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Public and Private Sector Earnings - The Impact of the Standard Occupation Classification Revisions This product is designated as National Statistics

Released: 28 February 2014 Download PDF

Public and Private Sector Pay Comparisons - The Impact of the Standard Occupation Classification Revisions

ONS estimates of public and private sector pay so far have used the Annual Survey of Hours and Earnings (ASHE) coded to the Standard Occupation Classification 2000 (SOC 2000). In 2011 ONS began rolling out an updated occupational classification, SOC 2010 accross many of its surveys including ASHE.

This report explains some of the key differences between SOC 2000 and SOC 2010 and how they affect the estimated pay differential between the public and private sector. The report then goes  on to explain how a consistent time series for the pay differential has been estimated.

Following this report the ONS will be publishing updated estimates of the public and private sector pay differential on the 10th March 2014.

Introduction

Comparing the pay of the public sector and the private sector is not a straightforward task because the two sectors are made up of a variety of different jobs and types of people. A number of different results can be derived depending on the methodology that is used to calculate pay differences.

ONS uses a statistical technique, called regression, to estimate the pay difference when controlling for some of the factors that influence the pay of the two sectors. The latest report, published in November 2012, estimated that a public sector employee earned, on average, 7.3% more than a private sector employee in 2011.

If controlling for differences in the organisation sizes of the two sectors, as larger organisations tend to on average have higher average pay than small organisations, the estimate of the pay gap was 2.2%.

These estimates are based on earnings data collected in the Annual Survey of Hours and Earnings (ASHE) with an adjustment for bonus payments using the Average Weekly Earnings (AWE) series produced by ONS.

Changes to the Occupational Classification

Occupation is one of the key variables used within the regression model of the pay difference between the two sectors. ASHE contains information on the types of occupation each employee is working in and is coded to the Standard Occupational Classification (SOC). This is a common classification of occupational information for the United Kingdom and enables operational users in both research/statistical and client-oriented applications to use SOC in as consistent a way as possible.

The SOC classification is updated on a ten year cycle and current ONS estimates of the pay differential have used ASHE coded to the Standard Occupational Code for 2000 (SOC 2000). In 2011, ONS started rolling out an updated occupational classification, SOC 2010, across many of its surveys including ASHE. This results in a discontinuity to the estimate of the public and private sector pay differential.

The 2011 ASHE information was initially published using SOC 2000 and then reworked at a later date on a SOC 2010 basis. Therefore it is possible to look at the pay differential under both occupational classifications for the same year. When considering the regression results without the impact of firm size the pay differential is revised from 7.3% to 3.7%, and controlling for differences in firm size the pay differential is revised from 2.2% to –0.9%.

Figure 1 - Pay difference between the public and private sector in 2011 using SOC 2000 and SOC 2010

Figure 1  - Pay difference between the public and private sector in 2011 using SOC 2000 and SOC 2010
Source: Annual Survey of Hours and Earnings (ASHE) - Office for National Statistics

Notes:

  1. Positive number means the public sector earns more

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Why Change SOC

The Standard Occupational Classification, first introduced in 1990, is maintained by the Classification and Harmonisation Unit (CHU) of the Office for National Statistics (ONS). They conduct this maintenance function by responding to user queries, collecting and collating information on new occupational areas and by developing databases of occupational information for the purpose of revising the classification.

The conceptual basis of the UK national occupational classification has remained unchanged since 1990 but the types of occupation and groupings are updated every 10 years in response to the changes in occupational areas. Additionally SOC is updated to harmonise with the latest international standards and SOC2010 reflects the work of the International Labour Office who revised the International Classification of Occupations (ISCO) from its 1988 version to create a 2008 version.

There are currently nine major occupational groupings, and the main changes introduced between SOC 2000 and SOC 2010 were:

  • an introduction of a stricter definition of managers;

  • the reallocation of most nursing occupations from Major Group 3 to Major Group 2;

  • a reclassification of occupations associated with information technologies;

  • further alignment with the 2008 revision of the International Standard Classification of Occupations (ISCO08), specifically via the introduction of a limited number of supervisory unit groups.

The update to SOC 2010 has meant the UK occupational structure has improved the compatibility with international standards and is a better occupational structure than its predecessor SOC 2000.

More details on the revisions to SOC, including a detailed explanation of the four main changes are available in a paper produced by Peter Elias and Margaret Birch, published in May 2010 titled - SOC 2010: The revision of the Standard Occupation Classification 2000.

