Wednesday, 22 July 2009

A more helpful starting point

Michael Taft: There are few subjects that can create dispute and contention quite like public-private pay differentials (Manus O’Riordan’s article linked on this site and the subsequent comments is a case in point). While a number of studies have attempted to provide the last word – using complex variables – the problem here is the weight given any particular input. This is not to dismiss these exercises – they are helpful. However, it only shows that even statistical analysis can be politically-laden.

I’d like to propose a new starting point in pay comparisons. It’s not the last word, but it makes a good ‘first word’ upon which further analysis can be constructed on. That comparator – or like-with-like – is enterprises of similar size. This is not only because of the obvious issue of scale (employees in larger enterprises earn more than those in smaller ones on average). There are other similarities:

• There is likely to be a more varied skill, occupational age and educational base
• There are likely be formalised pay scales
• In-house career paths are likely to be more prevalent, with more employees remaining in jobs for longer – length of employment equals higher pay
• There is likely to be a greater human-resource infrastructure
• There is higher union density with collective bargaining rights – three times more than in smaller enterprises – benefiting from the trade union premium
• A greater proportion of employees have occupational pension coverage – seven times that of small enterprises: this is where you will find most defined benefit schemes

When we use this like with like comparator, we find that public sector wages are less than in the financial sector but on a par with the industrial sector. We shouldn’t find this surprising. In the industrial sector, employees in smaller enterprises would need a 50 percent wage increase to reach the wage level pertaining in larger companies.

I have focussed on the industrial and financial sector because they’re the only sectors for which the CSO provides a breakdown by size, along with a weekly average wage. But these two sectors are useful. Combined, they comprise over 300,000 employees (the public sector employs 373,000, including public enterprise). Over 55 percent of employees in these two sectors work in the largest enterprises.

This makes no comment on the related issue of whether public sector wages should be cut. But it is important to note that the ESRI’s simulation of the economic impact of cutting public sector wages by 5 percent showed that it would result in reduced GNP and consumption while increasing, albeit marginally, unemployment. And the impact on the fiscal deficit would be negligible: reducing it by 0.4 percent (and this simulation was taken before the deflationary April budget – so the fiscal ‘benefit’ could well be even less).

I have gone into more detail on this here.

1 comment:

Jane Gray said...

A very useful alternative starting point, Michael.
I agree that statistical analyses have been deployed in very political ways in the current debate, but I think it's also important not to give the impression that there are 'lies, damned lies and statistics'! There are very good scientific reasons to expect that attributes of sectors, firms and organizations (like size) predict differences in wages, as well as attributes of individuals (like years of experience). The problem with the debate so far is that it has pretended that there are only two sectors in the Irish labour force - public and private. It may well still be true that some clusters of occupations within the public sector are more highly remunerated than comparable clusters within the private sector - but it seems highly unlikely that this is true of all (or perhaps even most) public sector jobs.