Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Public sector versus private sector pay – update

Almost six months ago, annoyed by the poor standard of debate in response to a particular question on Questions & Answers, I compiled estimates of what the average pay was in the public and private sectors. The overall finding was that average pay in the public sector was almost €50,000 per year, compared with less than €40,000 a year in the private sector. In the lengthy comments that follow that blog entry, amateur statisticians of all sorts came up with incredibly inventive explanations as to what might explain these differences and still be consistent with pay be approximately equal across both sectors.

Unfortunately for them, the evidence is overwhelmingly stacked against them. For example, a 2008 study by the ESRI showed that, holding things like occupation level, job type and experience constant, the degree to which the public sector enjoyed a premium over the private sector varied from 10% at the top to 30% for other grades. This corroborated evidence from the time of the initial benchmarking exercise in 2002 that – contrary to sentiment and popular belief within the public sector – pay differentials, and their consequences for recruitment and retention, were not significant issues in the public sector in the period 2000-2002. Research by Frances Ruane and myself found that if anything the pay differential was skewed in favour of the public sector, something which seems indisputably to have been the case all along. Now, the latest figures from the CSO have been analysed and Davy have found – again! – that grade for grade, age for age, hour for hour, the public sector enjoy a huge premium of anything up to 70% (on a per hour basis) over their private sector colleauges. Honestly, to people like Ernie Ball in my comments section, how much more evidence do we need?!

Ireland now finds itself in the following situation:

  • Firstly, our public finances are in a woeful state, with gross spending set to top €64bn this year, and tax receipts of €34bn or so. Everyone can agree we need to cut expenditure and raise taxes.
  • Secondly, employment in the private sector is rapidly contracting. While Live Register figures may overstate the case, CSO figures compiled through surveys show a 12% fall of almost 170,000 in the numbers employed by the private sector. The ability of workers to stomach tax hikes is diminished, placing the onus on the government to cut expenditure.
  • Thirdly, two thirds of government expenditure is pay. Now, total pay = average wage * number employed. Personally, while there may be some room for cutting the numbers employed in the public sector, I think this should be avoided in times of rapidly increasing unemployment, so as to not make a bad unemployment situtation worse. Therefore, if the number of persons employed is not going to shift that much, then the average wage they enjoy must.
  • Fourthly, it is now impossible, for the reasons outlined above, to make the case that the public sector is not overpaid. We must have another benchmarking exercise immediately, this time with an open methodology, so that people can see how any why they’ve fared the way they have.

This isn’t picking on the public sector for ideological reasons, or as David Begg called commentators recommending public sector cuts people with “ice in their veins“. This is the bare minimum needed by the country to ensure its economic survival. The unions say that the better off must bear the brunt. Does that include the better off of their membership?

For context, below is the chart from February updated to reflect the latest figures and including a separate series for semi-states and estimates for the health sector, based on the HSE annual reports and the Department of Finance figures on voted expenditure. The health figures seem particularly difficult to get, so my estimates are gross pay figures, minus pension/supperannuation and employers’ PRSI. All suggestions or recommendations for further refinement welcome, as per usual.

Average wages across sector, 1998-2009
Average wages across sector, 1998-2009

They say a picture tells a thousand words…

  • karl deeter ,

    I’m in total agreement with you on this but how will we ever convince the public sector to embrace cutting their own wages? The private sector does it via the market and job losses, but how do you do that when you have

    1. guaranteed for life employment
    2. top level benefits (pension)
    3. having gotten the pension levy through (it’s not nearly enough but it has been accepted eventually)
    4. unions that will encourage strike action?

    this is a case of trying to get turkeys to vote for xmas! I don’t know that being right is enough, and frankly, there won’t be enough support behind the current administration to see this through.

    • Ronan Lyons ,

      I think the bulk of the challenge is not the ‘turkeys voting from Christmas’ argument, it’s the enlightened self-interest argument.
      Just today, BA pilots voted 94% in favour of salary cuts, because they understood the implications if they took an uninformed view (http://www.guardian.co.uk/business/2009/jul/13/british-airways-pilots-salary-cut)
      As the man says, if you can keep your head, while all around you people are losing theirs, you clearly don’t understand the gravity of the situation!

      • The Irish Economy » Blog Archive » Public Sector Pay Differentials: Regressions Can Actually Be Useful ,

        […] economists that claim to be presenting such meaningful comparisons but unfortunately are not.  Ronan Lyons and Constantin Gurdgiev have excitedly pointed to some figures released by Davy’s showing a […]

        • David McManus ,

          I agree about what needs to be done.
          @ Karl: If the public sector was to go on strike all we need to do is employ Mary Harney’s tactics from a few years ago with the nurses.Simply don’t pay them!
          If they spend 3 hours a week on strike,then deduct their pay by 3 hours.Very simple but as you said we need a strong government to do it.

