Transcript School of Business and Economics - 123-reg

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Urban and Regional Economics
Seminar Group
The Regional Economy and Public Sector Pay
David Blackaby
Philip Murphy
Nigel O’Leary
Anita Staneva
Swansea University
What constitutes a Regional Economy
Urban and Regional Economics Seminar Group
Open University in Wales 25-26 September 2013
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Background to the current Financial Crisis
•Origins can be traced to the US banking sector due to over-lending to high risk
individuals (sub-prime loans) – many of whom subsequently defaulted
Triggered a chain reaction in the financial sectors of many other countries since many
banks had bought the (toxic) debts which had been bundled with other financial assets
•In the UK, the loss of confidence within the financial sector was compounded
by the house price bubble (which had been fuelled by over-lending by banks)
Caused a big drop in UK inter-bank lending, with knock-on effects on other sectors such
as manufacturing
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(UK) Policies to limit impact
•In the early part of the recession, the UK Government placed an emphasis on international cooperation and where possible co-ordinated fiscal and monetary policy responses to help move
the UK and world economies out of recession
•The UK Government used a number of levers during the recession in an attempt to influence
the economy:
Bank base rate reduced to 0.5 per cent
Bailing out of some banks and finance to support the balance sheets of the banks
Value Added Tax temporarily reduced from 17.5% to 15%
Quantitative easing of £200billion – Asset Purchase Facility by which the Bank of England can buy
corporate bonds
Car scrappage scheme
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Recession in the UK labour market
•This pro-active economic policy stance partly explains why UK employment
didn’t fall as quickly as expected, both in comparison to previous recessions or
the fall seen in GDP (Jenkins, 2010):
Employment only fell by 1.9% (573,000) in the 2008/9 recession, compared to a 6.4% fall
in GDP over the same period
 In contrast, employment fell by 2.4% (619,000) in the 1980s recession and by 3.4%
(910,000) in the 1990s recession when the declines in GDP had also been smaller (4.6%
and 2.5%)
• A similar pattern has been observed in some other countries but not all
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In response to the economic downturn the current government has
implemented a policy of fiscal consolidation, as the 2009-10 budget deficit
reached a post-war peak of 11 per cent of GDP.
Fiscal consolidation has had, and will have, a significant impact on:
•
regions particularly dependant on welfare expenditure
•
the size of the public sector workforce, with regional and highly local implications
The Budget 2012 OBR forecast projected an estimated fall in government
headcount of:
•
630,000 by 2015-16
•
around 730,000 by 2016-17
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The Centre for Cities in their annual reports highlight concerns for two of the major cities
in Wales, Cities Output 2011 and 2012 have highlighted both Swansea and Newport as
among the top 5 cities most vulnerable to government spending cuts.
Top 10 cities for estimated job losses in the public sector
1 Newport
2 Swansea
Job losses
% of all job
2,200*
3,000*
2.94%*
2.91%*
Predicted public sector job losses by
2016 (% of total output)
-6.2%†
-5.6%†
*Source Centre for Cities, 2011
†Source Centre for Cities, 2012
So far public sector job losses in Wales haven’t been as high as in the rest of the UK
•Public sector employment in Wales 2013 Q2 down 2,000 (0.7%), over last year
•In the UK over the same period fell by 105,000 (1.8%)
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The importance of public sector pay for public sector finances has grown as the size of
the public sector has increased. The cost of financing the public sector wage bill has
important implications for fiscal policy, either being financial through taxation or
borrowing.
The recent recession and accompanying public sector deficit again brought to the
forefront issues surrounding the size of public sector and the pay of public sector
workers (not just in the UK but across the globe resulting in public sector pay freezes or
pay cuts).
In 2009 just over 6 million individuals were employed in the public sector representing
21% of total employment (Matthews 2010). The public sector pay bill amounted to £182
billion, 30% of all government expenditure and 13.1% of national income (IFS 2011).
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The size of the public sector deficit and public sector pay were central issues in the runup to the 2010 General Election and all parties stated in their manifestos that limits
would be placed on the size of pay increases for public sector workers.
•The Labour Government in power stated, “we will take a taught stance on public sector pay, saving
over £3billion by capping public sector pay rises at 1% in 2011-12 and 2012-13... Any governmentcontrolled appointment involving a salary over £150,000 will require ministerial sign off”.
