A Christmas Riddle

ATURDAY, DECEMBER 18, 2010

A Christmas Riddle

BOM is closing down for Christmas. But before we go let's leave you with a riddle to ponder over the mince pies.

Tyler has been doing some more work on the pay gap between the public and private sectors. As everyone surely knows by now, average public sector pay is considerably higher than private sector pay. When we last blogged it, we reckoned the public sector premium stands at an astonishing50% - once we take account of the full cost of those gold plated pensions.

How did we reach that conclusion? We based it on the following analysis from the Office for National Statistics, which compares the public and private sectors in terms of both gross pay and total reward (ie includingemployers' pension contributions):

The conclusion is overwhelming - for both men and women, for both high and low earners, for incomes including and excluding pensions, public sector employees do much better than private sector. The median full-time employee in the public sector gets nearly 30% more than his/her counterpart in the private sector, once we take account of the employer's pension contribution.

And in truth, the public sector does even better than the ONS numbers suggest. That's because the ONS only takes account of the employers'explicit pension contribution, a contribution that hugely understates thetrue cost of public sector pensions.

As we blogged here, the true cost of public sector pensions as a percentage of salary averages around 25% more than current pension contributions. Which means that we need to gross up the public sector total reward numbers even further. At the median income level that takes the public sector premium up to a staggering 50%+.

All of which is pretty shocking.

But the public sector unions and their supporters have come up with an answer. They say that the public sector premium reflects the fact that public sector employees are on average better qualified than their private sector counterparts.

Here for example is what the TUC says:

"The obvious retort to the small-state brigade when they harp on about average pay [do they mean us?] is that the private and public sector workforces are different. As the private sector employs more unskilled workers on the minimum wage than the public sector, and the public sector has a high proportion of professional workers (such as teachers and doctors) it is not surprising that average pay is higher in the public sector...

...there has been a big growth in employment of graduates in the public sector over the last ten years – much bigger than in the private sector. Even in 1998 the public sector was already employing more graduates. Given that graduates are paid more than others, this in itself would tend to make average public sector pay higher. There are quite significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity) and those with other qualifications."

And the TUC is quite right - the proportion of public sector employees who are graduates is indeed much higher than it is in the private sector. In fact, at nearly 40%, it is twice as high.

Now, the TUC reckons that explains why public sector pay is higher. They're better qualified than the dolts working in the private sector, so naturally they get paid more.

Whether qualification and other differences really do explain the earnings gap is the very thing Tyler is currently attempting to bottom out. But it raises another perhaps even more critical question - in our current parlous economic state can it possibly make sense to have so many of our expensively educated graduates working in the public sector?

Because as the TUC highlights, although the public sector "only" employs just over 20% of Britain's manpower, it employs 40% of our graduates. 40%.

Can we afford to have 40% of our best brains working in the non-wealth producing public sector? Don't we need them in the private sector creating the prosperity that will power us out of Labour's economic crater?

That's a real Christmas riddle.

What's that?

Most of those supposed public sector grads are no such thing? Their growth merely reflects the "significant decreases in the proportion of public sector staff with higher education short of a degree (which we will call diplomas for simplicity)"? Many of those new public sector grads are merely redesignated diploma holders (like nurses)?

Hmm. You've probably got a point there.

Hmmm...

The mince pies are calling. Happy Christmas everyone.