Watching Monday’s Questions & Answers, I became increasingly baffled as to how poorly understood the gap between public sector and private sector pay in Ireland actually is. I conducted a mini-straw poll, through the various media of living room chat, email and Twitter. That poll made me realise that while I had been labouring under the presumption that despite all the stats we have on wages across sectors, those stats were having no impact, others were labouring under the presumption that the debate had to be kept at a general level because we had no statistics on the topic.
The guts of a decade ago, I undertook some research for Prof. Frances Ruane on the original benchmarking deal. What we found at the time was that there was no gap emerging between public and private sector wages, or if the gap was there at all, it was in favour of public servants. For those interested in more on that 2001 perspective, I’ve embedded a version from Scribd at the very bottom of the post.
Given the way this week is going, with public sector unions somewhere between agog and apoplectic at the idea of having their wages reduced, and given that no-one in public discourse (if Q&A is representative) is quoting these figures, I thought it might be no harm to see if I could do up what we in the business call “a one-slider” that might make them understand the decision a little better.
First, a general comment about public sector pay cuts. This can’t possibly be that much of a surprise to anyone in the public sector. After all, this is what they signed up to in 2001, with benchmarking. Benchmarking may have been an incredibly expensive way to do it – costing the economy €1bn+ every year and counting – but it did establish a principle in public sector wages in Ireland. That principle is that trends in public sector wages must mirror those in the private sector. It’s incredibly cheeky of those happy to have the principle applied in the good times to argue that they shouldn’t have to ‘bear the brunt’ of having the same principle applied in the bad times.
Now for the one-slider!
Graph of public and private sector wages, Ireland, 1998-2008
And in true consultant style, three key points from the above graph:
- Lest we forget the most obvious, in every year of the series, public sector workers were paid more per year than their private sector counterparts*. 30% more on average! (There may be perfectly legitimate reasons for this, for example average experience/years worked may be higher, responsibilities may be greater… but a priori, who knows?)
- As you can see, the gap has widened, not narrowed over the decade. In fact, in euro terms, it widened 8 years out of 10! And after the two years of greater private sector increases (prizes for eyesight if you can spot them on the graph), there were huge increases in public sector pay the following year.
- Public sector pay is at least five years ahead of private sector pay. What public servants earned in 2003 took their private sector counterparts until 2008 to earn (in fact, they’re not even there yet, another €500 or so to go!).
With the Live Register now rocketing towards 400,000 and private sector wages now stagnant, bonuses disappearing, total earnings in the private sector are falling. Therefore, according to the principle of benchmarking, so must public sector wages. As they are paid €50,000 on average, compared to average wages of less than €38,000 in the private sector, this won’t be the biggest economic calamity to befall Ireland this year. Now, can we please incorporate this knowledge into our social dialogue?
* Public sector includes public administration and education, but excludes health. No data there for some reason. Private sector includes all sector apart from agriculture (again no data). Some other methodological notes: I have had to assume Q4 figures for 2008 equal to Q3 in some instances or just take the average for the first three quarters, as Q4 data are not yet out. Construction figures only start in 2004, while manufacturing/industrial wages end in 2007, so I have had to use rates of change for the remaining sectors in those time periods, but the level of wages is determined by the full sample of private non-agricultural wages.
Filed under: 1 Irish Economy | Tagged: 1 Irish Economy, 2008, 2009, esri, frances ruane, ireland, irish wages, private sector, public sector, public sector benchmarking, public sector wages, questions and answers, recession, ronan lyons, rte, unemployment, wages |
Ronan Lyons | Blog 
A great post Ronan – and very timely.
Another interesting dimension is the ‘Pension Apartheid’ now in place between the private and public sectors. One indicator of how rigged things are in favour of the public sector was a comment I heard today that a business owner or director who contributes to a pension fund the *maximum* allowable for tax relief could NEVER accumulate a pension fund capable of providing the equivalent retirement income of that of a senior civil servant.
Part of the Government’s ‘take-and-take’ strategy I guess.
Is there any data on the respective educational qualifications of those in the private sector vs. public sector? Many jobs in the public sector (particularly in education and health) require advanced degrees. Fewer do in the private sector. This might well justify the gap, no? In other words, your “one-slider” is at best an inadequate contribution to the public debate. Knowing that there is a gap doesn’t mean that cuts in public pay are justified, as you seem to imply. For there may be very good reasons for the gap.
Interesting. Why has no one else mentioned this? Why is it not on the news and the countless radio programmes dedicated to pay cuts? Are there too many public servants they do not want to alienate as listeners by suggesting they deserve a pay cut? Very strange that I have not heard this information elsewhere, and such a shame too.
