When Theresa May took the stage at the Conservative party conference last autumn she reprised her pledge for a fairer economy. Specifically, she homed in on pay growth, or the lack of it.
“Our economy should work for everyone, but if your pay has stagnated for several years in a row and fixed items of spending keep going up, it doesn’t feel like it’s working for you,” the prime minister declared.
Fast-forward to this summer and the one in six workers who ply their trade in the public sector will know exactly what she is talking about. Living costs are rising at an increasingly rapid pace and, thanks to a cap imposed by May’s government, public sector pay is falling behind.
Under the Conservatives’ austerity drive, a large part of the pain has been borne by public sector workers – a broad cohort ranging from low-paid NHS workers to high-paid civil servants. Their pay was frozen in the financial years 2011-12 and 2012-13 – except for the lowest earners. Rises were then limited to an average of 1% from 2013-14 to 2015-16, and then capped at 1% again for the next four years. It remains to be seen if May and her cabinet colleagues, weakened by last month’s election shock, will soften that stance.
The current squeeze on public sector workers is in stark contrast to the years of the global financial crisis. Their pay was relatively protected after the crash while earnings in the private sector fell. Average weekly earnings for the public sector were £479 in 2011, up 9% from £439 in 2008. In the private sector, average weekly earnings were up just 3% over the same period to £448 in 2011, and that was before taking into account inflation. But thanks to government-set pay restraint, public sector workers have missed out on the recovery in wage growth in recent years.
Now that the pound’s sharp drop since the Brexit vote is pushing up import costs and stoking inflation, that pay restraint is being felt even more acutely. Wages are falling in real terms for many public sector workers or, in other words, the cost of many goods and services is rising faster than their pay packets. That is also the case for private sector workers, but their real wages are falling at a slower pace.
As the Resolution Foundation thinktank recently noted: “The scale of the current public sector pay squeeze is much tighter than in the private sector, and will continue for some time too.
“While real growth up to the end of 2016 was 1.6% for the private sector, it had fallen to 0.3% for the public sector.”
For public sector employers that squeeze is causing serious problems when it comes to recruiting and retaining workers, as shown by the news that more nurses and midwives are now leaving the profession than joining it. That has knock-on costs for the public sector when hospitals and other places of work are forced to rely on agency staff to fill the gaps.
Looking into what is pushing people to leave the public sector, the TUC says many workers cannot make ends meet any more. It points to polling of 21,000 health service members last year by the public sector union Unison, which found that one in 10 had pawned possessions to ease their cashflow problems, and a similar proportion had used payday loans.
The TUC’s own analysis suggests there is worse to come. It calculated that nurses, firefighters and border guards will all see their real pay drop by more than £2,500 by 2020 if the government sticks to its 1% cap.
It is worth noting that going by simple sector-wide averages, those employed by the state are still earning more than those in the private sector. Public sector workers earn about £25,000 a year on average and for the private sector it is £22,500, says Jonathan Cribb at the Institute for Fiscal Studies thinktank.
“But once you control for education, age, where people live and their experience, the difference is quite small,” he adds. Furthermore, the gap is narrowing.
Based on current plans and on forecasts from the Office for Budget Responsibility, the government’s independent economic forecaster, the IFS says private sector pay will rise six percentage points faster than public sector pay between 2016-17 and 2020-21. That would reduce the average difference between public and private sector pay to a level not seen in at least the last 20 years and to one that is “well below the level seen in the early 2000s when there were shortages of nurses,” notes Cribb.
But the government will be wary of rushing into any big policy changes to fix its recruitment troubles. John Hawksworth, the chief economist of accountancy group PwC, says the public sector pay bill was about £180bn last year.
“So if you were to raise the public sector pay rise to 3% for the next three years it would cost you an extra £10bn by 2020 compared with current plans,” he adds.
“So I guess there’s a clear case for doing it in terms of recruitment and retention and fairness … but on the other hand it is a significant amount and has to be weighed in the overall fiscal balance against other priorities.”
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