•The Conservative manifesto stated, “we will freeze public sector pay for one year in 2011, excluding
the one million lowest paid workers”.
•The Liberal Democrat Manifesto proposed, “setting a £400 pay rise cap for all public sector workers,
initially for two years, ensuring that the lowest paid are eligible for the biggest percentage rise”.
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All parties were suggesting that some comprehension should take
place in the public sector earning distribution and this was reflected in
the Coalition Agreement (2010),
•“we will introduce arrangements that will protect those on low incomes from
the effect of public sector pay constraint and other spending constraints...We
will require anyone paid more than the Prime Minister in the centrally funded
sector to have their pay signed off by the Treasury... We will undertake a fair
pay review in the public sector to implement our proposed ’20 times’ pay
multiple”.
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The emergency budget on 22 June 2010 set out the Government plans for reducing the
deficit with detailed spending plans for individual government departments published in the
Spending Review in October 2010.
•It was announced in the Budget that a two-year pay freeze would be introduced for public sector
workers except for those earning £21,000 or less who would receive an increase of at least £250 per
year.
•It was estimated that the pay freeze would save £3.3 billion a year by 2014/15. According to the Office
for Budgeting Responsibility the impact of the deficit reduction plan and the pay freeze would lead to a
reduction in 320,000 public sector jobs by 2013-2014.
In 2011 the Government considered taking a more regional/local approach to public sector
pay and in the Autumn Statement the Chancellor of the Exchequer asked the independent
Pay Review Bodies to consider how public sector pay could be made more responsive to
local labour market conditions.
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Treasury evidence to Pay Review Bodies stated:
•
8% premium for those working in public sector but not uniform across the UK
•
public sector pay is only 40% as responsive to area differences in amenities
and costs as the private sector
•
public sector pay premia suggests that the sector pays more than is
necessary to recruit, retain and motivate staff in some areas
•
public services would benefit if public sector pay was more responsive to local
labour markets
•
more market facing pay could help private businesses, particularly in areas
where public sector pay is relatively high
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Overman looked at impact of public sector on private labour markets and notes
the following effect
•
local demand effect (multiplier)
•
supply side distortion (crowding out/displacement)
Using data over period 2003-2007 finds the negative supply side effects from
wage premium on traded sector roughly offset by positive demand effect on nontraded
The Welsh Government in their response to request for evidence stated:
•
no credible academic evidence or research to crowding out in practice
•
since 1999 more jobs created in the private sector than in the public sector in
Wales
 opposite true for the UK as a whole
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In their evidence to the Pay Review Bodies the Treasury cited
evidence from:
•
Institute of Fiscal Studies (IFS) of a 8.3% public sector premium (2009 to
2011)
•
Office of National Statistics 7.8% public sector pay premium April 2010
However, they note the pay premium is not uniform in some areas
(Wales), it can be up to 18%.
Their Table 1 presents the IFS evidence and Chart 1 their slightly
more disaggregated analysis.
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Source: Government Evidence to the Pay Review Bodies
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Source: Government Evidence to the Pay Review Bodies
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Estimated public sector pay premium
Estimated average public–private hourly wage differentials
(2009 Q2–2011 Q1)
Raw differential
Male
Female
All
+20.2
+27.5
+24.3
Notes and sources: see Table 5.4 of The IFS Green Budget: February 2012.
© Institute for Fiscal Studies
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Estimated public sector pay premium
Estimated average public–private hourly wage differentials
(2009 Q2–2011 Q1)
Male
Female
All
Raw differential
+20.2
+27.5
+24.3
Controlling for education, age
and qualifications and region
+5.5
+11.3
+8.3
Notes and sources: see Table 5.4 of The IFS Green Budget: February 2012.
© Institute for Fiscal Studies
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Estimated public sector pay premium varies considerably
across the country
Estimated average public–private hourly wage differentials, controlling for
age and education, by region
United Kingdom
Wales
Northern Ireland
East
Yorkshire and the Humber
South West
East Midlands
West Midlands
Scotland
London
North
North West
South East -1.4%
5.5%
Men
18.0%
15.5%
12.2%
10.5%
7.5%
7.1%
7.1%
5.6%
4.7%
4.6%
4.1%
-5%Notes and0%
5%
15%Budget:20%
sources: see
Table 5.4 10%
of The IFS Green
February 2012.
