Public and private sector pay

 As ever the IFS is brilliant on this, from a July 2024 paper, by Cribb and O'Brien. 

1. The overall picture is lagging public sector pay since 2001.

"And taking the long view, real public sector pay at the end of 2023 was still 1% lower than its level at the beginning of 2007, almost 17 years earlier. Real private sector pay was only 4% higher over the same period."

2. Interestingly, public pay has varied an awful lot, with low paid public sector workers doing relatively well.  

 

3. and different professions faring differently. 

IFS say

"Figure 6 shows how pay has changed for some major (and high-profile) public sector occupations: nurses, doctors, teachers and educational assistants compared with the public and private sectors as a whole.5 For comparability (particularly due to discontinuities in NHS England data), we focus on the period since 2010. 

Figure 6 shows that pay for most of these high-profile public sector occupations has fallen by more since 2010 than the average for public sector wages. The one exception is educational assistants, a relatively lower-paid occupation, whose average pay grew significantly faster than even average pay in the private sector. That pay growth for teachers, doctors and nurses lagged behind the public sector average is not necessarily surprising due to the pay compression in the public sector documented in the previous section, as these are among the better-paid public sector occupations. The reductions in pay for teachers in the 2010s were particularly large and slightly larger than implied by pay scales, reflecting the fact that the teacher workforce has become slightly less experienced (and therefore less well paid) over time.6 This has happened in other occupations too; for example, there have been significant expansions in the number of doctors over time, leading to increases in the share of doctors who are younger and therefore less well paid (General Medical Council, 2023). 

 

The labour market: December 2024 release

1.  I have been worried for some time that the UK labour market has been impaired following the disruption from Covid and the like.  To me, there is a risk that U* has risen to more than 4.5% the BoE has estimated (their estimate is on p. 13 of the November MPR).

2. So the labour market data will be crucial on this.  What does it say? Fkigure 4 of the release shows a blip up 

"Annual average regular earnings growth for the private sector was 5.4% in August to October 2024 (Figure 4). This was up on the previous three-month period (4.9%) and last higher in March to May 2024, when it was 5.6%."

3. What are we to make of this blip up?  I don't want to read too much into one month, but it's concerning.  The ONS does say "This growth rate is affected by a small decrease in the October 2023 estimates, which has caused a slight base effect.".  It turns out that wages fell in October 23, so there is an effect here, but this is one month in a 3month on 3 month measure.

4. Vacancies have continued to fall, and are now roughly at the 2019Q4 pre-pandemic level.  Our previous work, however, showed this was inflationary.

5. this gives a VU curve like this

which uses overlapping months.  

 

Adjustments along many margins

We have spent time in class reviewing how firms can adjust to prices by changing no only quantities, but other margins as well.  Here's an example from the Next case 

Para 396: "in the early 2000s paid rest breaks which sales consultants had received were removed following the introduction of the national minimum wage".

How much would European productivity growth rise if our hi-tech sector were more like the US?

 

   The Draghi report assigns slow EU productivity growth to a large range of factors.  He mentions in particular the tech sector

““…the productivity gap between the EU and the US is largely explained by the tech sector. (p.2)

“The EU economy has traditionally been strong in all mid-technology sectors” (p.20)

 

2.      So what do the data say?  We have used EUKLEMS/INTANProd as follows.

3.      Split the economy up into

a.      ICT equipment manufacturing: C26.  Call this ICT manufacturing

b.     Information services.  Sector J: writing software, making movies etc.  call this ICT services

c.      Everything else. Call this ICT using

4.      Write productivity growth as a share-weighted average of productivity growth in all the sectors

 

 

Where the shares are shares in value-added and the same equation applies for TFP growth.

 

5.      Average annual growth rates, 1997-2019 are below for the US, EU9 (9 major EU countries) and the UK

 

US	share in GVA	LPG	TFPG
ICTusing	87%	1.91	0.44
ICTmfr	3%	12.90	10.40
ICTsvc	10%	4.88	1.86
Total		2.51	0.85
EU 9
ICTusing	91%	1.02	0.15
ICTmfr	2%	6.43	5.14
ICTsvc	7%	3.08	1.86
Total		1.25	0.35
Total with :
US shares		1.57	0.46
with  US prod		2.29	0.69
UK
ICTusing	89%	1.32	0.20
ICTmfr	1%	12.00	11.30
ICTsvc	10%	7.67	6.72
Total		2.08	0.98
Total with :
US shares		1.64	0.52
with  US prod		2.35	0.71

 

 

Where the colums are

a.      The share of that sector in the total economy

b.     Average labour productivity growth (LPG)

c.      Average TFP growth (TFPG)

And the row marked total is the weighted average.

 

The table tells us:

a.      The US has a higher GVA share of ICT manufacturing and ICT services. 

b.     But it also has higher productivity in those sectors than the EU (but not the UK).

c.      Thus the italics show two counterfacturals

a.      EU and UK productivity growth with the US shares (but EU and UK productivity growth)

b.     EU and UK productivity growth with the US productivity growth (but EU and UK productivity shares)

 

What do we find?

a.      Most of the EU/US gap is not because of industrial structure.  If the EU had the same industrial structure as the US, it would only close about 25% of the productivity gap.  The problem is that the EU has lower productivity within those sectors (and low productivity in the ICT-using sector)

b.     The UK by contrast is closer in industry structure to the US  and has high productivity in these sectors. The UK problem is low productivity in the ICT using sector.