John FitzGerald: Public pay ‘restoration’ must be gradual

State must be wary of again widening pay gap between public and private-sector workers

Spending power: junior public servants still have significantly higher pay rates than their private sector equivalents. Photograph: Bryan O’Brien

Spending power: junior public servants still have significantly higher pay rates than their private sector equivalents. Photograph: Bryan O’Brien

 

The role of the property market in triggering the economic crisis is well understood but there were many other related problems which added to the pain of the resulting recession. The hubris of the boom period contributed to a rapid increase in labour costs across the economy, out of line with what was happening in neighbouring countries.

The resulting loss of exports was little noticed in the boom period and exporting jobs were replaced by jobs in the property-related sectors. However, when the crash came, the lost jobs in exporting sectors were sorely missed.

As part of the successful repositioning of the economy, average pay rates across the economy have remained pretty well unchanged since 2008, while pay rates have continued to rise in competitor countries. The result has been a significant improvement in Ireland’s competitiveness, contributing to the return to growth and a strong rebound in employment.

Wage stagnation

Behind this story of a rapid growth in economy-wide pay rates in the boom period, followed by a wage standstill for eight years, is a much more complex pattern of experience affecting individuals and sectors. In particular, the huge numbers who lost their jobs in the recession years (2008-2011) suffered a dramatic drop in their standard of living. Those, mainly young families, who had recently bought homes at the top of the boom, were very hard hit by falling incomes.

From before and during the crash, the average experience of public-sector workers and private sector workers has been very different.

Economic and Social Research Institute research showed that, even after taking their higher qualifications and experience into account, public sector workers in 2003 had pay rates on average 10 per cent above those in the private sector. However, as a result of the subsequent “benchmarking” process, by 2006 public-sector pay rates were over 20 per cent above those for comparable private sector workers. These elevated pay costs added to the tax burden.

Public-sector excess

When the crash happened, such higher pay rates proved to be unsustainable. It would clearly have been unacceptable to have imposed even more draconian cuts on public services to continue paying public sector workers way above comparable workers in the rest of the economy. The result was a dramatic and exceptionally painful cut in public-sector pay rates in 2009 and 2010.

While the move was very unwelcome, public-sector workers accepted these severe cuts in a series of agreements.

By 2010, the result was that public-sector workers were paid, on average, about 10 per cent more than their private sector counterparts, many of whom also experienced falling incomes and pay rates. Further agreements have seen a small further reduction in the differential.

The ESRI and Central Statistics Office research suggests that now senior public servants are actually paid less than their private sector counterparts as the adjustment in pay rates was much more severe for those on higher incomes. But they also benefit from more attractive pension conditions.

Lower levels

It is junior public servants, and those with lower qualifications, who still have significantly higher pay rates than their private-sector equivalents. This reflects the fact that the cuts in pay rates were strongly progressive in nature. However, it is these junior staff who are more likely to be in the high rent or negative equity age groups.

Obviously within the private sector the experience was very varied. Those working in financial services or hospitality have pay rates today that are still below those of 2008. However, those working in the IT sector and manufacturing, have, on average, higher pay rates than before the crash.

While the public sector legislation refers to “restoring” pay rates, this must be undertaken in a gradual fashion. It would be both unfair and unsustainable if the outcome was again to result in public-sector workers being paid dramatically more than private-sector workers with comparable qualifications and experience.

As a result, the “restoration” of pay rates should be undertaken in line with the growth in pay rates in the private sector over the next few years.

Where public-sector pay rates have fallen below what is needed to recruit and retain staff, as may be the case for certain staff categories, there is a case to increase pay rates.

Lower pay rates for entry-level staff were agreed at a time a recruitment embargo was in place, and these may warrant revisiting. However, the overall aim should be to maintain broad parity between public and private-sector remuneration for equivalent skills and experience.

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