This is a video looking at public and private sector pay differences.
The public and private sectors are different which means there is often difficulty in comparing the public and private sector in terms of earnings. For example, there is a different skill mix of jobs, different sizes of businesses, as well as, a different percentage of men and women working within them. Also the average number of hours worked differs, and so does the age and pay distribution.
Starting with the differences in skill levels between the two sectors we will use this example to illustrate the problems in comparing two groups. Here are two groups, A and B, and here are 40 people who are paid £9 per hour and they all do exactly the same job, which we will call “high skill”. Here are another 40 people all doing a lower skilled job being paid £6 per hour.
If we move these people into the two groups, here we have 25 high skill and 15 low skill people in group A and 15 high skill and 25 low skill in group B. The total pay for group A is £315, with an average of £7.88 per hour. The total pay for group B is £285, or an average of £7.13 per hour.
So taking the pay difference between the two groups gives us a gap of 10.5 per cent, suggesting that group A is better paid than group B. However, this is because of the different skill mix of the two sectors.
So let’s look at the skill mix of jobs between the public and private sector using information from the Annual Survey of Hours and Earnings, in April 2011, and looking firstly at low and lower-middle skill jobs, there is a higher percentage in the private sector. For the upper-middle and high skill jobs there are a higher percentage in the public sector.
The importance of these differences is that earnings tend to increase as the skill level of the job increases. So, considering the previous example, it would be expected that on average the public sector would earn more than the private sector because of the differences in the types of jobs.
Now looking at the age of employees in both sectors, here is the percentage of employees in both sectors up to around the mid 30s and here the percentage for the other years of age. We can see the private sector is made up of a higher percentage of younger employees. Looking at those aged older, we see the public sector has a higher percentage of older employees.
Removing these bars and changing the axis to £ per hour, we will now look at the average pay for each individual year of age. Firstly in the public sector, and now the private sector, and we see that earnings tend to increase most up to the early 30’s, before falling off in the mid-50’s as it is likely that those being paid the most leave the labour market earlier.
As earnings increase with age and the public sector has a higher percentage of older workers, again, keeping everything else the same, it would be expected that the public sector earn more, on average, than the private sector.
Another important thing to note when comparing the pay between the two sectors is the pay distribution of employees. To illustrate this, here is a random selection of people which we will say work in the public sector, and here is another random selection of private sector employees.
What we see is that the public sector distribution is more compressed than the private sector. This means that the private sector has more low paid employees but also more high paid employees than in the public sector.
We’ve explained some of the differences between the two sectors which make it difficult to compare the averages in pay between them. To try to account for some of these issues a statistical regression model can be run with the aim of estimating the pay difference, keeping all other things the same. A detailed article explaining this method is on the ONS website, with a link in the description of this podcast.
We will use this chart to show the estimated pay difference , we see the gap increased from around 2003 to 2005, before falling up to 2007, and then increasing from 2007 to stand at 7.3 per cent in 2011.
Another important issue to note at this stage is the importance of the size of the organisation. Employees working in large organisations earn more than those in small organisations. A large organisation is defined as having 500 or more employees.
Using these pie charts we can see that 94% of public sector employees work in large organisations compared with 49% of private sector employees.
In 2011, people employed in large organisations earned 24.9% more than those working in small organisations after running regression analysis to control for other factors.
If we now return to the previous chart on the pay gap over the period from 2003 to 2011 we can now analyse the impact that firm size has on the size of the pay gap.
As seen earlier the pay gap was 7.3% in 2011. If organisational size differences are accounted for, shown by the green line, the size of the pay gap decreases to 2.2%.
Next we will look at the pay gap across the earnings distribution, using this chart. The green line illustrates the pay gap across the earnings distribution when organisation size is accounted for, and the dotted line illustrates the UK average pay gap of 2.2%.
If we look at the lowest earners, at the 5th percentile, the value at which 5% earn less and 95% earn more, we can see that the pay gap is 11.2%. Now turning our attention to the highest earners, at the 95th percentile, the value at which 95% earn less and 5% earn more, the pay gap is -10.3%.
This shows that public sector employees earn more at the bottom end of the earnings distribution, and this is partially offset by the fact that private sector employees earn more at the top of the earnings distribution.
The blue line here shows the trend when organisational size is not accounted for, and as can be seen, it follows the same pattern as the green line.
Now we will look at the pay gap across the different regions of the UK, using this chart. The blue horizontal bars show the pay gap across the regions when organisational size differences are accounted for. As can be seen, all areas of the UK have a positive pay gap except for the South East and London, which has a pay gap of -3.0% and -7.9% respectively. The dotted line illustrates the UK average pay gap of 2.2%.
If we now look at the regional pay gap when organisational size is not taken account of, we can see, that the size of the pay gap, with the bars now illustrated in green, has increased, and the dotted line showing the UK average pay gap has increased to 7.3%. The only region now showing a negative pay gap is London.
Next we will look at the regional pay gap across the earnings distribution, using this chart. The blue line shows the pay gap for the whole of the UK across the earnings distribution.
The next three lines illustrate the North East, Yorkshire and the Humber and North West respectively. All three regions have a very similar pattern across the earnings distribution, although it is worth noting that the pay gap in the North East remains positive throughout.
The next three lines show the East Midlands, East of England and West Midlands respectively. All three of these regions follow a similar pattern to that of the UK average.
The next three lines show the South West, South East and London respectively. We can see that the pay gap for the South East is lower than the UK average across the whole of the earnings distribution.
This final group of regions shows the pay gap across the earnings distribution for Northern Ireland, Scotland and Wales.
If we bring back the pay gap line for London, since the pattern for London is different to other parts of the UK, we can see that compared to the UK average, the pay gap is higher at the bottom of the earnings distribution in favour of the public sector, and then favours the private sector at the top half of the distribution.
Lastly it is worth noting that there are other factors that could influence the pay difference, and this analysis does not include other forms of remuneration, for example, pension contributions, company cars, and health insurance. This is because the survey ASHE does not collect this information. Also ASHE does not cover those who are self-employed so it will miss many high paid self-employed, and also some lower-paid.