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© Institute for Fiscal Studies
Estimated public sector pay premium varies considerably
across the country
Estimated average public–private hourly wage differentials, controlling for
age and education, by region
Women
United Kingdom
11.3%
Wales
Northern Ireland
East
Yorkshire and the Humber
South West
East Midlands
West Midlands
Scotland
London
North
North West
South East
18.5%
10.0%
14.0%
16.1%
13.3%
15.7%
15.2%
19.9%
4.7%
18.3%
10.2%
2.3%
-5%
0%
5%
10%
15%
20%
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Notes and sources: see Table 5.4 of The IFS Green Budget: February 2012.
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In its evidence the Welsh Government stated, “HM Treasury has already submitted
evidence which the Welsh Government regards as incomplete, and in places, flawed”.
The Welsh Government noted (citing evidence from Blackaby, Murphy, O’Leary and
Staneva 2012):
•Undertaking more appropriate estimations, the results for Wales are not statistically
significantly different from those found in other regions
•Results are sensitive to:
outliers
inclusion of occupational mix
measurement of bonuses
•Differential varies overtime and across the distributions
•Were critical of crowding out explanation (already covered)
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In our paper we subject the IFS public/private sector pay estimates to a
number of robustness tests given the significance which the research has
been given in informing a proposed change in public policy
The public-private sector wage differential is found to be sensitive to
changes in specification:
•
•
Definition of hourly wages
Variables included in model
The IFS estimate a fairly basic wage equation which controls for education,
age and qualifications.
Including additional variables which are found to significantly influence
earnings and affects the size of the differential
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Estimated public-private hourly wage differential
(2009 Q2 – 2011 Q1)
IFS controlling for education, age, qualifications and region
(base specification)
Swansea controlling for education, age, qualifications and
region
Swansea controlling for education, age, qualifications and
regions – different definition of hourly wages
Swansea controlling for education, age, qualifications and
regions – including additional controls* and different
definition of hourly wage (full specification)
Males
5.5
Females
11.3
5.1
11.5
2.9
10.6
-4.1
5.3
* Notes additional controls include, additional education controls, establishment size,
occupational controls, managerial responsibilities, job tenure.
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Estimated public-private hourly wage differential – recent update
(2010Q1 – 2012Q3)
Controlling for age, age left full time education and
interactions
Controlling age, age left full time education,
qualification and region of work
Controlling for education, age, qualifi8cations and
regions – including additional controls* (full
specification)
Males
6.4
Females
15.7
3.3
12.0
-2.8
4.9
* Notes additional controls include, job tenure, marital status, establishment size,
occupational controls, managerial responsibilities, white ethnicity, part time;
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The estimated public/private differential varies dramatically by plant size
across regions.
Comparing small plants with public sector in Wales, 38% premium for
males, 15% for females (Figure 1).
However, negative and insignificant when compared to private sector
employees working in plants employing over 500 workers (Figure 3).
Which is the most appropriate comparison?
Including a control for union membership also significantly reduces the
differential falling from:
•
•
8.5% to 6.5% for males
15.3% to 9.9% for females
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Figure 1 Public-private wage differentials by UK regions – small plant size
(<25) (2009Q2 and 2011Q1 pooled)
Males
Females
0.6
0.4
0.4
Public sectro wage differential
0.6
0.2
0.0
-0.2
0.2
0.0
-0.2
-0.4
-0.4
North
Yorh
E.Mids E.Anglia London S.East S.West W.Mids N.West Wales
Scot
N.Ire
North
Yorh
E.Mids E.Anglia London S.East S.West W.Mids N.West Wales
Scotl
N.Ire
Notes: The point shows the estimated mean and the lines show the 95% confidence interval around the means, controlling for age, age
squared, age left full time education, interactions between age and age squared with age left full-time education, qualifications (degree, A-level,
O-level and other), married, divorced, white ethnicity, job tenure, managerial responsibilities, part time and NSSEC occupational controls.