Hi Ernie,
Thanks for the comment. You’re absolutely right, as I said myself there could be factors explaining the gap that are not accounted for. What remains, however, is the overall trend. Therefore, a few comments in response:
1) Even if we take the 1998 gap as a given, and somehow justified, it’s got larger since then, not smaller. Can we justify that?
2) A priori, before one factors in educational qualifications, experience, responsibilities, etc., one would wages in the private sector to be something in the region of 20% higher than the public sector, all else equal. Why? The private sector has to compensate for two huge factors that it cannot offer its workers beyond wages, namely total job security and defined (and better than index-linked) benefits pensions, both of which would easily be worth 10% of wages.
So we’re really trying to explain a 50% swing in wages. Are people really 50% more qualified in the public sector than in the private? I very much doubt it. As figure 4.52 here (http://www.competitiveness.ie/media/ncc090108_acr_2008.pdf) shows, Irish twenty- and thirty-somethings are very well qualified. They work in jobs requiring very specific knowledge in sectors such as pharmaceuticals, software development, financial services, medical devices and business consulting. None of these compares poorly to requirements for public services.
3) You make one HUGE presumption in all this, which can’t go unchecked. You presume that any third level qualification automatically justifies a higher wage. It doesn’t, the value that a worker with a higher level of education provides may justify a higher wage, but the experience of recent very well educated migrants to Ireland is surely proof enough that qualifications are not the be-all-and-end-all when it comes to higher wages. What is the value of the services that public sector workers provide? Private sector workers prove their value through sales, particularly those in internationally trading sectors, who prove their value to the tune of globally determined prices. Public sector workers don’t have the same market mechanism but the State should have some estimate of the social value of the services that these workers provide.
4) Lastly, you miss the crucial argument here. Public sector workers signed up for benchmarking, i.e. when private sector wages go up, public sector wages will go up, and when private sector wages go down, public sector wage will go down. As I said in my post, it’s incredibly cheeky of anyone to argue that the principle should only be applied in good times, not in bad.
Hi Ronan, cool blog,
Just a couple of points on that graph:
I don’t know enough about the CSO Private Sector data myself, but do you know if it’s just a measure of basic salary, or a composite of salary + benefits (bonuses, pension, BIK, etc)? Obviously the public sector data don’t capture these, so I imagine the private sector data don’t either. That might go some way towards accounting for the discrepancy, aside from the obvious structural differences – far fewer burger flippers and checkout girls as a proportion of the public sector than the private.
As to the growth in the disparity, again, have you considered the structural issues? How much of the trend in public sector wages was driven by pay increases, and how much by a changing profile of the public sector? If the proportion of higher grades increased, obviously the average wage would go up.
We don’t have data to hand on this (though we could, presumably, find the pay scales of each grade over the period without much difficulty), but could I suggest we take average Garda earnings as a proxy? According to the garda page on careersportal.ie, employment has grown in the area by 3%pa from 2000 – 2006. Assuming the profile’s stayed more or less the same (that is, the ratio of sargeants to gardaí etc) – and I think that’s a reasonable assumption to make – that should give us a reasonable idea of actual wage growth over the period (among gardaí at the very least).
So, looking at the CSO data and unless I’ve blundered badly somewhere, we can quickly see that the average weekly wage of a garda (excluding overtime) increased by 34% over the 2000 – 2007 period. This compares to a 46% increase in private sector wages over the same period, going by the figures in your graph.
What do you think?
Hi tosser (erm, cool name?),
On your main point, these series measure earnings, not wage rates, so they take account of basic pay, overtime, maternity/sick pay, bonuses, all that jazz. You would need to calculate all earnings by gardai including overtime, bonuses, etc. and show that these are representative of the broader public sector – but again, I’m not sure why the stats presented above aren’t good enough for you.
By the way, no-one is arguing that in percentage terms the private sector didn’t do better than the public over the period covered. In the figures given, private sector wages increased 71%, compared to 66%. Because the public sector was significantly better paid to begin with, this meant they still widened the gap by €4,000.
On a side comment you made, I’m not sure about your ‘obvious structural differences’ accounting for much. While it’s true average wages in ‘burger flipping’ (i.e. Hotels and Restaurants) are significantly lower than all other sectors, the “checkout girls sector” (also known to economists as the Wholesale and Retail trade) lies bang on the private sector average and above the industrial average.
Even ‘more modern’ private sectors of finance and communications earn just over €40k on average, compared to almost €50k in the public sector.