          • Mossy Heneberry ,

            Ronan, there is no way that the private sector pay is around €40,000 on average. The chart for private sector only goes up to 2008, which I’m sure you are aware of anyway.

            If you also take into account that the private sector has taken some or all of the following: wage cuts, no bonuses, reduced working week (therefore pay), reduced commissions,cancelled overtime, working longer unpaid hours, pension decimation and other perks and benefits lost, that €40,000 figure is a cloud cuckoo land estimate.

            Now how do we put a monetary value on having a job for life? In the 80’s and 90’s garda, teachers, nurses, firemen and prison officers were snapping up properties with investment loans because the banks saw them as a safe bet. And how do you factor in a gold plated pension? What about the fact that some public sector workers can retire in their fifties?

            • kevin denny ,

              Yup the evidence is clear enough. However averages conceal as well as reveal. I suspect the differential varies across the distribution. I don’t know these comparisons take pension entitlements into account. I presume they take no account of the benefit of security that many of us in the public sector enjoy.

              If you want to reduce pay rates then at the bottom you will run into the minimum wage so you have to reform that too. Joined up thinking is not a hallmark of policy making here. Bottling out of this is politically easier, the usual rhetoric about protecting the most vulnerable always goes down a treat. But there is no free wage-compression.

              • TTMM ,

                Folks, I realise that the public pay is in a mess and yes we all take action but please this is not the public sector workers action and we must not be scape goated. A deep public / private sector divide has occurred. It is not fair to compare average public sector pay with average private sector pay. Remember that 54% of the public sector are graduates whereas only 32% in the private sector. Should graduates in either sector not be paid more. Is that premium worth 25% – ask yourselves in you own company to compare graduate salaries with those of nongraduates – what is the differential factor.

                The ring fenced pension is no longer ring fenced and it is only a matter before the lump sum get taxed – I do not have a huge problem with that. However, please remember that any public sector worker while they may never be on the breadline, they have given up any opportunity to become millionaires that so may private sector workers became and many blew as a result of avarice now that we are in a down turn.

                As a result of levies, tax hikes, I am currently 274€ a fortnight worse off than last year. My siblings in the private sector have not taken any paycuts at all. One sibling has gotten a 6% pay rise. Two companies I work closely with in the food industry have given their workers a 6% pey increase at a time when farmers (the suppliers of raw materials) are getting pittance!! This is hardly social responsibility!!!! IBEC have confirmed that only 23% of companies have introduced pay cuts, at an average of 3.4%. As regards the shorter working week many companies that work Tue, Wed and Thurs – this allows the employee to draw the dole for the remaining 3 days as saturday is included – this means the worker is entitled to 50% of the dole.

                Finally, I have to ask all of you who do bash the public sector, if it is that good why have you not joined – main reason – most of you felt there was more fat to be gained in the private sector – now that the times are tougher you wish the public sector to bail out the whole country while the private sector enjoys pay cuts. What I mean is that we all made decisions and pitting against each other will not help, however, until we all readjust wages, costs, etc by 15 – 20 % we are going no where in terms of competitiveness and its the companies that are giving the 6% increases that are causing the most problems as they are reducing our competitiveness big time. If these corporations can afford the increases perhaps the Government should include corporation taxes. Please also remember that many private sector jobs are the result of public money incentives – therefore private secotr cannot be totally ungrateful to the tax payer and now must also play their part.

                Lastly, what we should all be doing is shopping around and demanding price reduction – yes there are special offers e.g. in my filling station, coffee is €1.70 as it was last year. They do a coffee and a muffin for €3.50 which saves €0.40 from last year but I do not wnat the muffin so please make my coffee cheaper – point is we should be demanding cheaper food, insurance, ESB, VHI, telephone etc.

