By Carl Parker, ASCL Conditions of Employment Specialist: Pay

Read part one of Carl's blog: Arguments about wages and inflation are spiralling out of control 

Sometimes I wonder if I’m the only person shouting at the radio when yet another government minister trots out the well-rehearsed line that paying public sector workers more will drive up inflation.

The accepted measures of inflation are the retail prices index and the consumer prices index. Recipients of the public service of state education do not pay a retail or consumer price for this service. The same applies for most other public services.

The cost of providing state education can, therefore, rise with no direct effect on inflation because ‘consumers’ are not charged more. When we look at school teachers’ and leaders’ pay, we can say with certainty that increasing pay will not mean a penny more is paid by a parent to send their child to school.

In terms of the direct effect on inflation, it really is as simple as that. There are no direct inflationary consequences of increasing the pay of school teachers and leaders.

This is also the view of the former Deputy Governor of the Bank of England, Sir John Gieve, who told the BBC’s Today programme in December 2022  that "public sector pay increases don’t directly affect prices…”.

Will paying the school workforce more lead indirectly to higher inflation? 
For the government’s line on inflation to hold true, there needs to be evidence that paying the school workforce more will indirectly lead to higher inflation. In other words, that higher public sector wages will drive up wages in other parts of the economy as private sector workers demand to keep up with public sector pay rates. Economists refer to this as “spillover”.

Two things have to happen for “spillover” to occur. Firstly, public sector pay has to be higher in comparable terms than private sector pay. Secondly, public sector pay increases have to be regularly higher than the private sector.

Neither of these things are happening.

The latest ONS figures for average earnings in the UK are:

• Public sector: £607 per week
• Private sector: £628 per week

Average pay in the public sector is irrefutably lower than that of the private sector. This is confirmed by the National Institute for Economic and Social Research (NIESR) who measured the like-for-like gap in pay between the public and private sectors and produced the following chart, showing their estimate of the public-private wage gap:



NIESR stated (in its direct advice to public sector pay review bodies) that “the current episode of public sector pay restraint is significant because it marks the longest period of sustained downward pressure on public sector pay in recent history.” 

Widening pay gap
The gap in pay between the public and private sectors is widening. The latest figures from the Office for National Statistics (ONS) for wage growth September-November 2022 shows regular private sector pay rising at a rate of 7.2% against 3.3% in the public sector.

Common sense, instinctive economics tells us that with public sector pay significantly below the private sector, and with public sector pay increases below the private sector, there is no likelihood of “spillover” wage increases from the public to the private sector.

That’s common sense, but what happens if we look at a more detailed, econometric analysis? 

In its latest evidence to pay review bodies, the Treasury referenced a report by the Bank for International Settlements, which included analysis of “spillover” and included this graph:

 


The red line shows the likely impact of public sector pay increases on the private sector in the five countries indicated (based on regression analysis). The analysis places GB below the regression line (which is already low) and the report’s authors state that the “spillover” effect is “non-significant”. 

Common sense economics and detailed econometric study tells us that it is a myth that public sector pay increases will fuel private sector wage growth and, in turn, fuel inflation.

Sir John Gieve agreed, and told the Today programme that he does not believe public sector pay increases have a “major effect” on private sector pay.

The current dogma that public sector pay increases will fuel inflation is wrong and is causing real harm.

To paraphrase the NIESR report, in the end, labour market economics dictate that you have to restore equilibrium to pay in the public and private sectors. It’s a matter of when not if. To delay doing so only causes harm, not just to the public sector workforce but also to the public they serve.

Carl Parker is ASCL Conditions of Employment Specialist: Pay.