 2010). So, if we examine the data published by the OECD, and assuming a modest 3% increase for teachers in other countries since 2008, we find that the starting salary for a primary school teacher in Ireland is below that of Luxemburg, Germany, Switzerland, Denmark, Netherlands, Spain, Norway, Scotland, England and Finland. At the top of a long incremental scale Irish national school teachers are well paid but less well paid than those in Luxemburg, Germany, Switzerland, Austria and Portugal. Exactly the same pattern is true of second level teachers. When I last checked my atlas all of these were European countries.
Harris’s ‘research’ also claims that Irish secondary school teachers ‘take the most holidays [in Europe]’. Again, let’s consult the OECD for some awkward facts regarding actual teaching hours. According to Chart D4 in Education at a Glance 2010, at lower secondary level Irish teachers spend 720 hours in class each year, above the OECD average of 703 and above that of 17 other European countries. His snide remarks about teacher’s holidays simply expose his bias.
When it comes to public sector pay Senator Harris is equally sloppy in his research. The public sector pay bill has increased significantly since 2003 but that’s more a reflection of increased public sector numbers than any pay bonanza for your average public sector worker. Let’s look at some more awkward facts. Our starting point is June 2003 when the first phase of the infamous benchmarking award was paid. Let’s say our employee is awarded a 10% increase under benchmarking. Between June 2003 and October 2008 (s)he enjoyed ten pay increases, three arising from benchmarking, three from the Sustaining Progress agreement and three from Towards 2016. The total percentage increase up to that point was 27%, when inflation over the same period was just over 20%. So, a 7% increase in real gross income. Not bad, but not a bonanza. Since October 2008 pay cuts amounting to about 13% have been imposed. Add in deflation of -5.5% and we find that the average public sector worker in 2010 has a gross salary 14% higher than in 2003 while inflation over the same period was 15%. So, in terms of gross income public sector workers are right back to where they were in 2003. Add in recently imposed income and health levies and Harris’s notion of the average public sector worker being a ‘fat cat’ is simply indefensible. He rightly feels empathy with private sector workers who have lost their jobs. He singularly fails to relate to the experience of low and middle income public sector workers who, like their private sector colleagues, are seeing their living standards assailed on all sides.
Harris claims that ‘the Government could find the €6bn it needs by simply cutting back public pay and pensions to 2003 levels’. The public sector pay and pensions bill is about €21.8 billion. To save a net €6 billion the gross bill would have to be cut by at least €8.5 billion or by almost 40%. The reason is that public servants pay PAYE, health levies, income levies, PRSI and make pension contributions to the State. Cut their pay and you cut all these sources of income to the State. Cuts don’t translate into savings. It’s a mistake repeated by most commentators. It’s simple maths. Senator Harris should try it some time.
Tuesday, 18 August 2009
Myth of 'lavish' Social Welfare spending revisited
The myth of Ireland's lavish Social Welfare rates refuses to go away - its latest proponent was Constantiv Gurdgiev on RTE's Prime Time. The myth has been debunked several times, most recently by Sli Eile here on PE. Click here to read Michael Taft's deconstruction of Gurdgiev's claims.
Thursday, 11 June 2009
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
House Price | Secretary General | Clerical Officer | GDP (€million) | |
1974 | €10,943 | €9,881 | €2,748 | €3,860 |
2006 | €351,263 | €19,1488 | €34,050 | €152,091 |
Increase % | 3110% | 1838% | 1139% | 3840% |
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)?
Friday, 5 June 2009
Mythbusters 101: Wages in the Irish public sector
Sli Eile: Are incomes, on average, higher in the public sector than in the private sector? Note the reference to ‘incomes’ and not ‘wages’ in this question.
The context is claims made by some commentators that wages (note wages) are about 20% higher in the public sector than in the private (and the strong implication that wages in the public service need to be cut by this amount for reasons of restoring public finance as well as encouraging cost competitiveness in the traded sectors). Allied to this is a broader agenda about reducing wages in general. It is no accident that media and political commentators focus in not only on the supposed wage difference but also the claimed benefits of security, pension entitlement and outmoded and inflexible work practices.
By focussing, narrowly, on wage costs as distinct from incomes (much harder to measure with up to date statistics) the terrain for making comparisons is restricted. Thus, income of the self-employed, dividends, rental income, profits etc are excluded. But, lets stay with that narrow terrain of wages for the moment.
An important reference was the paper entitled Public-Private Wage Differentials in Ireland, 1994-2001 by Gerry Boyle, Rory McElligott and Jim O’Leary published in the ESRI Quarterly Economic Commentary in 2004. The data are dated but it remains the single most used reference point for comparing wages. Recourse to published CSO data on average hourly earnings for specific sectors is possible to compare trends since 2001, the last year covered in the Boyle et al comparison (even though the latter uses total monthly earnings).
