Restoring public sector pay cuts remains unsustainable

Assessed on a like-for-like basis, it is almost certain that public sector workers continue to be paid significantly more than their private sector counterparts

Discontent: members of the  teaching   unions picket during the recent strike. Photograph: Cyril Byrne

Discontent: members of the teaching unions picket during the recent strike. Photograph: Cyril Byrne

 

That public servants had to endure significant cuts in their incomes during the financial crisis is well known. The bulk of these cuts came in the form of either the pension-related deduction introduced in 2009, which reduced take-home pay by an average of 7 per cent across the public service, or of the cuts in wages and salaries imposed from January 1st, 2010, which also averaged around 7 per cent.

These measures were implemented at a time when the economy was imploding and the public finances were deteriorating at a frightening pace. When the supplementary budget of 2009 was presented to the Dáil in April of that year, the budget deficit was heading towards 13 per cent of GDP, compared with the small surplus of just two years previously. Worse was to follow in 2010.

The budget deficits recorded in those years were mostly structural in nature. In other words, they were dominated by a component that was expected to persist even after the restoration of normal economic conditions. Reducing the deficit to a safe level therefore required the implementation of expenditure-cutting and tax-raising measures that would also be structural in nature; that is, by measures that would have a permanent effect. Temporary measures were not going to cut the mustard.

One other point worth making, to remind ourselves of the background against which the pay cuts of 2009-2010 took place, is that the previous decade had seen a veritable explosion in public sector pay. Between 1998 and 2008, the exchequer pay and pensions bill rose by 160 per cent, from €7.4 billion to €19.3 billion, with average pay per head rising by almost 75 per cent (20 per cent in real terms), boosted inter alia by the awards made in the first round of benchmarking.

Healthier

Happily, the fiscal conditions that obtain now are much healthier than in 2009-2010. In particular, the budget deficit has been greatly reduced. It is not surprising in the circumstances that demands for increases in public sector pay are being made. But talk of restoring pay to pre-crisis levels, as if this were an entitlement created by the ending of the crisis, rather misses the point. Just as the fiscal crisis was caused in part by unsustainable pay increases, so it has been overcome in part by means of pay reductions. Moreover, the structural element of the budget deficit has not been eliminated; the latest official estimate puts it at 2.5 per cent of GDP.

This is not to say that there should be no increases in rates of public sector pay in the period ahead. But the grounds for such increases need to be clearly identified and their opportunity cost (the concomitant changes in other spending or in taxes) needs to be carefully considered. In terms of a general increase, a rise in the cost of living could provide the basis for some adjustment, although the prospects for inflation suggest that any adjustment that might be justified here is likely to be very small.

Grounds for increases might also be provided by measures that boost productivity or by compelling evidence that pay is the cause of recruitment or retention problems. However, grounds such as these might form the basis for increases in pay for individual grades or clusters of grades, but not for across-the-board increases. In addition, there may be a case for unwinding measures that unduly penalise certain groups, such as new recruits.

Comparisons

What role might comparisons with the private sector play in setting public sector pay? This is a fraught question, recalling the unfortunate benchmarking experience of the 2000s. The first round of benchmarking, completed in mid-2002, culminated in pay increases averaging 9 per cent, at a gross cost of €1.2 billion per annum. These increases were perceived, at least by public sector trade union leaders, as having been required to achieve equity between public and private sector workers, although the benchmarking body offered not a shred of evidence in this regard.

Indeed, research subsequently carried out indicated that, on a like-for-like basis (ie, taking account of characteristics such as education and experience), public service workers were paid 13 per cent more on average than their private sector counterparts before the benchmarking awards kicked in.

By the mid-2000s, the benchmarking awards had boosted this premium to more than 23 per cent, according to the Economic and Social Research Institute (ESRI). By 2010, the most recent year for which estimates are available, it had declined somewhat, to 17 per cent, again according to researchers at the ESRI. (This estimate for 2010 fully takes account of the pay reductions implemented that year.)

Interestingly, the European Commission has published a set of estimates, also for 2010, that puts the Irish premium at 21.2 per cent, compared with an EU average of 3.6 per cent.

Given the trends in average pay in the two sectors since 2010, it seems likely that the public sector premium has declined further. Still, it is almost certainly the case that public sector workers continue to be paid significantly more than their private sector counterparts, on a like-for-like basis. Therefore, insofar as this type of analysis might be expected to provide an argument for a public sector pay increase, it is likely to disappoint.

In any event, summary measures of the public-private pay differential are much too crude to provide a robust basis for assessing equity between the two sectors. There are many reasons for this, but among the most important is that such measures do not take into account critical aspects of employment conditions, such as tenure and pensions.

In general, public sector workers enjoy guaranteed, defined benefit pension entitlements and relative security of tenure. The value of both has surely increased appreciably in recent years.

Jim O’Leary is an economist who resigned from the first benchmarking body before it published its report in 2002. He can be contacted at mail@jimoleary.ie

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