Economics Jim O'LearyLast weekend two colleagues and I presented a paper at the annual conference of the Irish Economics Association*. The paper set out the results of several months' painstaking research into the relationship between public and private sector pay in Ireland.

The data are collected by the ESRI from a sample of thousands of individuals on an annual basis. The data cover the earnings of the individuals concerned as well as a host of other economic, financial and social information.

The core idea behind our research was to discover whether, having taken account of personal attributes like age, gender, work experience and educational attainment, and job characteristics like occupation, contract type and establishment size, public service employees earn more than their private sector counterparts, or, in other words, whether public servants earn a premium.

The answer? A resounding 'yes'. For 2000, the latest year for which we have completed our analysis, we estimate a public sector premium of almost 11 per cent on monthly earnings.

It is as well to acknowledge the limitations of this kind of exercise at the outset. The earnings measure we have used does not include bonuses or benefits-in-kind, because suitable data are not available. Nor, for the same reason, does it take account of pension arrangements or differential PRSI contributions.

In addition, our methodology does not incorporate any allowance for the greater security of public service employment, something that has an undoubted value but a very difficult one to estimate. It is a moot point as to what the net effect of including all these elements would be. I suspect that it would result in a higher estimate of the public sector premium.

One of the most fascinating aspects of our research relates to the behaviour over time of the premium as estimated.

The Irish economy of the 1990s experienced extraordinarily rapid output and employment growth. Labour market conditions tightened a great deal with the unemployment rate falling from 15 per cent in 1994 to 4 per cent in 2000.

In these circumstances it would not have been surprising had private sector employers, competing aggressively for a diminishing pool of available workers, pushed up private sector wages at a faster rate than public sector wages were rising.

This perception of a public sector being "left behind" did gain currency towards the end of the decade, and was important in demands for big pay increases from the teachers' unions and other public service unions.

If this perception were valid, we would expect to see it to show up in a decline in the public sector premium over the period. Our research fails to uncover convincing evidence of this phenomenon, however. Granted, the premium we estimate for 2000 is about two percentage points smaller than our estimate for 1994, but this margin is not statistically significant.

Moreover, preliminary work we have carried out for 2001 indicates that in that year the premium rose again by about two percentage points. These are remarkable results. They suggest that Irish public servants enjoyed the full fruits of the Celtic Tiger and preserved intact their earnings advantage vis-à-vis their private sector counterparts over this period. This runs counter to what international evidence exists on the cyclical behaviour of public sector- private sector earnings differentials.

A great deal of analysis of public-private wage differentials along similar lines to ours has been carried out for other countries. This enables us to compare the Irish situation with the situation elsewhere.

In some respects our results echo those reported in the international literature. For example, we find that the public sector premium is significantly higher for women than men, a finding that is common to almost all countries where this issue has been investigated. We also find the premium is higher for low-paid than for high-paid workers. This again is in line with the pattern observed virtually everywhere else.

However, there are also important points of difference. One - the cyclical behaviour of the premium - has already been mentioned. Another, and perhaps the most notable one, is that the premium we estimate for Ireland is much higher than comparable international estimates.

Estimates of public sector premiums for the UK, Italy and France in 1998, based on hourly earnings, are in the range 4-6 per cent. Our estimate of the Irish premium in 1998, based on hourly earnings, is about four times larger than this. Estimates for Germany in 2000 show a premium of 9 per cent for women and a negative premium of almost 8 per cent for men. Our equivalent results for Ireland for 2000 are a positive premium of over 13 per cent for women and a positive premium of over 8 per cent for men.

The biggest question that our research poses is why our estimated premium is so high. One answer is that it is simply an overestimate because the earnings variable we use leaves out important elements (bonuses, benefits-in-kind, pension entitlements and so on). My considered judgment is that the inclusion of all these elements would result in a higher premium for all but the highest-paid public servants.

In a similar vein, it may be argued that we have overestimated the premium because we have not taken account of some productivity-related attributes that public sector workers are more generously endowed with. This is possible, but we have actually tested our estimates to see if they are free of this kind of bias and we are reasonably confident that they are.

Another answer is that public service workers need to be paid a substantial premium vis-à-vis their private sector counterparts to compensate them for the uniquely demanding working conditions that they endure (think of gardaí, teachers, nurses, prison officers).

This is not a convincing explanation for at least two reasons. Firstly, it doesn't explain why the public sector premium is so much larger in Ireland than elsewhere. Secondly, it ignores the fact that many private sector occupations have their own uniquely unpleasant/hazardous/ demanding features.

So the question remains: why is it that on a like-for-like basis Irish public servants are paid so much more than their private-sector counterparts (a margin that will have been widened significantly further by the so-called benchmarking awards)?

The answer, I suspect, has to do rather less with any of the points just discussed than with the relatively closed architecture of public-sector labour markets in Ireland, in particular the barriers to entry that prevent or discourage private sector workers from joining the public service at anything other than a limited number of recruitment grades. More on this at a later date.

* Public-Private Wage Differentials in Ireland, 1994-2000 by Gerry Boyle, Rory McElligott and Jim O'Leary

Jim O'Leary lectures in economics at NUI-Maynooth. jim.oleary@may.ie