Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Pay bill figures show the need for public service transformation

Last year, I pointed out an important distinction between public and private sectors. In downturns, the private sector tends to make its adjustment by cutting hours worked, not pay rates. With permanent contracts in place for the vast majority of its staff, Ireland’s public sector is not in a position to do the same. Therefore, when looking to make savings, it has to adjust pay rates, not numbers. (Indeed, given the severity of Ireland’s private sector jobs depression, even if the public sector were in a position to cut jobs not rates, it probably would not want to do so.)

However, the apparatus for how the public sector labour market works means that adjustment is like moving a liner at sea. Things happen very slowly and even after the captain changes course, the liner will continue to drift in the previous direction for some time. Nowhere is this more evident than in the adjustments to payroll made by the public sector, when compared to the rest of the economy.

Earlier this month, the CSO published figures on hours worked and earnings, for different sectors of the economy, for the second half of last year. The graph below shows the adjustment made by each sector in the third and final quarters of 2009. The final quarter will not necessarily be representative of the rest, as it will include bonus payments, for example – but for that very reason, it’s important to look at it as well as a more regular quarter like Q3. The percentage given is the change in the total paybill in a quarter compared to the year before.

Year-on-year change in total wage bill, by sector, 2009
Year-on-year change in total wage bill, by sector, 2009

A very clear picture emerges if one thinks about the economy in four parts:

  • construction, which is in severe adjustment
  • finance, which is in limbo (or purgatory or something like that)
  • the public sector (civil service, education, health, GardaĆ­, army, etc)
  • the rest of the economy (manufacturing, ICT, professional services, etc)

The adjustment in the construction sector’s paybill in the second half of 2009, compared to a year previously, was a pretty astonishing 36%. In finance – perhaps initially surprising but on reflection maybe just as one might expect of a sector in limbo – there had been no change to its overall paybill.

The telling figures come from looking at the public sector and the rest of the private sector, however. In the private sector, the adjustment in the wage bill has been on average 13%. Only in manufacturing did it differ substantially – there the adjustment has been just 9%. However, in the public sector, there has – despite all the cuts – still been no downward adjustment in its overall pay bill. Indeed, the pay bill actually increased by 1.4% in the third quarter.

In one sense, you can’t blame the Minister for Finance. In relation to public sector pay, he’s done all that could be expected of him in a short space of time. In particular, he has made inroads into two unsustainable inequities in the Irish labour market, by making public servants contribute slightly more to their pensions and by bringing their core pay slightly closer in line with their private sector counterparts.

But the CSO figures show that this will not be enough. They highlight how important transformation – rather than additional incremental reform – of Ireland’s public service is, if things are to change enough to keep the Government deficit and debt at sustainable levels, and if we are to prevent this from ever occurring again.

The central determination of pay scales and employment numbers – combined with a culture of increments – has left the public service with a complete disconnect between what they do and how they pay for it. Ireland needs to have a public service populated by a new type of organisation. That organisation will understand what benefit it brings to society, and thus will know what money it needs to raise to fund its service. And the organisation will have much greater control over accessing the skills it needs. This means breaking down barriers between the public and private sectors and indeed within the public sector. It also needs to be able to reward those who excel at their jobs – and only those.

So much of this is elementary to those in the wider economy who are responsible for the financial and human capital at their disposal. And yet, as the CSO figures show, the public service remains in a different world.

  • Paul Mara ,

    so, this is what I’ve gotten from what I’ve read above:
    – the public sector has adjusted pay rates
    – cutting public sector jobs would add to an already high unemployment rate
    – the private sector doesn’t cut pay rates
    – the private sector cuts hours to employees

    and you argue for more of a connect between public and private sectors

    I’d presume that keeping people employed would be the goal

    so, is it then that both sides could contribute?
    – public sector has a facility to cut hours
    – private sector has a facility to cut pay (reduce the minimum wage? maybe cut social welfare rates as well?)

    • Alan D ,

      In relation to the above:

      “making public servants contribute slightly more to their pensions and …bringing their core pay slightly closer in line with their private sector counterparts”

      Can you clarify to what you are referring here?

