The price of the premium
Seamus McGuinness, economist with the Economic and Social Research Institute (ESRI), outlines their study on the differences between public and private pay and discusses how the Budget has altered the gaps between employees in the two sectors.
The issue of public sector pay has been widely debated as policy makers, social partners and economists look at identifying the most effective means of addressing the deficit in the public finances and restoring Ireland’s competitiveness.
Clearly, the existence of a substantial public sector premium is damaging on both fronts. In a study published recently in the Economic and Social Review, researchers at the Economic and Social Research Institute (ESRI), using a large Central Statistics Office data set on employees, demonstrated that the overall public sector pay premium increased from less than 10 per cent in 2003 to almost 22 per cent in 2006, after controlling for differences in education, experience levels and other wage determining characteristics of public and private sector workers. When broken down according to gender, the analysis revealed that the earnings gap increased from 5 to 23 per cent for males and from 14 to 21 per cent for females.
Previous research suggested that, in 2003, lower skilled public sector workers enjoyed a substantial wage advantage relative to their private sector counterparts. However, senior public sector employees incurred a pay penalty relative to their private sector equivalents, with these differences more pronounced for males (Ernst & Young and Murphy, 2007).
Our study confirmed this pattern. However, when the analysis was replicated using the 2006 NES data, the results indicated that the pay penalty for the most senior public sector workers observed in 2003 had been replaced in 2006 by wage premiums in the region of 8 to 13 per cent for both males and females. These results demonstrate that any pay deficiencies that existed prior to the first round of benchmarking and the benchmarking review body reports, numbers 40 and 4, had been completely eradicated by 2006.
The ESRI study has been the subject of some debate surrounding the appropriateness of the methods used to estimate the wage gap between public and private sector employees. It is true to say that the ESRI approach differs fundamentally from that of the benchmarking body which relied on job evaluation techniques. However, the process of job evaluation is open to question regarding the extent to which public sector workers can be effectively benchmarked with private sector equivalents on the basis of job content.
Furthermore, there is little theoretical or empirical grounding to the apparent assumption that wages will be primarily determined by job characteristics. However, the approach adopted within the ESRI study discussed here largely ignores job content and compares the earnings of public sector workers with their private sector counterparts that are equipped with the same education and experience levels. Within economics it is widely accepted that skill levels are the principal factors determining an individual’s productivity and, hence, their earnings. As such, the ESRI researchers would advocate that the methodology that they adopted in their study, which is standard within the international literature, is the most appropriate means of assessing the magnitude of the public sector pay premium.
After the pension levy that was implemented in March 2009 and the cuts in pay rates in the most recent budget, which all public sector workers will endure this year, the advantage in pay rates observed within the March 2006 data is now likely to have been substantially reduced. It is also possible that some public sector workers may actually be worse paid after the pay cuts than employees with similar characteristics in the private sector, while undoubtedly some public sector workers will still be better off. Nevertheless, until more current data becomes available one can only speculate on the likely magnitude and distribution of any remaining gaps between public and private sector employees.
Seamus McGuinness joined the ESRI as a research officer in July 2007. Prior to this he held posts at the Northern Ireland Economic Research Centre, the Economic Research Institute of Northern Ireland and the Melbourne Institute of Applied Economic and Social Research (University of Melbourne). He obtained his PhD in economics from Queen’s University Belfast in 2003. His research interests are the labour market and the economics of education.
