Last week, the CSO released the latest results from the National Employment Survey, which reports detailed information on earnings across all sectors of the economy. The data from the survey relate to October 2007.
The first media treatment of the story that I saw was the Sunday Independent’s lead story saying the public sector is “now earning 50 per cent more the private sector.” My reaction was that while the headline might be true, this wasn’t a very useful way to think about the issue of public sector pay.
The report also details a host of other well-known patterns: Those with more education earn more, older workers earn more, those in professional occupations earn more. With the possible exception of Vincent Browne, I’m not sure there is anyone out there who would draw the implication from these figures that the government should intervene to eliminate all these gaps.
In any case, it’s a sufficiently well-known point that one needs to control for worker characteristics before one can make meaningful comparisons that I decided to take a break from Sunday newspaper bashing and leave it be.
However, now we are seeing pieces of analysis put forward by professional economists that claim to be presenting such meaningful comparisons but unfortunately are not. Ronan Lyons and Constantin Gurdgiev have excitedly pointed to some figures released by Davy’s showing a series of bilateral comparisons: For each occupation, age, education, and experience grouping, there is a public sector premium ranging from 25% to 75%. Case closed—the premiums are much larger than we thought, no?
Well, not necessarily. A bilateral comparison of public and private sector workers in the same age grouping won’t control for the fact that public sector workers may have higher education levels. Similarly a bilateral comparison of public and private sector workers in the same education grouping won’t control for different levels of experience.
Now, as it turns out, calculations from the ESRI’s analysis of the previous edition of this survey—see page 25 of this PDF file—show that public sector workers are more than twice as likely to have a third level degree, have more years of work experience, and are more than four times more likely to be classified as having a professional occupation. So this issue definitely arises when making these comparisons.
Perhaps then it is impossible to control for all these different features at once I hear you say? Well, it turns out that some economists use a highly scientific method called multiple regression to deal with this issue and those boffins at the ESRI have run these, em, regressions to estimate the public sector wage premium.
The ESRI study, linked to above, found that, controlling for observed characteristics, the premia in 2006 ranged from 10% at the upper end to 32% at the bottom end. (Of course, these regressions are hardly perfect either since they likely hide substantial unobserved heterogeneity but they certainly beat a series of pair-wise comparisons.)
It is possible that these premia widened between 2006 and 2007. However, without running the appropriate regressions on the updated survey data, we simply don’t know. Also, even if we did, a lot has happened since October 2007 including the application of the public sector pension levy, so we can’t be sure where these differentials are right now.
Let me conclude by saying something that will probably have no effect whatsoever on our commenters: I am not saying public sector pay shouldn’t be cut. My point is just that when discussing important policy issues, we should at least employ the most useful evidence available.