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Friday, December 09, 2022

Wage increases in an unreformed public sector will destroy the social contract

The topic of raising pay for high-level public sector workers, and whether or not we can afford it, has taken up a considerable amount of column inches recently.

I am a former public servant and have the pleasure and privilege of regularly working with public servants and know of their dedication and commitment and how it can be underrewarded and unrecognized.

Teachers, airport staff and nurses also face similar challenges as those receiving lower wages in the private sector in terms of the cost of living and housing crisis. It is vital to say this because, if not handled sensibly, the coming impact of inflation and the government’s response to it could create deep social and political divisions.

In reality, however, there are deep economic and political divisions between a powerful unionized public sector that can negotiate and an indigenous private sector that largely cannot.

Like my April 2020 book An economic response to Covid-19 explained, the private sector is divided between a powerful multinational sector, including institutional investment funds, which has the attention of the government and a much more vulnerable indigenous sector that struggles to be heard.

That book analyzed how in the previous global financial crisis, the latter sector suffered a longer U-shaped recession compared to the rapid recovery of the multinational sector and the relative stability of the public sector.

Months earlier, the government had organized, only to drop out, an event exploring what was then already a small business funding crisis. Among the 13 speakers, only one representative was scheduled to represent small businesses.

Back then, he feared that a lack of balance in the policy discussion would produce the wrong response to covid-19. While that balance has thankfully been somewhat restored, it has returned in the inflation debate in which the voices of private sector taxpayers and SMEs are largely absent.

Inflation is not a walk in the park for anyone. But the general public salary is, on average, a third higher than private sector levels, according to published general figures. As the fearsome Mick Lynch, General Secretary of the UK Rail, Shipping and Transport Union, which is currently involved in a major national labor dispute there, said, there are public sector workers who are having real hardship.

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If not handled delicately, the coming impact of inflation and the government’s response to it could create deep social and political divisions. In the photo, the Minister for Reform and Public Expenditure Michael McGrath

But compared to often low-income private sector workers, they have secure jobs and pensions.

Some argue that wage gaps between sectors are actually much lower, using factors such as higher qualifications, longer lengths of service, the larger size of public service organizations and the pension tax to justify their measures.

But as we have seen at HSE, top ratings are no guarantee of performance.

Furthermore, larger organizational sizes and longer duration of employment size reflect relatively higher job security and immunity to downsizing compared to the private sector.

Therefore, citing these as factors is arguably invalid (if it doesn’t add salt to taxpayers’ wounds). And though he resents it, the pension tax is a fraction of what a private sector worker would have to pay, if he could afford it, to get a public service pension.

In reality, the public-private wage gap is real, substantial, and arises not from justified factors but also from increased political and lobbying power.

In An economic response to Covid-19 I explained how that imbalance has skewed fiscal policy.

Compared to a broadly balanced “austerity” of 2008 and 2014, when roughly €12 billion each were raised in tax increases and spending “restriction” (“restriction” because spending actually increased in that period), fiscal policy during the recovery of 2015 and 2019 was heavily biased against taxpayers.

Spending rose €16bn a year between 2015 and 2019, but net tax cuts were just €0.7bn. That failure to restore private sector after-tax pay to pre-2008 levels is a key cause of a cost-of-living crisis that, even before recent inflation, was dire.

Savage cuts in mortgage rate relief, particularly now, leave homeowners brutally and unjustifiably exposed to ECB rate hikes due to start in two weeks.

So perhaps the question is not whether we can afford public wage increases, but whether, if we can, also afford to restore private sector after-tax income to 2008 levels.

In answering that question, it is fair to point out that those who dominate the so-called National Economic Dialogue mostly benefit from more taxes and spending, since this props up their salaries and pensions (and their procedures are informed by the broadcaster itself seeking more state funding).

The salaries and pensions of politicians and civil servants are linked to each other and research institutes such as ESRI and universities benefit from the state subsidy of generous salaries and pensions. Additionally, high-level public sector hiring appears to lack diversity from a private sector perspective, with data from the Institute of Public Administration suggesting that less than 10% of such positions are held outside the public sector.

Speaking of pensions, in 2020 an actuarial review calculated that simply by removing one (very generous) feature of public sector pensions, the fact that they rise as public wages rise, €23 billion could be saved over the next 50 years, offsetting the need for the increased PRSI suggested by the Taoiseach. On the contrary, more wage increases will increase this burden.

In short, and given the aforementioned dominance of those who benefit from wage increases in the policy establishment, it is difficult to see an already fragile social contract surviving wage increases that are not accompanied by sweeping and unprecedented reforms.

Marc Coleman is managing director of Octavian Economics and a former economist at the European Central Bank and the Department of Finance.

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