Understanding the Discontinuity

Estimates of the pay differential are based on a linear regression of log-hourly earnings with independent variables:

  • Sex (because of differences in the distribution of men and women in the public and private sectors)

  • Age & Age squared (because the relationship between earnings and age is non-linear)

  • Occupations (from SOC 2000 – 11 groups) (because pay is heavily determined by the occupation carried out)

  • Region (that the job is located in - 12 across the UK) (because of differences in the percentages of jobs in each sector across the country).

  • Sector (Public, Private, Non-profit organisations)

  • Employment status of full and part time (because full time workers tend to be paid more per hour than part time workers)

  • Employment status of permanent and temporary (because permanent workers tend to be paid more on average than temporary workers)

  • Job tenure based on days worked (job tenure is a proxy for firm specific experience).

A specification test was performed on the regression model with the aim of reducing the specification error as far as possible with the available data and 11 categories of occupation performed best. Using a more detailed occupation level can lead to some categories consisting nearly entirely of occupations in one sector. The 11 categories of occupation used are

Table 1 - 11 Occupation Groupings used in Public and Private Sector Pay Analysis

Group SOC 4 digit code
1a - Chief Executives and Senior Officials 1110 - 1119
1b - Corporate Managers and Directors 1120 - 1199
1c - Other Managers and Proprietors 1200 - 1299
2 - Professional Occupations 2100 - 2999
3 – Associate Professional and Technical Occupations 3100 - 3999
4 – Administrative and Secretarial Occupations 4100 - 4999
5 – Skilled Trades Occupations 5100 - 5999
6 – Caring, Leisure and Other Service Occupations 6100 - 6999
7 – Sales and Customer Service Occupations  7100 - 7999
8 – Process, Plant and Machine Operatives 8100 - 8999
9 – Elementary Occupations 9100 - 9999

Table source: Office for National Statistics

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The two main areas of change to the occupational classification that impact on the pay differential are

  1. the reallocation of most nursing occupations from a lower occupational group (Major Group 3) to a higher occupational group (Major Group 2)

  2. the introduction of a tighter definition of managers

Table 2 shows the relationship between SOC 2000 and SOC 2010 using the 2011 ASHE dataset. The numbers represent the percentage of individuals that were in one of the occupational groups on SOC 2000 and the corresponding group under SOC 2010. Those highlighted in yellow show the diagonal where individuals were in the same occupational group under both classifications. For groups 2, 4, 5, 6, 7, 8 and 9 between 79% and 89% of individuals were in the same group. The main revisions were in major group 3 and among the managerial groupings 1a, 1b and 1c.

The revision of occupations from Major Group 3 to Major Group 2 is shown in Table 2 by the blue shading, where 29% of individuals have been moved up the occupational group.

Table 2 - Percentage of individuals that were in one of the occupational groups on SOC 2000 and the corresponding group under SOC2010 for ASHE, April 2011

Table 2 - Percentage of individuals that were in one of the occupational groups on SOC 2000 and the corresponding group under SOC2010 for ASHE, April 2011
Source: Annual Survey of Hours and Earnings (ASHE) - Office for National Statistics

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Of those moving from group 3 to group 2, just over 60% are nurses and a further 10% are midwives, physiotherapists and journalists. Around three-quarters of those moving up a group are in the public sector and their pay in the higher group compares less favourably to their private sector counterparts in Major Group 2 than it did in Major Group 3.

The tighter definition of managers is shown in Table 1 by the orange shading, where 14% of managers in group 1b have moved to major group 2 and a further 20% of managers have moved to major group 3 when using SOC 2010. Most of this movement is for workers in the private sector, accounting for 79% of those moving from group 1b to either 2 or 3. Their pay in these lower groups compares more favourably to their public sector counterparts than it did within the original SOC 2000 group of 1b.

Taken together these reclassifications help to explain the reduction in the estimated pay differential of the public sector earning more on average than the private sector when using SOC 2010 compared to SOC 2000.

To further understand the impact of these SOC changes further results have been produced on a SOC 2010 basis, where it is estimated the public sector earned 3.7% more than the private sector. Those occupations where the largest revisions between groups took place were moved back to the groups they were in when using SOC 2000. The occupations moving from group 1b under SOC 2000 to groups 2 and 3 under SOC 2010 were sales managers and financial account managers. The results are in the following table 3.

Table 3 - Model results for 2011 on a SOC2010 basis moving some occupations to their previous groups in SOC 2000

Percentage
Occupations moved to previous grouping in SOC 2000 Excluding organisation size
No occupations moved 3.7
Nurses 5.1
Sales managers1 4.7
Financial accounts managers 4
Midwives  3.9
Physiotherapists  3.8
Nurses and sales managers  6.3
Nurses, sales managers and financial accounts managers 6.7
Nurses, sales managers, financial accounts managers and midwives 6.8
Nurses, sales managers, financial accounts managers, midwives and physiotherapists 7

Table source: Office for National Statistics

Table notes:

  1. Sales managers refers to those who were classed as ‘Sales accounts and business development managers’ under SOC 2010 and ‘Marketing and sales managers’ under SOC 2000.

