Saturday 20 January 2018

Stats don't lie: public sector is still mollycoddled

Dan O'Brien.
Dan O'Brien.
Dan O'Brien

Dan O'Brien

ARE workers in the public sector overpaid compared with their counterparts in the private sector? How do public sector salaries compare with those in other countries? Should the reductions in pay since the crash be reversed when the public finances permit?

These questions have been among the most divisive in Irish society since the economy crashed. They are all but certain to remain highly controversial. If the economy recovers, public sector unions will be quick to demand the reversal of post-2008 pay cuts; if it does not, fresh and even more divisive battles will be fought over where further savings can be made in government spending. Given how divisive these issues are, discussion of public sector pay needs careful contextualising.

The publication yesterday of the annual report by the Institute of Public Administration on trends in the sector* provides just such context. It contains many international comparisons on important aspects of the public sector, such as health, education and the amount of red tape bureaucrats generate.

For those in the public sector who feel embattled and under-appreciated -- often with justification -- this weekend's report contains plenty of impartial foreign sources which reflect well on parts of the sector. There are no shortage of indicators which point to decent performances in some areas of the public sector as well as continuing improvements. While there are major and multiple issues around underperformance in many areas, it should be acknowledged that the sector is by no means all bad.

Importantly, the report also shows that about one in six people working in the economy is employed by the State. This is close to the average for rich countries. It is far lower than in countries such as Denmark and Finland where the proportion is, respectively, double and half as much again. Keep those comparisons in mind, because they provide some of the most essential context when considering public sector pay.

Ireland's public sector is not bloated in terms of numbers employed, every shred of available evidence points to it remaining bloated in terms of pay -- even after the numerous cuts those in the sector have endured since the crash. While it is important to acknowledge the financial difficulties pay cuts have meant for many people in the public sector, it is equally important that hard evidence informs future political decisions on remuneration. That evidence leads to only one conclusion.

Start with the gap between public and private sector pay. In Ireland, employees of the State have long been better paid than their counterparts employed by private companies, and the gap widened dramatically during the bubble years up to 2008**. The gap has usually been explained away by the higher education levels of those in the public sector compared with private sector workers.

Testing the validity of this explanation should be easy: is the gap in Ireland in line with the gap elsewhere when you control for differences in education and other factors -- such as age -- which could justify pay differentials? Curiously, there has until recently been very limited effort to answer this question. But that is changing as obtaining value for every cent of taxpayers' money becomes imperative in an age of austerity.

A study published last October by economists at the European Commission is the most comprehensive effort yet to compare the gap between public and private sector pay rates across the continent***. It sought to take account of factors, such as education levels and age profile, that could explain pay differentials between the two sectors. It found that of 26 EU countries in 2010 (the most recent year for which figures are available) the unexplained pay gap was bigger in Ireland than in any other country. In other words, even when different education levels are accounted for, the pay gap is bigger in Ireland than anywhere else.

In relation to Ireland, it specifically stated that while "a positive public wage premium is observed at all levels of educational attainment; the largest one is observed for workers with low education", going on to add "it is worth noting that even in the case of managers and professionals, the public wage gap is very sizeable, at 15.4 per cent and 26 per cent, respectively".

Pay cuts implemented after 2010 -- most notably those for high earners under last year's Haddington Road Agreement -- will have narrowed the gap, but not by very much given stagnating pay levels in the private sector.

It is very much worth noting that three other bailout countries -- Cyprus, Spain and Portugal -- happened to be in the top five of the 26 when it came to 'unexplained' public sector pay premiums. This is broadly consistent with a narrower study**** done by European Central Bank economists, which showed that of 10 euro-area countries, Ireland -- along with Mediterranean countries -- paid their public sector workers more than those in the private sector.

If the southern end of the Continent tends to pay the protected well, the more egalitarian and efficient northern part is very different. Public sector workers in countries such as Denmark and Finland earn less than their private sector counterparts.

In countries that really value fairness, those who have greatest security of employment accept that the privilege comes with lower pay. It is perverse to hear some of those who talk a lot about equality in this country defending one of the greatest inequities in Irish society.

If the October study proves beyond reasonable doubt that public sector pay remains out of line with the unsheltered sector of the Irish economy, an entirely separate set of data shows that public sector salaries remain higher on average in Ireland than in most other countries.

The best available way of measuring public sector pay across different countries is to compare the total pay bill in relation to the size of the economy. Eurostat, the European statistics office, publishes these figures annually for every EU country.

Despite the cuts in pay and the reductions in numbers in the public sector since 2009, Ireland's public sector pay and pensions bill stood at 11.5 per cent of GDP in 2012, one-tenth more than the average in the euro area.

But even this measure understates the position. The pay and pensions bill stood at 14.2 per cent in 2012 as a percentage of GNP, a measure most analysts -- including those in government (when it suits their purposes) -- believe more accurately reflects Irish prosperity levels.

By this measure, only four countries among the 28 EU member countries paid more for their public sectors. Three were Denmark, Finland and Sweden. But the reason the Nordics have such large pay bills is not because of high pay levels, but because they all have vastly bigger numbers at work in the public sector compared with Ireland, as discussed earlier. All this says clearly that average pay levels in the Irish public sector remained among the highest in Europe even as late as 2012.

The State is among the most indebted in the world. Reducing these debt levels will require tight budgetary control even if a decent recovery takes hold. But if there is scope for some budgetary loosening in the years ahead, it should surely be in the form of tax cuts of the kind introduced after 1987, so that all earners benefit, or be invested in training for young people or much-needed infrastructure projects. The case for returning still high public pay levels back to bubble-era levels is non-existent.

*wipa.ie/pdf/Public_Sector_Trends_2013.pdf **esri.ie/UserFiles/publications/20091102110232/WP321.pdf

***ec.europa.eu/economy_finance/publications/economic_paper/2013/pdf/ecp508_en.pdf

****ecb.europa.eu/pub/pdf/scpwps/ecbwp1406.pdf

Irish Independent

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