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The UK government is facing a “winter of discontent” in public services. In response, it asserts that it cannot afford higher salaries and wants to limit public servants’ right to strike. This can work politically. But financially it makes no sense. Public sector salaries should be set at the levels necessary to attract and motivate the required workforce. A jump in inflation does not change that logic.
Since the Conservatives took power in May 2010, overall real average pay (including bonuses) had risen by 5.5 per cent in the private sector by September 2022, but fell by 5.9 per cent in the public sector. Shockingly, between January 2021 and September 2022, average real pay in the private sector fell by 1.5 percent, but public sector pay fell by 7.7 percent. In fact, all of the decline in real public sector pay since 2010 has occurred in the last two years.
Such a large cut in public sector salaries would not have been possible without high inflation. But does one want to reduce real wages in the absence of an increase in the price level? The answer is: yes. The UK has faced a major deterioration in its “terms of trade”. Thus, the prices of its imports have increased sharply as compared to its exports. The UK would be poorer if energy prices had not risen. Some of this adjustment in real income must come through to wages. Thus, some decline in real earnings is neither surprising nor inappropriate. Inflation has only made implementation possible.
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Yet even if real earnings in the economy fall slightly, why should the public sector’s decline be much greater than the private sector’s?
One could argue that public sector wage controls are an effective way to prevent wage-price spirals, that the government cannot afford to overpay public sector workers, or that inflation is an opportunity to reduce excessive levels of public sector wages, especially when one benefits, especially considering the generous pension.
There is no merit in any of these arguments.
On the first, Ben Zaranko of the Institute for Fiscal Studies notes that “it is difficult to see how public sector wage increases could directly contribute to the wage-price spiral”, given the lack of public sector prices. Also, he notes, one could argue that public sector pay is leading inflation, as it is lagging far behind. Above all, the policy on wages will not reduce inflation. This requires macroeconomic measures.
On the other hand, the government’s decision not to raise salaries in line with wages in the private sector is not because it cannot afford to do so. Taxes can be increased if desired. It is indeed a political decision to pay public sector employees for the unfunded promises of the government.
On the latter argument, as the IFS noted in its October 2022 Green Budget, average wages in the public sector are higher than in the private sector, but this advantage disappears when one takes into account worker characteristics – age, experience, qualifications and so on. Account public sector workers are then paid slightly less than private sector workers. In fact, the ratio is now more unfavorable for public sector workers than at any time in the past 30 years. True, if one also takes employer pension contributions into account, public sector workers were paid an average of 6 percent more than private sector workers in 2021. But this slight advantage is sure to decline further in 2022.
Above all, the test of whether a salary is appropriate is whether it maintains services at the level promised by the government. It is clear that there are significant shortcomings in key staff, as well as widespread concerns about their quality. Thus, data from NHS England “shows a vacancy rate of 11.9 per cent on 30 September 2022 within the registered nursing staff group (47,496 vacancies). This is an increase from the same period last year, when the vacancy rate was 10.5 percent (39,931 vacancies). again, The data shows a dramatic deficit Recruiting teachers in subjects like physics or design and technology.
As Chris Cook argues, government should ask whether public sector pay is at a level that will maintain the delivery of essential services. The social structure of the country is crumbling. In particular, ill health harms labor supply. If the government is not ready to raise the necessary taxes, it should be honest about it. Allowing inflation to erode real wages, while expecting services to be maintained, let alone improved, is patently dishonest.
The government should keep private sector salaries in line, especially where it has significant recruitment and retention problems. If this means he has to reopen spending plans that no longer make sense in today’s faltering pounds, so be it. What is happening now may be penny-wise, but it is pound-foolish.
martin.wolf@ft.com
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