  2. Financial accounts managers refers to those who were ‘Financial accounts managers’ under SOC 2010 and ‘Office managers’ under SOC 2000.

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The estimate of the public sector earning around 3.7% more on average than the private sector increases to 5.1% if nurses are moved from major group 2 back to major group 3. If moving just sales managers back to group 1b the gap increases from 3.7% to 4.7%. The pay gap also increases if moving financial account managers, or midwives, or physiotherapists, but not by as much as the nurses and financial managers.

Rather than moving the occupations individually, moving all occupations collectively back to the groupings they were in under SOC 2000 increases the pay difference from 3.7% to 7.0%. This is much closer to the 7.3% original estimate when using a SOC 2000 classification. Therefore, the reclassification of these occupations in SOC 2010 helps to explain the difference in the estimate of the pay gap when using SOC 2010 compared to using SOC 2000. 

Producing a Consistent Time Series - Roll Back SOC 2010

The SOC 2010 classification better reflects the current occupational structure across the United Kingdom. The ASHE 2011 data is available on a dual coded basis but previous years only contain information on a SOC 2000.  Going forward from 2011, estimates will be available on a consistent SOC 2010 basis.

To produce a long run time series ONS has considered several options and our proposed solution it so rollback SOC 2010 onto the earlier datasets.

A conversion code has been created which uses probabilistic matching to convert a SOC 2000 occupation into a SOC 2010 equivalent. The code does not give the exact same occupational group as would be achieved by investing time and resource to dual code. As the 2011 ASHE was dual coded it is possible to compare the results where SOC 2000 has been converted alongside the actual SOC 2010. After converting SOC 2000 to SOC 2010 the estimate of the pay differential is closer to the actual SOC 2010 results and in 2011 it is 1% lower for models without and with firm size included, shown in figure 2.  So the conversion gives a lower estimate of the pay differential and assuming that the same difference applies for the back series it is possible to adjust the estimates for 2002 to 2010. This is done by increasing the observed differential when converting SOC 2000 to SOC 2010 by 1 percentage point.

Figure 2 - Pay difference between the public and private sector in 2011 using SOC 2000, SOC 2010 and SOC 2010 equivalent

Figure 2 - Pay difference between the public and private sector in 2011 using SOC 2000, SOC 2010 and SOC 2010 equivalent
Source: Annual Survey of Hours and Earnings (ASHE) - Office for National Statistics

Notes:

  1. Positive number means the public sector earns more

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Converting SOC 2000 to SOC 2010 going back in time assumes that the SOC 2010 classification is better than the SOC 2000 classification for all years where SOC 2000 is available. Particularly for the case of Nurses this may not be the case the further back in time we go as SOC 2000 was the optimal coding frame when it was introduced. We have decided to adopt this option as we feel this is the best way of removing the discontinuity with the least drawbacks.

There were two other options that ONS considered. One was to leave the discontinuity but in speaking to some users it was felt that having a time series, understanding the discontinuity and a method to overcome it was important. The remaining option was to minimise the impact of the SOC reclassification by running the regression model with more occupational groups. However, when making comparisons of public and private sector pay, using the three-digit occupational level, some occupations are so specific that they are based entirely in the public or private sector.

When two or more explanatory variables in a regression are highly correlated with each other the variation in one of the variables may be captured instead by one of the other variables. For instance the 3 digit group which contains Nurses, who are predominantly based in the public sector, will be highly correlated with the variable that indicates whether someone is in the public or private sector. We could then start to see the variation explained by public/private sector status being captured instead in the occupation variable. This would compromise the accuracy of the variable we are most interested in. This issue is known as multicollinearity.

Going Forward

ONS will be publishing the latest figures on the Public and Private sector pay differential on March 10th 2014. As outlined in this note all estimates made on data captured before 2011 i.e on a SOC 2000 basis, will be based on occupation codes reclassified to a SOC 2010 equivalent such that they are as consistent as possible with the estimates based on actual SOC 2010 occupation codes i.e. 2011-2013.

Background notes

  1. Details of the policy governing the release of new data are available by visiting www.statisticsauthority.gov.uk/assessment/code-of-practice/index.html or from the Media Relations Office email: media.relations@ons.gsi.gov.uk

    These National Statistics are produced to high professional standards and released according to the arrangements approved by the UK Statistics Authority.

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