This debate still misses the point, however. When public sector workers signed up to benchmarking, they signed up not to free money, but to their earnings tracking private sector earnings. With private sector earnings falling, the public sector simply cannot argue in a principled way that it should be exempt.
Two comments:
1) In line with tosser’s suggestion, wouldn’t it be fairer to compare median incomes rather than averages?
2) You’ve now repeated twice that your interlocutors have “missed the point” which you take to be this: “When public sector workers signed up to benchmarking, they signed up not to free money, but to their earnings tracking private sector earnings. With private sector earnings falling, the public sector simply cannot argue in a principled way that it should be exempt.”
However, I have to point out to you that the latest pay cut, er, pension levy has been imposed without any form of benchmarking at all. What was the elaborate benchmarking process that allowed the two Brians to come to the conclusion that public sector wages had to be cut by X amount to keep them commensurate with cuts in the private sector? Where was the data about declines in private-sector wages presented to the nation (or its representatives) in order to justify these cuts? The answer is that there was no benchmarking process and that these cuts were based on nothing more than hunches and calculations about what could be sold politically. They were introduced at the thirteenth hour of the last day of talks among the partners and there’s no evidence that much thought beyond “how much can we extract?” went into them.
Following up to myself (feel free to combine these): the public sector might well be willing to have benchmarking in good times and bad. What does a pension levy have to do with that? If you want to benchmark the public sector then there has to be a benchmarking process undertaken by a duly-appointed body. And the result has to be adjustments to pay, not some special surtax with a flimsy justification but that happens to be easier to sell.
Hi Ernie,
Thanks for checking back in and for the new comments. Broadly I agree…
On (1), there’s a discrepancy between what you and ‘tosser’ say about structural differences and measurement. If you both believe that there are a large number of ‘burger flippers and checkout girls’, then surely the private sector median will be dragged further down no? Either way, I agree, would be good to know.
On (2), ‘what’s acceptable politically’ is always the way benchmarking has been done. In the paper linked above, academic economists – who stood to benefit from benchmarking as it was, it should be said – were the only people arguing that something more rigorous than ‘what’s acceptable politically’ should be applied. I agree with you: I would love to see something more rigorous applied so these kinds of debates are almost redundant. But we are living with the consequences of this kind of thinking now.
On (3), the reason they ‘snuck it in’ as a pension levy, rather than a pay cut, was to save public sector pensioners. I don’t have any real issue with that, or rather would have less of an issue if public sector pensions were capped at a certain level.
On a broader issue, what do you think of deflation? In your opinion, should public sector pay, if not benchmarked to private sector pay, be benchmarked to consumer prices over the coming five years? The typical mortgage holder stands to benefit by €4-5k this year from falling interest rates alone.
Hi Ronan,
This is a great discussion. Thanks as always for a cool blog.
May I just say on the structural issue, I think ‘tosser’ makes a fair point (and so it pains me to call him one…) which you do not seem to have countered. Broad economic sectors themselves contain a wide spread of salaries, so to equate checkout girls with the average of their sector and then to compare that with the private sector average tells us no more than that if there is a structural issue, the intra-sectoral distribution of private sector salaries has the same skewed form as the inter-sectoral one.
So, to tosser’s point: We don’t really have the data but it would seem to be a fair assumption that the public sector employs a greater proportion of higher value-added employees. This is especially true as an increasing number of low-value-added tasks have been subcontracted out the private sector (cleaning, etc.)
But I think you are right in what is the fundamental point, that the public sector has got away with fiscal murder as Min. Cowen sleepwalked his way through social partnership.
Benchmarking is a fuzzy, confused mess that lends itself to manipulation and fudging. Labour markets tell a much truer story, in my opinion.
I sat the AO competition for Finance in 2005 and I remember how the really big room was choc-a-bloc with budding young Myles Na Gopaleens at a time when the private sector was starving for talent like that. That excess labour supply told us everything we needed to know about the price of public sector labour: P-bar was well above P*.
Who are the private sector counterparts in education?
Hi Kath,
Good question – simple answer would be privately run schools/colleges? (Although one could argue that the monopsonistic position of the government skews wages to whatever level they determine anyway…)
Broader point would be: regardless of whether public and private sector have direct counterparts, what is the evidence/rationale against wage cuts in education, given that the fate of the public finances, and thus cost of public borrowing and thus international assessment of Ireland’s riskiness for investment, is determined largely by the public sector pay bill?
Indeed, in education, there’s hardly another determinant of overall spending other than wages… Surely, they should come down to curb spending and help save Ireland’s private sector, no?
