Wage stagnation, recessions and joblessness: are public-sector wages safe from inflation?

November 23, 2023

The UK and other countries are reported to suffer stagnating wages for the past few decades, a concern certainly not helped by the current inflationary crisis. Public-sector organisations are required to be more transparent, are likely to be under more pressure on equality, usually have more workers’ protections, lack the competitive pressures of the market and may be able to provide different benefits and perks (e.g., blue light discount) to supplement pay, etc. compared to the private-sector. This raises the question, given the differing sets of pressures facing the public and private-sectors: is public-sector pay more resistant to inflation than private-sector pay?

We collected ONS data, which shows since 2000 the average earnings of workers in various sectors and private industries. The chart below shows the yearly percentage change in public- and private-sector workers’ earnings, less the inflation (CPI) of that year.

From 2000-2022, after-inflation public-sector wages grew by 13.2%, whilst private wages grew by 19%.

As an aside, circa. 2008 marked an inversion in consistent yearly wage growth in both the public- and private-sector as well as across different private industries (not shown), perhaps due to the great recession.

Inflation is not significantly stronger after 2008 than it was before (excepting 2022). However, the unemployment rate did not return to its pre-recession lows until 2015, coinciding with the decline in earnings growth graphed above. Standard economic models assert that lower unemployment results in higher wages as employers have fewer hiring choices, granting workers more leverage.

Probing this, we found that for every 1% decrease in the unemployment rate, private-sector before-inflation wage growth increases by 0.8% on average. The same for the public-sector yielded no positive or negative relationship. Perhaps this difference is because the State will often try to maintain the size of its public-sector workforce to counter a recession, unlike private-sector businesses, which will shrink to meet reduced demand. This suggests that the reason the private-sector has seen a faster growth rate is a sensitivity to employment not shared by the public-sector.

However, these are average earnings as opposed to median earnings*, which likely makes these results more sensitive to outliers. This raises the question, do lower earners in the private-sector resist inflation too, and if not, do the higher earners conceal this in the results above?

To try and control for this, we looked at the average wages of 24 private industries in 2000 to see if they predicted the after-inflation wage growth at the end of the 2000-2022 period, including, lower-earning industries, such as hospitality at £15k p/a, and higher earning industries, such as IT at £57k p/a. We did not find a statistically significant relationship, suggesting that higher wages do not lend special protection against inflation, thus denying the previous notion that the private-sector’s wage growth lead over the public-sector is because it has higher earners.

However, workers ought not to expect simply anywhere in the private-sector to be a relative safe haven from inflation. Though the private-sector’s growth overall exceeded the public-sector, 42% of private industries saw a 2000-2022 after-inflation wage growth below the rate of growth in the public-sector.

In summary, we did not find evidence that public-sector wages have a distinct protection from inflation. Rather, private-sector wages performed relatively better against inflation, which may be due to a higher sensitivity to the employment rate. Though this was not the case for all private industries: a worker’s experience of wage growth will vary by their industry, and likely by other factors not explored here like their location, role, skills, union membership, etc.

Looking to the future, it is not clear if the current economic turmoil will present a repeat of 2008. At that time, there was low inflation, few job vacancies and high unemployment. Now, the situation is reversed. Our finding of a negative relationship between unemployment and private-sector after-inflation wage growth suggests the private-sector may be shielded from inflation, so long as unemployment remains low. However, the same prediction cannot be made for the public-sector whose wages we found are not negatively related to unemployment and may be more influenced by other variables like prevailing political forces.

For further discussion of this article, please contact James Sharp.

*The ONS does not store median wage data in a usable form for the purposes of this article.

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