ECONOMICS:Public sector workers enjoy an earnings premium ranging from 21% to 72%, writes JIM O'LEARY

LAST FRIDAY the Central Statistics Office (CSO) published its latest National Employment Survey. This survey, instituted as recently as 2003, is the most comprehensive source of data on earnings in the economy. The sample on which it is based comprises some 4,500 employers and 60,000 employees.

Information is collected, not only on earnings, but also on key employee characteristics like age, gender, experience, educational attainment and occupation.

The survey published last week relates to 2007 and offers all sorts of fascinating insights into the structure of earnings across the economy yet the material that has commanded the most attention is that concerned with the differences between the public and private sectors.

In this regard the headline-grabbing number was 48 per cent, the margin by which average hourly earnings in the public sector are estimated to exceed those in the private sector.

Of course, public sector workers tend to be older, more experienced, and more highly-educated than their private sector counterparts and this partly explains the raw earnings gap. But the survey data reveal that, controlling for occupation, for age, for experience or for education, public sector workers still enjoy a huge pay advantage.

For example, public sector workers with third-level degrees in 2007 earned on average 44 per cent more than private sector employees educated to a similar level; public sector workers with more than 30 years’ work experience enjoyed average earnings 38 per cent ahead of their private sector counterparts.

Across every occupational category, age group, band of experience and level of educational attainment, public sector workers enjoyed a sizeable earnings premium ranging from 21 per cent to 72 per cent.

Now, public sector workers with a third-level degree may also be older and more experienced than private sector employees with third-level degrees; likewise public sector managers may on average be better educated than private sector managers. This being the case, in order to compare like with like, we need to go further than the published survey data.

Actually, this kind of analysis has also been done, though not yet on data as recent as 2007, and I know more than a little about it since it was two Maynooth colleagues and myself who pioneered this work in an Irish context with a paper published five years ago.

What we found was that, controlling for a wide range of employee characteristics and other relevant factors, public sector employees enjoyed a 13 per cent earnings premium in 2001.

Since our 2004 paper, there have been several others in a similar vein, the most recent of which, an ESRI paper published last December, concluded that the public sector pay premium had widened to 24 per cent by 2006.

This is an extraordinary margin by any standards, all the more so since it makes no allowance for superior pension arrangements and job security in the public sector. It also exceeds by a very wide margin estimates of the public sector pay premium in other European countries.

Moreover, the strong likelihood is that the premium has widened further since 2006.

Let’s place the above in the context of the current crisis in the public finances and the steps needed to address it.

At the time of last April’s budget, the Government indicated its intention (perhaps better described as an imperative) to make corrective adjustments to the public finances of €16.5 billion over the next four years, starting with a €4.75 billion package of measures in budget 2010. Judging by what limited detail has been published to date, it seems at least a third of this, or €5.5 billion, will have to come from reductions in current spending.

Given the proportion of the relevant current expenditure aggregate that it accounts for, savings of this magnitude could not conceivably be secured without big cuts in the pay and pensions bill. There are only two ways in which such cuts can be achieved: by reducing numbers employed and by reducing average rates of pay.

Given the desirability of preserving service quality, the need to avoid exacerbating the problem of unemployment, the heavy financial costs to the Exchequer of voluntary redundancies and the overwhelming evidence of an exceptionally large public sector pay premium (even after the introduction of the so-called pension levy), the case for concentrating the burden of the large outstanding adjustment more on pay rates than numbers seems compelling.

Yet cutting pay rates does not amount to a policy, more an emergency tactic. A thorough-going policy on public sector pay requires Government not only to reduce outlandish public sector premiums but to address the factors that created those premiums.

What this requires in turn is a complete overhaul of the system of public sector pay determination, in particular the abandonment of the present omnibus benchmarking model and its replacement with something much more flexible and much less centralised.

What is also required is the dismantling of the myriad barriers to entry into the public service, including the tight restrictions on recruitment to the sector and mobility within the sector that boost the bargaining power of incumbents. Absent such restrictions, it is unlikely that a pay premium of 24 per cent would last very long.

Jim.oleary@nuim.ie