      As far as I know the so-called ‘pension levy’ was applied to PS salaries as a general levy which went into general Govt. coffers (final destination unknown, possibly NAMA or equivalent black hole?) as opposed to a being a contribution to any actual PS pension fund. So no real way to measure whether or not this has been an efficacious measure with regard to overall labour market adjustments.

      And in terms of the core pay reference, do you mean the Croke Park agreement or something else? I haven’t seen much evidence of anything at all being brought into line, in real terms, to date.

      I would therefore have to question the assertion that the minister has “done all that could be expected of him”, or even that he has “made inroads” – I think it’s all fur coat and no knickers I’m afraid, a lot of spinning but no actual progress.

      I’d be happy to be contradicted on either point! Any good news of substance is welcome.

      • Ronan Lyons ,

        Hi Alan,
        In a literal sense, you’re right. The money saved through the pensions levy is not tied to paying the public sector pensions bill, and there is no provision in the Croke Park agreement or elsewhere, apart from Benchmarking (but that clearly didn’t work), to ensure public sector pay is kept in line with private sector pay. So I should clarify what I meant.

        What I meant was: in a world where the Minister for Finance can only work by implementing incremental reformation – and not root-and-branch transformation – nothing more could be expected of him out of two Budgets than the OECD’s largest ever public sector pay cut and a substantial pensions levy to close the gap. (The best available estimate is the one from the UK last month: contributions worth about 40% of annual salary would be needed to pay for a public service pension. Ireland has a slightly lower cap, so you may be talking 35-40%.)

        I think we are in agreement about the need for fundamental transformation – as per my final paragraphs. Thanks for the comment,

        Ronan.


        Hi Paul,

        Interesting question… It’s not well understood why wages in the private sector are so sticky, but the best explanation economists have come up with is that there is an implicit agreement between worker and employer about employing in good times and bad. It’s unclear regulation will be able to force the private sector into being more flexible. What also needs to be understood better is the role bonus/irregular payments contribute in the private sector, as these are almost entirely absent from the public sector.

        The ultimate goal should be that anyone in the country – and probably, given EU law, anyone in the EU – should have the right to apply for any public sector job at any level in the country. And that the managers of public service organisations should have discretion over how much they are paid. This is not easy and means public sector managers will need a new set of skills, but what Ireland needs to agree on is not what the public service is or is not good at, at the moment, but rather what we want it to be good at in the 2030s and then the road map to there.

        Thanks for the comment, hope all’s well,

        Ronan.

        • Alan D ,

          Thanks for clarification Ronan. In total agreement with your main points and it’s an excellent article. Roll on the emergence of the “new organisation”, though I fear something very drastic may have to happen (meteor strike?) for it to be achieved.

          • GS ,

            A few points that really have to be made.

            The CSO figures do not include the pension levy which in reality is an additional tax on public servants which is a reduction on average of 7.5% on take home pay or the paycuts which came into effect in 2010 but hey don’t let the facts get in the way of a good graph!

            Generalisations about transforming the ‘public service’ are lazy and uninformative. There are huge differences within the general public service in terms of efficiency and provision of services. For example there is a huge difference between the performance of individual local authorities, different schools, different hospitals, even different ministerial departments e.t.c.

            On a general level, I disagree with the preoccupation with linking public sector wages with those in the private sector. Why compare a nurse’s wage with a shoe salesman or a Garda’s wage with an accountant? I would argue that the problem is that the social value and importance of the work undertaken by many public servants is undervalued by media commentators. I am not saying that some areas of the public service do not need reform/abolishing but generalisations about reforming the public service as a single entity shortchanges those of us who engaged in a process of improving our service for over a decade.

