Wednesday, August 3, 2011

44% and all that

There has been surprising (well surprising to me anyway) response to a front-page article from last weekend’s Sunday Independent.  Here are some extracts from the article which ran under the headline:

Private-sector pay now 44% behind

The pay gap between workers in the public and private sectors has widened to 44 per cent since the recession began, according to a study carried out by a firm of international economic consultants.

The Indecon report, for the Sunday Independent, reveals that, on average, weekly pay in the public sector has increased by three per cent since 2007.

However, the Indecon report shows that, before tax, the average public sector worker earns €871 a week -- or €269 a week more than the average private sector worker, who receives €602 before tax.

There is no disputing that 871 is a number that is 44% higher than 602.  We could reverse the comparison and say that private sector workers get paid 31% less than public sector workers but that is just a different way of saying the same thing.  However, let’s focus on the 44% difference between public and private sector workers.

Firstly, these figures do not come from an “Indecon report for the Sunday Independent”.  These figures might be in this report but they actually come from the Central Statistics Office.  The CSO publishes a quarterly Earnings, Hours and Employment Costs Survey from which this information was drawn but the source was not cited.

The latest release of the EHECS was published on the 16th June (six weeks ago!) and can be read here.  There has been some analysis of the results of the EHECS on this site here.  Table 2 on page 6 of the EHECS release provides the figures that Indecon refer to: average weekly private sector pay is €602.85 and average weekly public sector pay is €871.09. 

Secondly, we will explore how real this 44% difference is for these notional “average” private and public sector workers.  In annual terms these weekly rates correspond to an annual salary of €31,348 for the  private sector and €45,297 for the public sector.

Using a fairly simple tax calculator we can work out the net pay of each worker.  The private sector worker earning €31,348 has a net pay of €25,875 or €498 per week.  The public sector worker earning €45,297 has a net pay of €29,993 or €577 per week.

Although in gross terms there is a 44% difference between the wage rates when we consider the take home pay the difference falls to 16%.  A €268 advantage for the public sector worker in gross weekly pay is reduced to €79 by the time the money reaches the worker’s pocket.

Here is a summary of the figures provided by the tax calculator.

Pay Rates

Although some of the difference is accounted for tax and PRSI it is clear that the pension deduction of zero for the private sector worker and nearly five thousand for the public sector worker has a huge effect.

The pension deduction for the public sector worker of €4,886 is made up of two components:

  • There is a €2,106 deduction as the employee contribution to the individual’s pension, and
  • There is a €2,780 deduction for the Public Sector Pension Levy.

The above comparison is therefore not strictly valid as it compares a private sector worker making no pension provision against a public sector who is.  Next we will assume that the private sector worker makes a 7.5% pension contribution.  Here is the updated table.

Pay Rates2

In this instance the “average” public sector worker takes home 25% more than the “average” private sector worker making an employee pension contribution of 7.5%.  The private sector worker does not, nor cannot, pay the public sector pension levy so this seems a much fairer comparison to make. 

In any case, trying to suggest that the public sectors earns 44% more than the private sector is wide of the mark.  There is no doubt there is a difference, and I will leave it to others to debate the merits or otherwise of this, but it would be helpful if we could at least start the debate with meaningful figures.


  1. I suppose the first and obvious point to make is that the contributions towards a Defined-Benefit pension scheme shouldn't be classed as "lost-income" in anyway, shape or form.

    Poor form on the part of the Indo, the CSO releases are always very clear in stating the Pension Levy and other deductions are not included.

    (As a side, now that there is a Pension Levy on the funds of private sector pensioners as well it is worthy to note that they may contribute X but may only get .95x (if they start contributing now).

  2. Hi Rob,

    The point about the Pension Levy is well made and does reduce the value of pension savings made by a private sector worker.

    As to the point of pension deductions being "lost income", the issue I was trying to raise was that a public sector worker's pension deductions are not related to the pension they receive. Regardless of the level of contribution the pension will be the same.

    It is a great deal for public sector workers. The "average" public sector worker makes an 11% salary contribution in the form of pension deductions and gets a pension that would require 25% salary contributions in order to be fully funded.

  3. Seamus
    While never wishing to take the side of the Sunday Independent, I would take a different view from you on this. [PS I work in the private sector, in a company that supplies building related products, so I may be a little sensitive to how the 'burden' of adjustment has been shared up to now in the economy].
    1. Earnings are gross earnings and it is valid to make the comparison on gross earnings.
    2. While it is true that the net after tax differential is much less, it is less because of payroll taxes mostly. The Irish economy need not be run with such a heavy reliance of payroll taxes. It could tax non-earned income or wealth or vat more heavily. Therefore I suggest that the tax 'wedge' if that it what it is called be analysed separately.
    3. Your comparative with private sector pension deduction of 7.5%, does not sound like a valid comparison. A more valid method may be to deduct from the private sector column a pesion% which would give the same benefit as an average public sector pension.
    4. The average pay comparision does not nor can it realistically give a value for 'fixity of tenure'.

    That said, I have huge sympathies for lower paid and temporary public sectors workers who have borne the brunt of the PS cutbacks to the eternal shame of the PS management, government and unions.

    Yet very few suggestions have even been put on the table, let alone implemented, which would affect high earners. For example:

    1.Cut the top three points off all PS scales in excess of €60,000 and reduce pay accordingly.
    2.Freeze all increments above €40,000.

    The reality is that there is a huge differential in pay and benefits, particularly pension benefits, between the public and private sectors.

    Public sector workers may not like to hear it, but the view of private sectors workers is that they are being pissed on. The most recent FAS 'pre-retirement retirement' pay reinforces that view.

  4. Seamus,

    Thanks alot for the reply.

    I am very interested to read your point that (on average) PS workers contribute 11% of salary to pensions but recieves one which would have required a 25% contribution.

    What is the best way to caluclate this? Naturally (as a start) I can use the purely pensions part of the yearly PS Pay and Pensions Bill from the DoF..and I am sure one can find the direct contribution the PS Pension Levy amounts to annually but what about the other PS pension-related deductions?

  5. And not to even get into the the whole fact that those in public sector are more likely to have a higher degree. Different average skill levels.

    You'd think if Indecon were getting paid, they'd at least try do some decomposition using SILC data. Or at least have some sort of a benchmark. But not, that wouldn't do for the headline the Sindo had already decided.