Ronan, you wrote:
“What is the evidence/rationale against wage cuts in education, given that the fate of the public finances, and thus cost of public borrowing and thus international assessment of Ireland’s riskiness for investment, is determined largely by the public sector pay bill?”
You ought to know that this is a tendentious and biased way of asking the question. The weasel word “largely” looms, er, large in this question. But I’m willing to play ball. Here’s the evidence I look at:
1) According to the OECD, Ireland’s public service expenditures is average to low among OECD countries as a percentage of both GDP and GNI.
2) Relative to both GDP and GNI this expenditure DECREASED during the boom years (so much for the “bloated” public sector).
3) Every international report I’ve seen on the matter bemoans Ireland’s chronic underfunding of education relative to other industrialised nations.
4) Ireland differs from most of those nations by having exceptionally low rates of taxation, particularly on property, wealth, capital gains, and corporations.
5) Ireland’s tax base during the boom years was skewed to an inordinate dependence on stamp duty. When the housing bubble (pumped up by Fianna Fáil and their developer and banker friends) finally burst, stamp duty receipts collapsed, leading to the current fiscal crisis.
So the answer to your question is another question:
What is the evidence/rationale against increases in tax on the wealthy given that the fate of the public finances . . . is determined largely by inadequate levels of tax revenue?
Ernie, make sure when comparing the Irish % spend on the public sector to other countries, that you adjust for a potentially massive defence budget in that country
Hi Ernie,
Thanks for checking back in – looks like I’ll have do another post to explain myself better! Funnily enough, we’re probably in agreement on some things, but as you can imagine, I’ve a different conclusion! Hope to have something up over the weekend,
R
[…] reason for taking 50,000 is thats the average public sector pay. The reason for taking 32,000 is thats the average industrial wage. I take your point that a like […]
Ronan. Great blog. However, I think that you fail to see the disparity between public and private sector pay. There are people in the private sector below or just on tbe minimum wage and at the other end of the scale there are bankers on €3m a year and those even richer – Tony O’Reilly, Bono etc. So the average private sector wage would be much, much higher than public sector.
Ronan, can I have a look at that data? I’ll be nice to it, I promise 🙂
Best,
Steve
hi lads,
this is an interesting debate.
who are public employes in ireland?
how many of them in the working population?
now that money from EU are over, it’s time to think about a real susteinable economy for this country, i suppose.
what’s the wage of a public tax officer and what’s of a qualified accountant working in private held company(at HERTZ, for example)?
Livio
Ronan
one thing perpexes me about wages ‘ averages ‘
in quantyifying the avegage do they take say the taoiseachs gargantuan salary ( is any one in public service paid more than him – ) and the lowliest worker on minimum wage say 16+K and some ‘ average salaries ‘ in between and divide this by the number of samples they take.
How do they arrive at the average ‘ What does it mean unless it reflects the salary MOST people earn excluding the people on the fringes.
I would appreciate if you could advise me on this point.
Your article is very instructive ,
Thank you
Hi Don,
They break down the public sector (and indeed the entire economy) into different industries and different grades/types of occupation. They have data on how many people work in each industry at each grade. They then require employers to fill out information on average earnings for each level of worker and the averages reflect how many people work at each.
So, if there were only one Taoiseach at E220k and the only other employees in the public sector were 10,000 clerical officers on E25k, the average would essentially be E25k.
Hope that clarifies things a little,
R
[…] Public Sector pay in Ireland & the €50,000 question: It’s not that difficult! […]
Is there any data on the respective educational qualifications of those in the private sector vs. public sector? Many jobs in the public sector (particularly in education and health) require advanced degrees. Fewer do in the private sector. This might well justify the gap, no? In other words, your “one-slider” is at best an inadequate contribution to the public debate.
Bingo. I was just scrolling down to make this very point when I came across this comment.
Doctors, nurses, firemen, soldiers, police, engineers etc. are *not* the same as the unfortunates who get paid cleaning out toilets for the lord muckety-mucks of the Irish ‘private’ sector – and how inappropriate that term is as the top rungs of this elite get bailed out in a doubling of our national debt, a burden which will fall on the PAYE workers.
[…] average salary estimates for the public and private sectors in Ireland. The answer, that the average worker in the private sector earned €40,000 last year, almost €10,000 less than their pu…, has proved if not controversial than certainly a starting point for debate. Given some of the […]
[…] […]
[…] their wages cut and where prices are falling should read either or ideally both of the following: Public Sector pay in Ireland & the ?50,000 question: It’s not that difficult! Ronan Lyons … State jobs pay 20pc more than private sector – National News, Frontpage – Independent.ie Job for […]