Britain leads the way on wage freezes

Over the last decade in Great Britain public sector pay has risen much faster than compensation in the private sector. This has led to political consensus that government employee compensation must be reined in, says Josh Barro, a senior fellow with the Manhattan Institute.

For example:

As recently as 2005, private British employees out-earned their public sector counterparts, but now public sector salaries average 7 per cent higher than private.

In 2009, public employees saw their wages rise 2.8 per cent while private wages rose just 1.1 per cent.

The disparity is even greater on benefits, with public employees receiving pension benefits worth nearly 20 per cent on top of salary.

Meanwhile, most private employees have defined contribution plans similar to American 401(k) accounts, and employer matches are typically in the 6 per cent range.

These facts, and the existence of a massive structural budget gap, have led all three main parties to endorse a cap on public employee raises in the current election campaign. The parties disagree about how austere the cap should be, but each plan would keep pay raises lower than have been seen in recent years, says Barro:

The Conservatives are calling for a one-year freeze on all public employees' salaries, except the lowest-paid one million (about a sixth of the total government workforce).

The Liberal Democrats would cap pay increases at £400 ($615) per year, a bit shy of 2 per cent for the median public employee, for at least two years.

Even Labour, a political party that counts labour unions among its key financial backers, would cap salary growth for all employees at 1 per cent for two years.

Pay trends in the United States have been similarly favourable to public employees. But with public employee unions serving as one of the Democratic Party's most loyal and important constituencies, can this fact pattern lead to the same consensus as in the United Kingdom, asks Barro?

Source: Josh Barro, Britain Leads the Way On Wage Freezes, Real Clear Markets, April 20, 2010.

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First published by the National Center for Policy Analysis, Dallas and Washington, USA

FMF Policy Bulletin/ 11 May 2010
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