In comparing the public and private sectors (sticking with a broad definition of public sector to include education, health, semi-state companies etc) account needs to be taken of differences in age-profile, educational attainment, unit size and occupational structure. Boyle et al. factored this in by using a multi-variate approach based on through-time data from the European Community Household Panel Survey (the comparator nowadays would be the EU Survey on Income and Living Conditions (EUSILC). As in any comparison of income care is needed with regard to quality of reported earnings – perhaps more so at the top and lower end of the income scale where some survey under-reporting is possible. By focussing, only, on employees there is relatively less scope for under-reporting. The other difficulty arises from comparing various ‘benefits-in-kind’ not all of which may appear in the reported data.
Data issues aside, the Boyle et al. paper concludes, clearly and convincingly, that on average wages are higher than in the private sector for employees. They conclude following extensive regression analysis on earnings data as follows:
We estimate that in 2001, the latest year for which we have completed our analysis, the premium enjoyed by public servants was about 13 per cent, on the basis of gross monthly earnings.
More recent work by Eilish Kelly, Séamus McGuinness and Philip O’Connell (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland’ ESRI Working Paper no 270, December 2008) also shows a significant premium for public sector workers compared to private – statistically allowing for various factors that differentiate these sectors (educational level, occupation, age etc). Using more recent data from a different data source to that used by Boyle et al.: the National Employment Survey, Kelly et al. report an increase in the estimated public sector pay premium (after adjustment for other factors) from 7.7 to 23.5% between 2003 and 2006. Furthermore they report, as did Boyle et al., higher premia still for lower paid workers in the public sector (32% in 2006 compared to 24% in 2003 in Kelly et al). It should be noted that Kelly et al restricted their sample to full-time, permanent employees who are aged between 25 and 59, and exclude semi-state body employees
(All of these studies use standard econometric regressions with employee wages regressed on a range of explanatory variables including age/experience, education, gender, size of enterprise etc. However, there are some differences in the list of explanatory variables included. For example Kelly et al include a measure of ‘professional body membership’ to control for the effect of union membership on wages. This variable, alone, accounts for a premium of 14% in 2006 in favour of public sector workers.).
Why such a premium exists and what its implications are in the current economic climate could be explored further. Historically, it is likely that the existence of such a premium is associated with:
- Strong trade union membership across the whole public service (picked up anyway in the Kelly et al paper);
- Allied to this the role of centralised pay agreements in maintaining a relatively stable pattern (between public and private) over time; and
- Benchmarking which had the effect of raising senior and top-manager pay in the public service relative to lower-paid public and private sector workers.
Boyle et al. showed that the difference between high and low earners is smaller in the public sector (in 2001). Furthermore they showed that the ‘premium’ to public service workers was higher at the lower end of the wage distribution which illustrates that the meagrely-paid among particular groups of public service workers like some industrial workers, clerical staff at point of entry etc on close to something around €25,000 a year are relatively well paid compared to the working poor or in the private sector on rock-bottom wages close to the national minimum wage (and sometimes less in the ‘informal’ economy). They estimate a premium of about 17% for the bottom 10% of earners (the lowest 10% of earners in the public service earned 17% more than the lowest 10% of earners in the private sector – after adjustment for factors such as age, education, occupation etc).
A marked feature of public sector pay has been the very large growth in senior and top management salaries– some of this linked directly to ‘benchmarking’ awards in two phases over recent years. The theory was that the public service needed to attract or retain the best talent by aligning salaries with comparable roles in the private sector. This ‘theory’ is very questionnable because:
- The public service can never be simply run like a business centered on the ethos of profit maximisation
- The inequality between the lowest and highest paid is a justifiable source of resentment among many {the ratio of salaries for Clerical officer staff (civil service, health and local authority) to CEO/Secretary-General has increased from a factor of 3.5 to 5.6 (Source: IMPACT/CPSU – Table 10) between 1987 and 2006 for examples}.
- Public service labour markets remain rigid and internal so that inflows from the private sector at the very top level is the exception more than the rule.
All of this needs to be borne in mind since the ‘premium’ to public sector workers compared to private sector workers is one dimension. The other ‘premium’ is the ratio of high to low earners in each of the public and private sectors has gone up appreciably over time. I don’t see too many people in the economic fraternity complaining about that. (We have seen obscene growing differences in regard to top remuneration in Corporate USA and mimicked in Ireland and elsewhere from the era of ‘greed is good’ onwards.)
What sorts of factors has driven salaries in recent decades and what implications can be drawn for incomes policy? I will look at these issues as well as some evidence on non-wage incomes, in a subsequent 'Mythbuster'.
The context is claims made by some commentators that wages (note wages) are about 20% higher in the public sector than in the private (and the strong implication that wages in the public service need to be cut by this amount for reasons of restoring public finance as well as encouraging cost competitiveness in the traded sectors). Allied to this is a broader agenda about reducing wages in general. It is no accident that media and political commentators focus in not only on the supposed wage difference but also the claimed benefits of security, pension entitlement and outmoded and inflexible work practices.
By focussing, narrowly, on wage costs as distinct from incomes (much harder to measure with up to date statistics) the terrain for making comparisons is restricted. Thus, income of the self-employed, dividends, rental income, profits etc are excluded. But, lets stay with that narrow terrain of wages for the moment.
