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IFS Briefing: Where should public sector pay rises be targeted?

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Arguments over public sector pay deals later this year are inevitable. The government’s spending plans, fixed in cash terms last autumn, were predicated on pay awards far below the current rate of inflation. In the absence of substantial budget top-ups from the Treasury, which appear unlikely, public sector workers are almost certain to be offered pay awards below the rate of inflation. How far below remains to be seen. 

The government also has to decide whether to offer flat, across-the-board pay rises, or whether to target resources at certain groups. Since 2010, more experienced and higher-paid workers in the NHS (and the wider public sector) have experienced larger real-terms cuts to their pay. Between 2010 and 2021, for example, clinical support staff in the NHS experienced an average real-terms pay cut of 2.8%. Hospital consultants, who on average earn more than five times as much, experienced a 12.2% pay cut. More generally, low-paid workers were spared from the public sector pay freeze implemented in the early 2010s and again last year. This policy of pay compression has narrowed the gaps between those on the lower end of the pay scale and their better-paid colleagues.

With limited money available for pay awards under its current spending plans, the government might be tempted to follow past precedent and offer bigger pay increases to the lowest-paid workers in the NHS and broader public sector. They, after all, are the ones who will typically be struggling most with the cost of living, and there are obvious political risks associated with NHS workers, in particular, experiencing a big hit to their living standards following their efforts throughout the pandemic.

But this is not necessarily the right policy for the problem at hand. It is far from obvious that public sector pay is the right tool to address social inequalities. Other, better-targeted policy levers are available. Instead, there is a stronger case for reward systems in the public sector to be designed around recruitment, retention and morale, to ensure the most effective delivery of public services. There is a risk that a further compression of the pay scale would make it harder to retain the experienced workers crucial to service delivery.

Ben Zaranko, Senior Research Economist at IFS and author of the observation, said:

‘With inflation running high and only limited money available for pay awards, a policy of offering bigger pay awards to the lowest-paid public sector workers might seem only fair. But if the government wishes to help low-income households, public sector pay policy is an incredibly blunt tool. It would be far more sensible to use the benefits system.

‘And, it is the more experienced and higher-paid public sector workers who have faced the biggest pay cuts over the past decade – often in excess of 10% – which has narrowed the gaps between those on the lower end of the pay scale and their better-paid colleagues. A further compression of the pay scale could lead to a situation where individuals are reluctant to take on additional training or management responsibilities because the financial returns for doing so are so meagre.’

Read the briefing in full here.

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