ANALYSIS:The IMF has said rises in public sector wages in Ireland since 2001 have contributed to the State becoming less competitive, write PHILIP O'CONNELL, SEAMUS MCGUINNESSand ELISH KELLY
IN RECENT years there has been a great deal of debate about pay levels in the public sector in Ireland, and how they compare with pay levels in the private sector.
Public sector earnings are important. They constitute a substantial proportion of overall public expenditure. They have an important bearing on recruitment, retention and motivation of public servants. They may also influence private sector wage rates, and, by extension, national competitiveness.
A consequence of this is that the pay levels in the two sectors are subject to regular analysis as people seek to determine whether or not there is what is called in the literature a wage premium – whether one sector’s employees are paid more than their equivalents in the other sector.
Our study comparing wages in the public and private sectors has just been published in the latest edition of the Economic and Social Review(www.esr.ie).
Using data from the CSO’s 2003 and 2006 national employment surveys, which typically contain information on more than 60,000 employees, the study shows that the average public sector wage premium increased from less than 10 per cent in 2003 to almost 22 per cent in 2006, controlling for the influence of age, sex, education, experience, occupation and other factors that determine earnings.
In the case of top earners, there was evidence of a private sector premium in 2003. However, this premium had been reversed by 2006, with senior public sector employees earning a premium of 8 per cent compared with their private sector counterparts.
The public sector advantage is even greater at the lower end of the income distribution, with those in the lowest public sector grades earning between 24 per cent and 31 per cent more than their private sector counterparts.
These shifts in relativities between 2003 and 2006 can be attributed to the various pay award processes (eg, benchmarking) and to the social partnership pay agreements which were implemented universally across the public sector but unevenly across the private sector.
The study also looks at the impact of pension entitlements.
About 96 per cent of public sector employees are covered by employer-sponsored pensions, compared with just 62 per cent of private sector employees.
When a very conservative estimate of the value of employer pension contributions – 10 per cent of gross wages – is added to wages of employees covered by such pensions, we find that the public sector premium increases by three percentage points on average.
A key issue in the debate concerns the appropriate method to use to compare wages in the public and private sectors. A simple comparison of average earnings in the two sectors would be misleading because of underlying differences in the composition of the two sectors. For example, differences in levels of education, in occupational structure and in length of experience can be expected to influence earnings.
The methodological challenge is to compare “like with like”. The Public Service Benchmarking Body adopted a “job evaluation” approach that measured the demands and requirements of a range of jobs across a small sample of “representative” jobs in the public and private sectors.
A more conventional approach to establishing whether there are earnings differentials between two groups or sectors is to use data on large numbers of cases to estimate a wage equation that controls for the factors that influence wages. These factors include both employee characteristics, such as age, gender, education and experience, and job characteristics, such as working time, type of contract.
Controlling for such influential factors allows a rigorous measurement of the extent to which any remaining wage differences can be attributed to either group membership or sectoral location.
This is the regression-based approach that we adopted in analysing the very large-scale national employment survey data from the CSO. It should be noted that, to ensure a like-with-like comparison, we confined the analysis to prime age employees and excluded self-employed individuals in the private sector. This is the approach adopted in previous studies comparing public and private sector earnings in Ireland, and our research builds on that earlier work.
Regression analysis is also the standard approach used internationally for comparing wages between different sectors or groups.
Using this approach, the international research has found that public sector employees often earn small premiums over their private sector counterparts. Thus, for example, the public sector premium has been estimated at between 3 and 6 per cent in France, Italy and the UK in the late 1990s. By contrast, public sector workers in Germany have been found to be paid less than comparable workers in the private sector.
The findings of our study demonstrate that any pay deficiencies that may have existed among higher public sector officials prior to the implementation of the first round of benchmarking and the Review Body on Higher Remuneration in the Public Sector had been completely eradicated by 2006.
Our research provides no support for the subsequent recommendations of the 2007 benchmarking report or the general review body reports for further upward adjustments in the salary levels of some senior public service grades. Indeed, it suggests that if such increases were to be awarded then this would undermine Ireland’s current drive to regain its competitiveness.
This suggestion should be viewed in the light of the view expressed in the report by the International Monetary Fund this year, namely that the “generous increases in public wages” that took place in Ireland since 2001 have contributed to the country becoming less competitive by pushing up wages in other sectors in the economy.
Philip O’Connell, Seamus McGuinness and Elish Kelly of the ESRI are authors of Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap, which was published yesterday.