An important reference was the paper entitled Public-Private Wage Differentials in Ireland, 1994-2001 by Gerry Boyle, Rory McElligott and Jim O’Leary published in the ESRI Quarterly Economic Commentary in 2004. The data are dated but it remains the single most used reference point for comparing wages. Recourse to published CSO data on average hourly earnings for specific sectors is possible to compare trends since 2001, the last year covered in the Boyle et al comparison (even though the latter uses total monthly earnings).
In comparing the public and private sectors (sticking with a broad definition of public sector to include education, health, semi-state companies etc) account needs to be taken of differences in age-profile, educational attainment, unit size and occupational structure. Boyle et al. factored this in by using a multi-variate approach based on through-time data from the European Community Household Panel Survey (the comparator nowadays would be the EU Survey on Income and Living Conditions (EUSILC). As in any comparison of income care is needed with regard to quality of reported earnings – perhaps more so at the top and lower end of the income scale where some survey under-reporting is possible. By focussing, only, on employees there is relatively less scope for under-reporting. The other difficulty arises from comparing various ‘benefits-in-kind’ not all of which may appear in the reported data.
Data issues aside, the Boyle et al. paper concludes, clearly and convincingly, that on average wages are higher than in the private sector for employees. They conclude following extensive regression analysis on earnings data as follows:
We estimate that in 2001, the latest year for which we have completed our analysis, the premium enjoyed by public servants was about 13 per cent, on the basis of gross monthly earnings.
More recent work by Eilish Kelly, Séamus McGuinness and Philip O’Connell (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland’ ESRI Working Paper no 270, December 2008) also shows a significant premium for public sector workers compared to private – statistically allowing for various factors that differentiate these sectors (educational level, occupation, age etc). Using more recent data from a different data source to that used by Boyle et al.: the National Employment Survey, Kelly et al. report an increase in the estimated public sector pay premium (after adjustment for other factors) from 7.7 to 23.5% between 2003 and 2006. Furthermore they report, as did Boyle et al., higher premia still for lower paid workers in the public sector (32% in 2006 compared to 24% in 2003 in Kelly et al). It should be noted that Kelly et al restricted their sample to full-time, permanent employees who are aged between 25 and 59, and exclude semi-state body employees
(All of these studies use standard econometric regressions with employee wages regressed on a range of explanatory variables including age/experience, education, gender, size of enterprise etc. However, there are some differences in the list of explanatory variables included. For example Kelly et al include a measure of ‘professional body membership’ to control for the effect of union membership on wages. This variable, alone, accounts for a premium of 14% in 2006 in favour of public sector workers.).
Why such a premium exists and what its implications are in the current economic climate could be explored further. Historically, it is likely that the existence of such a premium is associated with:
- Strong trade union membership across the whole public service (picked up anyway in the Kelly et al paper);
- Allied to this the role of centralised pay agreements in maintaining a relatively stable pattern (between public and private) over time; and
- Benchmarking which had the effect of raising senior and top-manager pay in the public service relative to lower-paid public and private sector workers.
Boyle et al. showed that the difference between high and low earners is smaller in the public sector (in 2001). Furthermore they showed that the ‘premium’ to public service workers was higher at the lower end of the wage distribution which illustrates that the meagrely-paid among particular groups of public service workers like some industrial workers, clerical staff at point of entry etc on close to something around €25,000 a year are relatively well paid compared to the working poor or in the private sector on rock-bottom wages close to the national minimum wage (and sometimes less in the ‘informal’ economy). They estimate a premium of about 17% for the bottom 10% of earners (the lowest 10% of earners in the public service earned 17% more than the lowest 10% of earners in the private sector – after adjustment for factors such as age, education, occupation etc).
A marked feature of public sector pay has been the very large growth in senior and top management salaries– some of this linked directly to ‘benchmarking’ awards in two phases over recent years. The theory was that the public service needed to attract or retain the best talent by aligning salaries with comparable roles in the private sector. This ‘theory’ is very questionnable because:
- The public service can never be simply run like a business centered on the ethos of profit maximisation
- The inequality between the lowest and highest paid is a justifiable source of resentment among many {the ratio of salaries for Clerical officer staff (civil service, health and local authority) to CEO/Secretary-General has increased from a factor of 3.5 to 5.6 (Source: IMPACT/CPSU – Table 10) between 1987 and 2006 for examples}.
- Public service labour markets remain rigid and internal so that inflows from the private sector at the very top level is the exception more than the rule.
All of this needs to be borne in mind since the ‘premium’ to public sector workers compared to private sector workers is one dimension. The other ‘premium’ is the ratio of high to low earners in each of the public and private sectors has gone up appreciably over time. I don’t see too many people in the economic fraternity complaining about that. (We have seen obscene growing differences in regard to top remuneration in Corporate USA and mimicked in Ireland and elsewhere from the era of ‘greed is good’ onwards.)
What sorts of factors has driven salaries in recent decades and what implications can be drawn for incomes policy? I will look at these issues as well as some evidence on non-wage incomes, in a subsequent 'Mythbuster'.
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