The data are weighted. Actual hourly pay is used; Source: Author’s calculations using data from the quarterly LFS (2009Q2-2011Q1);
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Figure 2 Public-private wage differentials by UK regions –
medium plant size (between 25 and 250) (2009Q2 and 2011Q1 pooled)
Males
Females
0.6
0.5
0.5
0.4
0.4
Public sector wage differential
0.6
0.3
0.2
0.1
0.0
-0.1
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.2
-0.3
-0.3
-0.4
-0.4
North
Yorh
E.Mids E.Anglia London S.East S.West W.Mids N.West Wales
Scotl
N.Ire
North
Yorh
E.Mids E.Anglia London S.East S.West W.Mids N.West Wales
Scotl
N.Ire
Notes: The point shows the estimated mean and the lines show the 95% confidence interval around the means, controlling for age, age
squared, age left full time education, interactions between age and age squared with age left full-time education, qualifications (degree, Alevel, O-level and other), married, divorced, white ethnicity, job tenure, managerial responsibilities, part time and NSSEC occupational
controls. The data are weighted. Actual hourly pay is used; Source: Author’s calculations using data from the quarterly LFS (2009Q22011Q1);
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Figure 3 Public-private wage differentials by regions – large plant
size (> 500) (2009Q2 and 2011Q1 pooled)
Females
Males
0.6
0.5
0.5
0.4
0.4
Public sector wage differential
0.6
0.3
0.2
0.1
0.0
-0.1
-0.2
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
-0.3
-0.4
-0.4
North
Yorh
E.Mids E.Anglia London S.East S.West W.Midls N.West Wales
Scotl
North
Yorh
E.Midls E.Anglia London S.East S.West W.Midl N.West
Wales
Scotl
Notes: The point shows the estimated mean and the lines show the 95% confidence interval around the means, controlling for age, age
squared, age left full time education, interactions between age and age squared with age left full-time education, qualifications (degree,
A-level, O-level and other), married, divorced, white ethnicity, job tenure, managerial responsibilities, part time and NSSEC occupational
controls. The data are weighted. Actual hourly pay is used; Source: Author’s calculations using data from the quarterly LFS (2009Q22011Q1);
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Public sector pay differential over time
The public/private sector pay differential is known to vary over the
business cycle, being higher in recessions and falling in periods of
recovery.
Important to be aware of this when developing policy.
Results using IFS specification, Figure 6, shows male private sector
workers actually do better than public sector workers over part of the
period.
Figure 5 shows effect of using a more detailed earnings equation.
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Figure 4 Estimated public-private wage differential over time, 1994-2012
(actual hours worked)
Results using IFS specification,
Figure 4, shows male private
sector workers actually do
better than public sector
workers over part of the period.
Notes: Reproducing IFS, the wage differentials are estimated by OLS regressing log hourly
wages (hourly earnings are calculated as gross weekly earnings divided by total actual hours paid
worked) on control variables for age and age squared, age left full time education, interactions
between age and age squared with age left full-time education and highest qualification; The dashed
lines represent 95% confidence intervals. Source: Author’s calculations using data from the quarterly
LFS. The data are weighted.
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Figure 5 Estimated public-private wage differential over time for Men and Women
Notes: The basic specification controls for age, age squared, age left full time education, interactions between age and age squared with age left fulltime education, qualifications (degree, A-level, O-level and other). The full specification additionally controls for job tenure, married, divorced,
managerial responsibilities, plant size, part time, white ethnicity, NSSEC occupational controls. The data are weighted. Source: Author’s calculations
using data from the quarterly LFS (three years moving average window data)
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Public/private sector wage differential across the earnings
distribution
Estimated differential varies along the earnings distribution – Figure 6
At the top of the earnings distribution, the pay gap is
•not significant for women
•significant and negative for men (-8%)
These differences are reduced once a full specification is used –
Figures 7 & 8
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Figure 6 Public-private wage differentials by percentile in the wage
distribution (2010 and 2012 pooled)
Notes: The estimates control for age, age squared, age left full time education, interactions between age and age squared
with age left full-time education, qualifications (degree, A-level, O-level and other) and regions of work (omitted category
North Ireland). Usual hours worked are used; Source: Author’s calculations using data from the quarterly LFS (2010-2012);
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Figure 7 Public-private pay differentials across the wage distribution
over time for men (base and full specifications)
Notes: The basic specification controls for age, age squared, age left full time education, interactions
between age and age squared with age left full-time education, and qualifications ; Usual hours worked are
used; The dashed lines represent 95% confidence intervals. The full specification additionally controls
for job tenure, married, divorced, managerial responsibilities, plant size, part time, white ethnicity, NSSEC
occupational controls and regions in the UK.; Source: Author’s calculations using yearly data from the
quarterly LFS.
