Business Irish

Thursday 17 August 2017

Our pay comparison policy is out of date and dangerous

Public Expenditure Minister Paschal Donohoe at Government Buildings during a briefing about the Public Service Pay Commission Report Photo: Gareth Chaney
Public Expenditure Minister Paschal Donohoe at Government Buildings during a briefing about the Public Service Pay Commission Report Photo: Gareth Chaney
Brendan Keenan

Brendan Keenan

ANY faint hopes that the new Pay Commission might find new ways of setting public sector pay were pretty firmly dashed with its report. To be fair, changing the methodology was not really in its remit, but it does not seem to be in anyone else's either.

This is a pity, because the drawbacks of pay based on comparisons between the public and private sectors - which is the theoretical basis of the approach - is more acute than in the past. The system has driven the public finance over a cliff twice; and the road to the cliff may be shorter and steeper than before.

Yet off we go. Two key findings were that public servants in the higher grades were paid less than their counterparts in the private sector but lower grades earned more. There is much discussion about the difficulty of turning the apples and pears of public and private into comparable kiwi fruits, but not nearly enough abut separating upper and lower within the public sector.

The separation of public sector workers into Golden Delicious and Granny Smith's was a major cause of the last disaster. Senior government workers got their own comparison body, grandly titled the Review Body on Higher Remuneration in the Public Sector.

It found that higher remuneration in the private sector was higher again and, under its comparisons, the pay of the grander apples raced away from the low-lying fruit. They never quite caught up with bankers but they did become some of the best-paid government workers in the world - something the commission delicately glides over.

By a happy chance, the system was applied to government ministers, who must sit on the other side of the negotiating table guarding the money of the citizens, without a thought as to how they themselves will come out of it. Or so the theory goes. The strange thing is that this was going on just as people were beginning to criticise the surge in higher executive earnings in the private sector. The trend began in the USA, where the gap reached extraordinary levels. Chief executive pay averaged 20 times average employee earnings in 1973: it is now 240 times.

How does one put rotten apples like this into the comparison? The gap is still widening and is particularly acute in financial services, where we hope to have a bunch of London emigrés settling in Dublin's docklands.

This extreme example covers the top one per cent of earners but the commission's analysis of wider groups is still instructive.

The top 10pc of private earners get seven times more than the bottom tenth, whereas the difference is less than four times in the public sector.

Average earnings comparisons are also interesting: €25,000 a year in the hospitality sector, €60,000 in information and communications technology (ICT) but a difference of just €7,000 a year between the best and lowest-paid public sector groups.

There is no ignoring those ICT figures which show both the pseudo-science of pay comparison and how it can all go horribly wrong. Liffeyside now contains another element not present for those earlier reviews - the concentration of intellectual property companies.

They pay exceptionally well at the higher levels too, but if they also start subsidising housing, health or education for their large foreign staffs, the whole exercise becomes even more fraught.

Another drawback of this whole approach is that, within the public sector itself, comparisons with the private sector are not the only relativity - perhaps not even the main one. Watching the salaries of their senior supervisors soar away from their own is bound to increase pay demands from the rank and file.

That in turn makes it more difficult to find an affordable solution to what is for them the most important relativity of all; that between one kind of government worker and another.

There will always be demands for special increases for special reasons from one group or another, sometimes justified, sometimes not. Around half a dozen are in the pipeline at present. Some will be conceded and will be followed by relativity demands from other groups, whose conditions may not have changed at all.

Historically, this was dealt with by governments spreading out the process over several budgets and trying to incorporate the costs within a tolerable overall increase in the pay bill. One disadvantage of national wage agreements is that they are too formal to allow for this kind of fudging.

Special deals were added to what was supposed to be the maximum which could be afforded and usually was the maximum paid in the private sector. For the moment, we are back to the old way of doing things, with the Government negotiating with its employees and playing for time while companies do whatever they say they are able to do, or can be forced to do.

Yet national wage agreements may be the best way to deal with the phenomenon which would have astonished observers even 10 years ago; the casualisation of work in the private sector

Many reasons have been advanced for this, including the decline in trade union power and membership, the loss of jobs through technology, and competition from emerging economies because of globalisation.

All of these feed into each other. Union power has declined both because technology has replaced, or threatens to replace, their members' jobs and foreign competition genuinely does reduce companies' ability to pay higher wages.

But these hugely disruptive forces hardly apply in the public sector, not even in State companies. At least not yet. In the meantime, how is the pay of its lower grades (already conceded as higher than private sector counterparts) to be compared to that of those on zero-hours contracts, or working for small firms threatened by technology, Asian imports or Brexit?

The nonsense of valuing public sector pensions when two-thirds of private sector workers have no pension provision at all should be proof that much of this is smoke and mirrors.

I am aware of the difficulties of incorporating qualifications, gender age and so on, but the strong impression is that the difficulties are too great to overcome. It must be asked whether this whole effort to construct numerical bases for pay bargaining is yet another cop-out from the politics of managing society by hiding behind impressive-looking, but ultimately dubious analysis?

One does not need numbers to know that because the previous system had an inbuilt bias in favour of government workers because increments were not counted and top-up deals were part of the process. The bias would now be greater because of what many would call market failure in the private labour market.

Governments everywhere seem unable to deal with this particular market failure and unable to understand why voters punish them for it. These pressures are obvious in Ireland too, and applying the methods of the vanished word of 1980s can hardly be the right response.

Government owes a duty of care to all citizens in allocating the resources available from the economy. That can be done only with serious politics, not spreadsheets.

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