The private sector is the real source of unfair pay

Will Hutton’s interim report on fair pay in the public sector, published yesterday, is packed with statistics illustrating what has happened to public sector pay over recent years. Importantly, it places these trends squarely in the context of earnings in the private sector.

Kayte Lawton is a Research Fellow at the Institute for Public Policy Research (ippr)

Will Hutton’s interim report on fair pay in the public sector, published yesterday, is packed with statistics illustrating what has happened to public sector pay over recent years. Importantly, it places these trends squarely in the context of earnings in the private sector.

Rising pay disparities have been a feature of the UK economy since the 1980s. In 1979, someone with earnings at the 90th percentile (putting them in the top 10 per cent) earned 2.5 times more than someone with wages at the 10th percentile; by 2009 this ratio had increased to 3.7.

This trend has been driven primarily by the private sector, and in particular through very large rises in earnings for people in the top one per cent (see chart 2.E).

Earnings for this group started at £117,523 last year and around 290,000 people fell into this bracket. Not surprisingly, public sector workers make up only a fraction of these top earners – Hutton estimates that just 20,000 have such high wages, and many are hospital consultants and other medical specialists. The proportion of top earners who are public servants has been falling as wages for this privileged minority have risen.

The boardrooms of major companies are where pay has really rocketed over recent years. Hutton shows that the ratio between the median earnings of FTSE 100 chief executives and those of the median UK employee almost doubled between 1999 and 2008, rising from 47 to 88 (chart 2.M).

Median-total-earnings-for-private-sector-chief-execs

There is no evidence that company performance or the skills and commitment of CEOs witnessed a commensurate increase over this period (chart 3.D).

Renumeration-of-FTSE-100-chief-execs

Meanwhile, the earnings of the highest paid civil servants are nowhere near those of even averagely-paid company executives. This is not to deny that wages at the top end of the public sector have been increasing more than at the bottom, as Hutton shows (chart 2.J).

Average-annual-salary-growth-for-top-and-bottom-pay-bands-in-public-sector

Some of this is down to the changing balance of occupations in the sector and poor organisational governance, but it is also likely out-of-control executive pay has had a knock-on effect for top pay in the public sector. This suggests that the root of the problem is unlikely to lie solely in the public sector itself.

Agreed wage multiples as proposed by Hutton could have an important symbolic role, as well as helping to raise wages at the bottom or dampen future pay growth at the top in some parts of the public sector. But the limited role of public sector pay in driving pay differentials across the economy means that the impact on ‘fair pay’ would be very limited.

Top private sector pay, particularly in large firms, is the major driver of wage inequality, and this must be where future action is targeted.

19 Responses to “The private sector is the real source of unfair pay”

  1. Deborah Segalini

    RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton

  2. Other TaxPayers Alli

    RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton

  3. False Economy

    RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton (via @OtherTPA)

  4. Peterward

    RT @FalseEcon: RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton (v …

  5. James Grant

    RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton

  6. TSSA

    RT @FalseEcon: RT @leftfootfwd: The private sector is the real source of unfair pay: //bit.ly/fel4LI writes @ippr's Kayte Lawton (v …

  7. Anon E Mouse

    The private sector is private and costs the UK taxpayer nothing.

    As long as people are paying their taxes what does it have to do with anybody how much people earn providing are acting lawfully?

    This is the politics of envy plain and simple and has relevance in 2010 unless one is proposing a socialist agenda…

  8. Daniel

    Inequality impacts upon everyone, because it clearly has a negative impact upon well-being. We also should be assessing what is fair, are those people worth so much? Do we want the private sector driving up the wages in the public sector, which does cost the taxpayer?

    And most importantly, couldn’t we pay for our much needed public services by profiting off of those with huge salaries?

  9. Sevillista

    Anon E Mouse

    1. We live in a mixed economy – many so-called private sector companies derive significant parts of their business
    from taxpayer financed expenditure (e.g. both suppliers of services such as Capita and Fujitsu, and suppliers of goods such as private defence contractors and pharma companies such as Glaxo). Government procurement is worth over £200 billion a year – almost 20% of the “private sector”.

    2. Many other private sector activities derive from Government regulation (e.g. lawyers) and profits from Government provision of monopoly powers and tax breaks (e.g. subsidy of poverty wages in retail)

    3. I seem to recall the financial sector is reliant on Government support to survive at
    the moment. A case for intervention.

    4. Shareholders can’t hold executives to account for inflated pay easily and there is a lack of transparency. Case for action there.

    5. There is a collective action problem – all shareholders would be better off if the arms race on pay was called off

    6. High pay arguably causes costs on society

  10. High Pay Commission

    "Private sector is the real source of unfair pay" @leftfootfwd //is.gd/i5P7R

  11. Anon E Mouse

    Sevillista – In a capitalist system that’s how it works.

    Your points are great but have no bearing on the issue. If Fujitsu tenders the best bid for the work and value for the taxpayer is upheld, then it is up to the shareholders of the companies and not government to set wages.

    Governments should be elected to govern and not micromanage the country – we tried that with Labour and look where it got us.

    Provided the companies are acting lawfully it is no one’s business how they run their business’s…

  12. Peter Pannier

    RT @HighPayCom: "Private sector is the real source of unfair pay" @leftfootfwd //is.gd/i5P7R

  13. Lady Kenneth

    RT @leftfootfwd: The private sector is the real source of unfair pay //bit.ly/fNtYb1

  14. Richard

    “The private sector is private and costs the UK taxpayer nothing.”

    Just a mere £120bn per annum, some 80% of the budget deficit.

  15. The private sector is the real source of unfair pay | Left Foot … - - govtpays.com

    […] Follow this link: The private sector is the real source of unfair pay | Left Foot … […]

  16. Chris

    @mousey

    Amazing you actually managed to write something in the comment box that was on topic and not just the usual cut and paste – does that mean an actual human wrote the above comments rather than the usual computer program? Maybe the editors of this blog should put a captcha on the comment box, it would at least make the human behind mouse work for his money.

    “Your points are great”

    Sevillista’s points are great and totally rebutted your generic high tory drivel.

    “but have no bearing on the issue.”

    Yes, they do.

    “If Fujitsu tenders the best bid for the work and value for the taxpayer is upheld, then it is up to the shareholders of the companies and not government to set wages.”

    No it isn’t, if they want taxpayers money they should abide by our rules.

    “Governments should be elected to govern and not micromanage the country – we tried that with Labour and look where it got us.”

    How did Labour micromanage the country? Labour biggest mistake was to leave the banks alone, if there had been more micromanagement of them, i.e. stopping them investing so heavily in CDOs, we would be up the creek.

    “Provided the companies are acting lawfully it is no one’s business how they run their business’s…”

    So, lets change the law to restrict extremely high levels of pay, we did so with extremely low levels of pay and its just been voted the best policy of the last 30 years. Warren Buffett recently denounced all this trickle down economics bullshit, it just concentrates wealth into an ever decreasing percentage of the population.

  17. Mr. Sensible

    The government is saying so much about pay in the public sector, but I don’t think is doing anything about what happens in boardrooms.

  18. A ratio cap of 20:1 won't make pay fairer | Left Foot Forward

    […] to those arguing for fair pay in the public sector, and reinforces the need to also address the private sector. But the proposed fair pay ratio of 20:1 is too high, and would have little bite in London. […]

  19. Look Left – Cameron set for school sports climbdown | Left Foot Forward

    […] report on fair pay in the public sector, which was published on Wednesday. As Kayte Lawton wrote on Left Foot Forward, there was plenty of evidence to show the pay of those at the very top grew […]

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