            • Ronan Lyons ,

              @GS
              A few responses to your points:
              (1) A pensions levy is not an additional tax. Bearing in mind the point Alan D made below, it is an attempt to make the system of public service pensions slightly less unsustainable. Or in your language, public servants had been “undertaxed” before and are now less undertaxed – although they are still undertaxed, as they do not even come close to covering the cost of their pension.
              Even if your point were correct, the private sector paybill adjustment would be twice as large as the public sector one.
              (2) Just because there is variance in the public service doesn’t mean there isn’t an average. And it also doesn’t mean that one should try to change the average. Private sector workers have more right to get excited about generalisations about the private sector than (permanent) public sector workers, who have relatively uniform working pay, conditions and arguably organisation culture.
              (3) If you disagree with the linking of public sector wages with private sector ones, would you hand back each year that part of your salary which is due to Benchmarking?
              To borrow a phrase, I hate to let facts get in the way of a good rant, but if you read the post, it says that pay should be linked to the social value of work undertaken. In many cases, this will be equivalent to the private sector wage. In other cases, it may not.

              • Ger ,

                Ronan

                As a private sector employer I would find it impossible to cut the pay of an employee, its a very difficult thing to do, and is socially embarssing, there is, I think, an social understanding on that.I would add that sacking employees is very diffcult and a last resort, but frequent.Cutting hours and jobs is ok, but not pay. I have only done it once and that was in the circumstances where the employees job had ceased to exist and I had an alternative lower paid one avaialble. The only way real pay falls in the private sector if is there is inflation.

                • Garo ,

                  Hi Ronan,
                  I have a few comments about this otherwise good post.

                  1. The finance minister has not done enough. He excluded the top paid civil servants and he did not touch existing pensions. Moreover, he actually delinked current pay and pensions so that pensioners who got massive pension rises thanks to benchmarking are not suffering any of the cuts that serving public servants are suffering.

                  2. There is a 2-tier pension system in the civil service. Pre-1995 and post-1995. the gulf is wide enough to merit some mention in your post.

                  3. The pension levy is a pay cut plain and simple. It applies to everyone working in the public sector including those on temporary contracts and thus not eligible for a pension. With that in mind an additional bar for Q1 2010 would be instructive.

                  4. It troubles me that you excuse the absence of any adjustment in the finance sector by saying that it is a sector in limbo. This is a sector that is hugely responsible for bringing us this catastrophe. About as much as the construction industry. Yet, while on suffers a 40% adjustment the other suffers none at all?

                  5. There is a significant variation within the civil service. From +7% for health to -7% for Education. Clubbing them in one group is incorrect.

                  6. Your remarks about “a complete disconnect between what they do and how they pay for it. Ireland needs to have a public service populated by a new type of organisation. That organisation will understand what benefit it brings to society, and thus will know what money it needs to raise to fund its service. And the organisation will have much greater control over accessing the skills it needs” could be said about almost all sectors but particularly the financial sector and the top management of almost all the private sector.

                  • Ralph Smith ,

                    The public sector unions want it in every direction.
                    1. Complete and utter job security
                    2. No Pay Cuts/ Extra Levys
                    3. ‘Healthy’ Pensions including defined benefit.

                    They don’t seem to appreciate that this is just like taking cash from an ATM. (Keep doing it and it will eventually run out)

                    The hard working public service workers on the front line need to address the elephant in the room which is the thousands of administrators and middle managers who contribute very little. If the geniune hardworking front line staff (Guards, nurses, prison warders ect..) don’t make noise about the wasteful paybill they will be bundled in the same group.

                    For example how many administrators and managers were let go when the regional health boards amalgamated into the HSE? There should have been huge rationalizations at that point. But there wasn’t and now every public service worker will suffer as the government tries to reduce the pay bill while keeping the wasters in employment.

                    • Ronan Lyons ,

                      Hi Garo,
                      Good set of comments. One or two replies:
                      (1) Pensions do not differ in practice across pre and post 1995, as far as I understand, by which I mean that both net take home pay while earning and the net amount received as a pension after working for similar service are the same. What differs is the total amount paid, with a great amount put aside by the Government for post-1995 employees.
                      (2) I am not excusing the finance figure at all. I think it is very interesting certainly, but I am not excusing it.
                      (3) The “disconnect” point is particular apposite for the public service because the private sector ultimately has to earn its keep. If it doesn’t provide any value, it dies.

                      @Ger
                      Thanks for that comment – your experience ties in with a lot of the behavioural economics literature. From a psychological point of view, it’s very interesting that people, when pushed to make savings, find it easier to fire three people in 100 than reduce everyone’s wage by 3%!

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