The pay of public servants has not fallen behind the private sector over the past five years, writes Jim O'Leary, the economist who resigned from the benchmarking body last April.
According to media speculation, the report of the Benchmarking Body, to be published next Monday, will recommend pay increases of up to 15 per cent for public service grades.
Such increases will be additional to the cumulative increases in basic rates of pay of 18-21 per cent already secured by public sector employees under the Programme for Prosperity and Fairness. What reasons might justify further substantial pay awards to public servants?
The answer is suggested by the context in which the body was conceived two years ago. Then labour market conditions had become very tight, evidenced by a rapidly falling unemployment rate and steadily accelerating wage inflation.
A common perception was that public service pay rates had fallen well behind their private sector equivalents and that the public sector was finding it difficult to compete for workers and motivate staff. A related perception was that public servants had become the victims of pay inequity.
The Benchmarking Body's terms of reference reflected these perceptions and enjoined it to regard, inter alia, "the need to recruit, retain and motivate staff" and "to ensure equity between employees in the public services and the private sector".
This suggests two grounds on which significant increases might be justified. The first is recruitment and retention. If it can be shown that public sector employers are unable to compete effectively with the private sector in recruiting and keeping staff, then a prima facie case for raising pay can be made.
How widespread are such problems? The latest Quarterly National Household Survey data indicate that public sector employment has risen more rapidly than employment in the private sector since 1997. The public sector, it seems, has managed to expand jobs at a rapid rate, not only through the recent softening labour market, but also through the very tight labour market conditions up to a year ago. This performance strongly suggests that the public sector in general does not suffer from significant recruitment and retention problems, or at least no more so than the private sector. So it would be difficult to justify generalised increases in public sector pay on these grounds.
That said, in specific areas of the public service acute recruitment and retention problems exist, where a case can be made for significant pay increases, as part of an overall package of measures to address these difficulties. It will be interesting to see which grades the Benchmarking Body has identified as within this category and what evidence it marshals in support of its selection.
The second basis for justifying significant pay awards is by appealing to the notion that public servants should be paid fairly, which begs the question of how "fair pay" can be determined.
There is an established methodology for this, which the Benchmarking Body used, called job evaluation, based on the notion of comparable pay for comparable work. It evaluates jobs with reference to factors such as experience, responsibility, interpersonal skills, emotional demands and so on, and scores them accordingly. The idea is that jobs with broadly similar scores should attract broadly similar pay.
The key issue here is whether and to what extent, public service grades are "underpaid" relative to comparable private sector occupations.
What kind of results might one expect the type of exercise to throw up? Consider the trends in public and private sector pay in recent years. In the 1997-2001 period, for example, average earnings across the public sector grew by 6 per cent a year, compared with average annual growth rates of 5.5 per cent and 5.4 per cent respectively in industry and the financial sector. Slightly more refined analysis shows average earnings amongst administrative civil servants and education workers, for example, broadly keeping pace with clerical and managerial employees in construction and industry.
What these data suggest, albeit at a fairly aggregate level, is that the pay of public servants has not fallen behind private sector pay over the last five years. The implication of this in turn is that if there is a generalised problem of inequity as between public and private sector pay, it is one that has existed for at least five years. How plausible is such a proposition, given that the proportion of unionised workers is three or four times higher in the public service than in the private sector Have public sector unions really been that ineffectual in promoting their members' interests.
Of course, the inferences that one might draw from available data on public and private sector pay trends should not be taken as proof that instances (perhaps many instances) of inequitable pay do not exist in the public sector. Much as these data suggest, and then only tentatively, that the phenomenon is not widespread. Again, it will be interesting to see what pronouncements the Benchmarking Body makes on this score, and what supporting evidence it adduces.
Let us suppose that there are public sector grades in respect of which there is no evidence of recruitment and retention problems and no evidence to indicate that pay is out of line with the private sector. Are there perhaps other grounds, in the context of benchmarking, upon which a significant pay increase might be justified for such grades?
Again, the Benchmarking Body's terms of reference provide a useful analytical tool.
They lay heavy emphasis on the need for public service modernisation and direct the Benchmarking Body to have regard to "the need to ensure ongoing modernisation of the public services so that the public service can continue to adapt to necessary changes and to achieve greater efficiency and effectiveness".
This would suggest scope for linking pay increases to changes that would enhance efficiency and effectiveness. However, the terms of reference qualify this by stating that "it is accepted that change is a requirement of a modern high-performing public service and is not, in itself, a basis for claims for improvements in pay and conditions".
Taking the two statements together would suggest that (i) the acceptance of change cannot be used to justify generalised pay increases, but that (ii) there may be scope for making pay increases conditional on specific changes in certain areas. How the Benchmarking Body deals with this issue will be of considerable interest.
No doubt the first instinct of many commentators will be to estimate the overall cost of the Benchmarking Body's recommendations. The gross cost of a set of pay awards averaging 12 per cent, given a baseline paybill of around €12 billion, is not far short of €1.5 billion a year. The net cost is around €1 billion a year. These figures inevitably prompt the question: can we afford such increases?
Two observations on this. The first is that the question rather misses the point. The issue is not one of affordability, it is one of justifiability. Can pay increases of the magnitude recommended by the Benchmarking Body be justified? Specifically, can they be justified with reference to the criteria implied in the body's terms of reference. If so, then the payment of those increases should be accorded a high ranking on the Government's "to do" list. If not, then quite a different attitude should be taken.
The second point is that the cost of increasing public sector pay is a recurring cost. Consequently, the net figure of €1 billion cited above goes nowhere near capturing the full cost. To do so we need to capitalise the stream of future expenditures. This yields a figure of around €20 billion, given prevailing interest rates. This is more than three times the total allocation to national roads in the National Development Plan for the 2000-2006 period, and more than 20 times the maximum projected cost to the so-called Bertie Bowl.
Jim O'Leary lectures in economics at NUI Maynooth. He was one of the original members of the Benchmarking Body, but resigned in April 2002