Public sector pay in decline as spending restraints and inflation bite

Average pay grew reasonably fast in 2015 and 2016 – driven more by an inflation slowdown than high productivity or nominal wage growth. However, this growth is now slowing rapidly. Adjusting for CPI inflation, ONS figures show growth in the year to January 2017 of 0.8 per cent, down from 2.0 per cent a year earlier. With inflation expected to rise further, there is every chance of real average pay growth turning negative in the next few months. Any new pay squeeze would be particularly unwelcome given that average earnings are still £23 a week below their pre-crisis peak.

But prospects for pay are determined as much by the firm and sector you work in as the overall state of the economy, and there are big variations across the labour market. In some sectors – including retail, finance and higher-end manufacturing – real pay actually surpassed its previous peak last year. In contrast, average pay in ‘Professional, Scientific & Technical Activities’ – which includes law, accounting, media and consultancy – has not recovered at all. Earnings in this sector are little higher than they were 15 years ago.

Figure 1: Some sectors have fared better than others since the financial crisis

Source: RF analysis of ONS, Tables A01 and EARN03, based on the Monthly Wages and Salaries Survey

Over the last year, real pay has fallen in a range of sectors, including professional services, parts of manufacturing, real estate, transport and storage, and finance. While these figures can be volatile, there are also some sectors that have experienced rapid wage growth, in many cases helped by the introduction of the National Living Wage.

Figure 2: Real average pay fell in some sectors in the year to January 2017 but rose rapidly in others

Source: RF analysis of ONS, Tables A01 and EARN03, based on the Monthly Wages and Salaries Survey

One obvious divide is that between the private and public sectors. While real annual growth in January was 1.0 per cent for the private sector, it had fallen to -0.1 per cent for the public sector – the first negative figure since September 2014. With inflation rising further, we expect that the pace of this public sector pay fall will increase in the near-term.

Figure 3: Real public sector pay is now falling

Source: RF analysis of ONS, Table A01, based on the Monthly Wages and Salaries Survey

For the one in six workers (over 5 million people) who are in the public sector, overall pay growth has been determined centrally as part of deficit reduction plans. Pay was frozen in 2011-12 and 2012-13 for all but the lowest earners; limited to an average of 1 per cent growth from 2013-14 to 2015-16; and then capped at 1 per cent again for the next four years. While the rising National Living Wage will support the lowest paid (particularly in social care), there are fewer low paid workers in the public sector overall.

Figure 4 shows how public sector real pay has risen and fallen since 2001, and how the next three years may look. This assumes that recent nominal trends continue and that inflation is as predicted by the Office for Budget Responsibility. Having grown in 2015 and 2016, average real public sector pay is now likely to continue falling for the next few years. On current pay trends, average pay in the public sector would be £1,700 lower in 2019-20 than in 2009-10.

Figure 4: Average public sector pay in 2019-20 may be no higher than in 2004-05

Source: RF analysis of ONS, Tables A01 and EARN03, based on the Monthly Wages and Salaries Survey
Notes: Average of the past 12 months. January 2017 prices. Between June 2010 and May 2012, public sector education includes English Further Education Corporations and Sixth Form College Corporations.

Looking at public sector workers beneath the headline level, the picture is similar in education, health and social work, and public administration. Indeed, on these projections average real pay in these sectors in 2019-20 would be lower than in 2004-05, meaning over 15 years of lost pay growth. In public sector education, real pay in 2016 was already lower than in 2003 and is now set to fall further, while health and social work could face a further 6 per cent real fall by 2019-20.

Whatever the other pros and cons of the current public sector pay policy, these wage falls will have a direct impact on living standards. For some workers they will be part of a double whammy alongside working-age welfare cuts. Pay cuts could also be expected to make it harder to recruit new workers in the public sector. Where this pressure comes alongside rising demand and uncertainty over migrant worker policy – such as in healthcare – the impact may be compounded. For these reasons, the ongoing impact of public sector pay policy should be monitored carefully in the coming years.