Saturday 10 December 2016

New study raises fresh questions about public pay

Published 24/07/2016 | 02:30

The ‘benchmarking’ exercise that Bertie Ahern initiated at the height of the bubble era ended up being a grossly untransparent wheeze which ratcheted up public pay. Photo: David Conachy
The ‘benchmarking’ exercise that Bertie Ahern initiated at the height of the bubble era ended up being a grossly untransparent wheeze which ratcheted up public pay. Photo: David Conachy

The economic crisis that hit Ireland from 2008 will remain in the national consciousness for a long time to come. The causes and consequences will no doubt be studied for many years.

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A brand new study by three University College Cork economists - Justin Doran, Noirin McCarthy and Marie O'Connor* - examines what happened to wages and income inequality in the public and private sectors from 2008 to 2013.

It comes to some eye-catching findings, most notably that the one in four public sector workers who were on the lowest incomes didn't experience a reduction in their gross pay over the period, but in fact enjoyed considerable gains.

That raises all sorts of questions about the "restoration" argument that their trade union representatives have been making so forcefully.

We'll return to that issue anon, but first some of the nuts and bolts of the paper are worth explaining. The study, which is published in collaboration with the think-tank PublicPolicy.ie, examines anonymised data from the Revenue Commissioners on taxable earnings (wages less contributions to health insurance, pensions, and so forth).

Using revenue figures makes this study unusual, and provides data which in some ways are superior to the CSO survey figures. That a huge number of people - 658,000 individuals - are tracked over a half decade makes the study invaluable.

A couple of things are worth highlighting. First, the wage figures discussed are gross (that is, before taxes). Given the increases in personal taxes since the crash, take-home pay has been hit harder than gross pay.

Second, the study excludes the grouping hurt most by the recession - namely, those who became unemployed. While this was done for a valid reasons, it should be kept in mind that the study only covers those who were fortunate enough to keep their jobs during the Great Recession.

Two distinct periods emerge from the study. In the first period (from 2008-2010), earnings fell in aggregate. In the second period (from 2011-2013), a recovery in wages was recorded.

Consider the first period first. From the onset of the financial crisis in 2008 to the year of the EU/IMF bailout in 2010, median wages (the middle figure in a sample) fell from €739 to €721. The percentage drop was greater in the public sector (6.5pc) than the private sector (2.3pc). The fall in market wages, however modest, does suggest a degree of flexibility in the Irish labour market.

The rate of growth in wages during the boom can partly explain the size of the falls during the bust. And because public sector wage growth exceeded that of the private sector on the way up, it is understandable that it fell more on the way down (there is also the small matter of the evaporation of the tax revenues which fund public pay).

Now consider the second period. After 2011 there appears to have been pick-up in wages across both sectors. From 2011-13, median weekly earnings in the public sector rose by 5pc and by 3.5pc in the private.

Overall, then, among the 658,000 people tracked over 2008-13, median weekly gross wages in the public sector group fell from €852 to €838 (-1.6pc) and rose in the private sector from €689 to €706 (+2.5pc).

The economists also look at how income equality evolved over the period, across the 658,000 people surveyed as a whole and within the public and private sector groupings separately.

In order to see how earnings changed by income group, the data are divided into quartiles, where Q1 contains the quarter of people earning least and Q4 includes the best-paid 25pc of people.

In the private sector during the recession, those earning higher incomes saw greater percentage falls in their gross pay than those on lower incomes. However, it was the higher earners who bounced back the strongest from the downturn.

The net result is that income distribution became a little less equal during the reference period.

Things were notably different in the public sector. The hardest hit were the higher earners - while the lowest earners actually saw pay increases, even during the recession. From 2008-2013 the public sector workers tracked in the survey who were in the lowest quartile had their median weekly wage rise by 7.4pc. Those in highest quartile suffered a fall of 4.9pc. Income inequality therefore actually declined in the public sector, and by much more than it increased in the private sector.

But the issue that grabs the attention is that for those people who were already in the system when the crisis struck and on lower pay, pay rose quite strongly over the five years - and all the more so in real terms, as consumer price inflation was zero.

This points to increments, promotions and other payments offsetting whatever pay cuts were imposed over that time.

It also shows that some sectors of the public sector held on to all of their bubble era gains, despite the loss of so much of the tax revenues used to fund those gains.

Another highly topical issue that arises from the study is the public sector pay premium. While it is well known that a public sector wage premium exists in Ireland (something that is more common in southern Europe than the north), the study seems to suggest that it is enjoyed by those on lower pay, rather than something all public sector workers enjoy. More research is needed to establish whether that is the case.

As it happens, it was announced by the Government just last week that a body which could do exactly that is to be set up. Paschal Donohoe, the Minister for Public Expenditure and Reform, said that he was establishing a Public Pay Commission.

This column has long advocated such a body in order to bring some sort of rigour to the public pay setting process, rather than the grab-what-you-can circus that has existed for too long.

Last week's announcement said the nature of the commission would be discussed with stakeholders. That's fine, provided the stakeholders themselves are not members of the commission.

The "benchmarking" exercise that Bertie Ahern initiated at the height of the bubble era was supposed to award pay increases on the basis of comparable workers in the private sector. It ended up being a grossly untransparent wheeze to ratchet up pay even more - the public pay bill rose by 138pc in just eight years up to the crash.

It is imperative that the new commission is peopled by independent experts, and that insiders will be kept firmly on the outside. There is no great complexity in how to do this - the UK model, for instance, has not been at all bad.

If an independent and rigorous commission can bring hard evidence to the table on pay issues, it will go a long way to preventing the sort of mismanagement that contributed to the crash and which made its resolution much more difficult.

*To read the study discussed in this piece, go to http://www.publicpolicy.ie/wp-content/uploads/UCC-PublicPolicy-22-June-16-1.pdf

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