                • Ronan Lyons ,

                  Hi Tom, thanks for the comment. A couple of quick comments:
                  1. This isn’t scape-goating of public sector workers. Their pay makes up 65% of all Government expenditure and the gap between receipts and expenditure is greater than all non-pay bits added up together, so something absolutely has to be done, there’s just no two ways about it.
                  2. The gap between public and private is 30% AFTER accounting for things like degrees, etc. – it’s up to 70% beforehand!
                  3. Under no circumstances does a degree on its own merit a higher wage – it is only a signal to employers of higher productivity on average.
                  4. You’re comparing today’s apples with yesterday’s oranges when you compare yourself to your private sector friends. Firstly, you’ve compared your net pay with their gross pay. For a start, you would need to factor in their income levies, tax hikes, etc., as you have done for yourself. Most public sector workers have seen their gross pay increase in the last year, incidentally. Also, you’re comparing your private sector friends, who have always had to pay their way fully when it comes to pensions, with public sector workers who only ever paid a very small part, which has increased slightly in the last 12 months.
                  5. This isn’t “bashing” the public sector – it’s trying to show the sheer scale of the problem, a problem which 100% absolutely cannot be solved without cutting the public sector pay bill dramatically. Unless you want to make yourself and/or large chunks of your colleagues unemployed, it has to come from a reduction in pay rates. Incidentally, I have worked in the public sector and can attest as to how well it’s paid!
                  6. Your comments on competitiveness are certainly not misguided, but that’s an entirely different issue to the public finances. All the price reductions in the world will not bridge the gap between tax receipts (€34bn this year) and gross expenditure (€64bn). They may in fact reduce tax receipts, in the form of lower VAT, unless people spent proportionately more as a result!

                  R

                  • fairness ,

                    Funny why everyone is interested in the public sector pay and conditions now. They did not care when the economy was booming because most were creaming it!!! Most in the public sector are not overpaid and most work very hard contrary to what has been printed. Our pay has been savaged and still public sector workers are doing the same hours and have not taken to the streets at the unjustified targeting for billions from this mess. We must all pay even all you private sector workers (the majority) who have only been effected by low tax increases happy days for you to enjoy all the price reductions!!!!
                    there has been such rubbish printed in the media against the public service. We deserve to be treated fairly in the media and by this government. We have children, mortgages creche fees we do not deserve to be treated with such antagonism and biased and untruthful comments. Fair play to all the public service workers who have participated in the industrial action something most do not want to have to do. Most have never been on strike.!!!When you are threatened by having three net pay cuts in a year of course we are going to defend our financial futures wouldn’t you?? we want this situation sorted fairly.

                    • Ronan Lyons ,

                      Hi fairness,
                      Thanks for the comment. To be clear, public sector pay was an issue as long ago as 2002 (see a variety of articles including one I wrote with Frances Ruane), but – as you point out – people didn’t really care because they thought the money was there. Now they realise that it isn’t. Just because people are slow to recognise a problem doesn’t mean that it isn’t a problem.
                      R

                      • DC ,

                        Just read CSO publication of average 4.4% cut in public sector gross pay ( excluding pension levies) while private sector cut was 0.7%! – I think IBEC, ISME and SFA call it sharing the pain ie socialising the failures of the private sector with everybody else. Hob cuts in teh public sectro were just 1% lower than private sector. Its hard to listen to commentators call for job reductions in the public sector-given the low pay and the imapct they have on the wider economy. Imagine a public sectro worker suggesting all car forecourts should close – to save money flows out of the country from car imports. They would be strung up.

                        The relaity, as can be seen from the reduction in GDP, is that the majority of the private sector is just one cheque removed from itself being part of the public sector – a €4m adjustment in govt spending in 2010 corresponds to a 2% redcution in GDP, yet our GDP has fallen over 11%. The private sector has not stepped up to the plate to compensate – but were in reality overly dependent on the government and its employees as a customer.

                        The private sector worker who got paid from his employer was really ultimately getting paid form the public purse for work done by the private sector for the public sector.

                        The public sectro worker offers labour and gets paid directly from the public purse.

                        We need to lose the notion of public good/private sector bad – a focus on the non PAYE sector who pay minimal tax from not delcaring income and keeping a thriving black economy going.

                        • Further public sector cuts 'unavoidable' - Page 11 ,

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                          • Mark Ryan ,

                            Just to compare private sector pay versus public sector pay. The public sector do not seem to take into account the overwhelming fact that private sector workers wages drop when they leave employment. This is not taken into account in the stats when one compares private sector and public sector wages.

                            I am a private sector worker whos wages dropped from 365 euro a week to 188 euro a week (welfare). And yes I do hold a bachelors degree and postgrad degree and thats the wages I was on. Can you tell me one single worker in the public sector whos wages have been halved. No, coz they have a guaranteed job. So if i get one more public sector worker saying, “oh my friend in the private sector got a 4 percent increase in wages and coz of the croke park deal i didnt (but I am still getting wage increments, superior pension etc… but ahem I wont mention that)….” there is no reasoning with some of them coz they are so pampered. And by pampered i mean job security – many workers in the public sector work very hard such as nurses etc…

                            • Karl ,

                              what are you comparing Gardai, firemen, paramedics and nurses to?

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