Ken Mulkearn | 26 Nov 2020

Chancellor runs risks with rationale for public sector pay freeze

The Chancellor’s plans for renewed public sector pay restraint centre on a salary freeze for all apart from those paid below £24,000, an estimated 2.1 million staff or two-fifths of the workforce, who will receive a minimum rise of £250. This is worth 1% to those on £23,999 and slightly more to those paid below this. NHS staff, whose wage negotiations for 2021 are under way, will be exempt.

In making his announcement, Mr Sunak said: ‘In the six months to September, private sector wages fell by nearly 1% compared to last year. Over the same period, public sector wages rose by nearly 4%. And unlike workers in the private sector, who have lost jobs, been furloughed, seen wages cut, and hours reduced, the public sector has not.’

Impact of pandemic on private sector

It is a fact that many areas of the private sector have seen redundancies, and more are likely. Large numbers of workers have been furloughed on 80% of their wages, although our research indicates that nearly half of bigger employers topped pay up to 100% (IDR Pay Climate 21, June 2020). Working hours have also been reduced, leading to loss of income and hardship in many instances. But cuts in basic pay have so far been rare and mainly confined to those sectors that have been worst-affected by the pandemic, such as air transport. As a result, the Chancellor’s claim requires closer examination.

Mr Sunak relied on figures from the Government’s own Average Weekly Earnings (AWE) series, as collected and published by the Office for National Statistics (ONS). According to the ONS, for each of the successive six months from April to September this year, ‘total pay’ (which includes bonuses as well as other elements of earnings like basic, shift pay and overtime) for the private sector changed as follows: +0.5%, -1.2%, -2.4%, -2.2%, -0.8%, +0.8%. Averaging these produces a figure of -0.88%, or the ‘nearly 1%’ referenced by the Chancellor. The same approach, over the same period, for the public sector results in +3.85%, or ‘nearly 4%’.

What does the AWE series measure?

Deciding whether this proves that ‘private sector wages fell’ in contrast to public sector wages requires a fuller understanding of what the AWE series is and what it is not. Regarding the former, the title is a clue: it is a measure of change in average weekly earnings. For September 2020, the average weekly figures were £549 for the private sector and £565 for the public sector (see chart). The ONS arrives at these by contacting employers every month and asking them how much in total they spent on wages the previous month. It also asks each organisation how many staff they directly employ. It adds up these two sets of figures for the sectors in question and divide one by the other to get the average weekly amounts in pounds. The ONS then shows how these have changed over time, producing the figures cited by Mr Sunak.

As an average, the AWE is strongly influenced by changes in the make-up of workforces and, perhaps more importantly in this case, by the overall number of hours worked. Given the impact of the pandemic, it is therefore unsurprising that the figures appear as they do. The reduction in hours worked across the private sector – alongside the necessarily greater hours worked across the public sector, particularly in the NHS – had a significant influence on the respective sectoral growth figures.

But this is only half the story. While he might not have wished to do so, the words the Chancellor used may have created the impression in some listeners’ minds that basic salaries across the private sector have been cut. But that is not the case. What the AWE figures are not is a measure of the outcomes for employees under annual pay reviews.

Our latest figures on these show that while the pandemic has had an effect, this has varied across the private sector, according to whether companies have been negatively impacted, such as those in hospitality, or whether the effect on business has been neutral or even positive, eg financial services or food retail. As a result, the median or typical pay review for the private sector is currently showing at 2%, with the interquartile range at between 0.5% and 2.8%. And some major employers have raised pay by 3% or more.

Calculated risk?

The fact that the Government has agreed with the Low Pay Commission and raised the minimum wage indicates that it may regard its stance on public sector pay as a calculated risk. The Government has made choices about its priorities, and freezing public sector pay jeopardises recruitment and retention in areas like teaching, already beset by issues of this sort. If inflation rises as forecast, the modest underpinning for the lower-paid will turn into a real-terms pay cut, and this could negatively affect economic demand. It is also possible that a real reduction in salaries in the public sector – the largest employer in many localities – could influence private sector employers to start holding wages lower next year. This was a factor behind reduced pay growth in the wake of the last major recession. If it recurs, we could see a return to austerity in fact if not in word, and the statutory minimum will be doing most of the heavy lifting to keep many working families’ heads above water. Is that what the Chancellor intended?