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Figure 8 Public-private pay differentials across the wage distribution
over time for women (base and full specifications)
Notes: The basic specification controls for age, age squared, age left full time education, interactions between
age and age squared with age left full-time education, and qualifications; Usual hours worked are used; The
dashed lines represent 95% confidence intervals. The full specification additionally controls for job tenure,
married, divorced, managerial responsibilities, plant size, part time, white ethnicity, NSSEC occupational
controls and regions in the UK.; Usual hours worked are used; Source: Author’s calculations using yearly data
from the quarterly LFS;
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Regional variation in the public sector wage differential
There is significant variation in the estimated wage differential
between regions, and the regional patterns are different
between men and women.
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Figure 9 Estimated public-private wage differential by UK regions for men –
base specification (2009Q1 and 2012Q3 pooled)
Notes: The estimates control for age, age squared, age left full time education, interactions between
age and age squared with age left full-time education and qualifications. The full specification additionally
controls for job tenure, married, divorced, managerial responsibilities, plant size, part time,
white ethnicity, NSSEC occupational controls and regions in the UK;
Source: Author’s calculations using data from the quarterly LFS (2009 Q1-2012 Q3);
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Figure 10 Estimated public-private wage differential by UK regions for women –
Base and full specifications (2009Q1 and 2012Q3 pooled)
Notes: The estimates control for age, age squared, age left full time education, interactions between
age and age squared with age left full-time education and qualifications. The full specification additionally
controls for job tenure, married, divorced, managerial responsibilities, plant size, part time,
white ethnicity, NSSEC occupational controls and regions in the UK;
Source: Author’s calculations using data from the quarterly LFS (2009 Q1-2012 Q3);
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Variation in the public sector wage differential over time
in Wales
Estimated pay differential for men in Wales was negative and not
significantly different from zero between 1994-2003.
In recent years, there is a significant public sector mark up for men
which reached about 8% in 2008-2010, and decreased to 5% in
2010-2012 (based on full specification estimates).
For women the differential is around 9% in 2008-2010, and 13% in
2010-2012 (based on full specification estimates).
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Figure 11 Public-private sector wage differential in Wales (usual hourly pay)
MALES
95% lower CI
Public sector gap
FEMALES
95% lower CI
95% upper CI
0.25
0.25
0.20
0.20
0.15
0.15
0.10
0.10
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.10
-0.15
-0.15
Public sector gap
95% upper CI
Notes: The estimates control for age, age squared, age left full time education, interactions between age and age squared with age left full-time education,
qualifications, job tenure dummies, married, divorced, white ethnicity, managerial responsibilities, plant size, part time, NSSEC occupational controls,
yearly and quarterly dummies. Earnings are calculated by using usual hours worked. The data are weighted. Source: Author’s calculations using data
from the quarterly LFS (three years moving average window data)
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Conclusions
We find the public/private sector pay differential
•
•
•
•
•
•
Is larger for women than for men as do the IFS
Is sensitive to definition of hourly earnings
Falls when additional controls are included and remains significantly positive for males in
only two regions
We find a significant differential favouring private sector workers in plants with over 500
employees for both males and females
Varies over time and is insignificantly different from zero for males over most of the period
Varies over the earnings distribution and falls for both females and males as earnings
increase, being significantly negative at the top of the earnings distribution for males
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Finally
Policy could have implications for the gender pay gap
Evidence would suggest a need to address public sector wage
differential at top of earnings distribution. Inconsistent with recent
public sector pay policy which has been to protect those at the
bottom of the earnings distribution - £250 uplift.
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When it came to public sector pay the Chancellor appeared to want
to move to a very local model and away from London weight v the
rest.
However, in the Autumn statement 2012 the Chancellor announced
he would not be pursuing market-facing pay in the public, “this
means continuing with national pay arrangements in the NHS and
Prison Service and we will not make changes to civil service pay
arrangements either”.
As a result millions of public sector workers in relatively less
prosperous areas of the UK will not see a further reduction in their
real wage rate.
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