Pressures On Public Sector Pay

29th September 2024

Over a fifth of government spending goes on pay. The Institute for Fiscal Studies examines recruitment and retention challenges which mean that pressures could mount going forward.

1. The new government has accepted the pay recommendations of the independent Pay Review Bodies (PRBs), meaning that public sector employees will see their pay increase by between 4¾% and 6% in 2024-25, depending on occupation. Chancellor Rachel Reeves has put the cost at an additional £9.4 billion on top of the 2% pay rises budgeted in the 2021 Spending Review.

2. While public sector pay increases for 2024-25 are in line with forecast pay growth in the private sector, pay trends in the two sectors have not followed the same path since 2010. Public sector pay held up much better than private sector pay between 2009 and 2014, but since then the situation has reversed. Whilst real private sector pay is now above its level at the start of 2019, public sector pay is, in real terms, only 1% higher and it is still below where it was in 2010.

3. Median pay relative to the overall hourly pay distribution has evolved differently over time for different public sector occupations. Broadly, it is better-paid public sector workers who have seen bigger falls in pay, with doctors' pay slipping from the 95th percentile of the hourly pay distribution to close to the 90th percentile since 2007. Teachers have seen falls from the 87th percentile to the 81st percentile. In contrast, while nurses and those in public administration have seen their pay fluctuate, by 2022 they are at roughly the same point in the distribution as they were in 2007.

4. Each area of the public sector faces specific challenges, though recruitment and retention are common concerns across much of the sector. In the NHS, there is an increasing reliance on international recruitment and agency staff to fill posts. The NHS ‘Long Term Workforce Plan' also aims to increase the number of staff from 1.75 million in 2023 to between 2.3 and 2.4 million by 2036-37, which implies that NHS pay may have to rise faster than that in the wider economy to ensure NHS careers are sufficiently attractive.

5. The teacher vacancy rate of 0.6% is twice the rate it was pre-pandemic. Training targets (as set by the Department for Education's Teacher Workforce Model) are being missed by big margins in most subjects, with less than a fifth of the target in business studies and physics being met. Although retention rates are not much lower than between 2013 and 2020, they are lower in subjects that are training the fewest teachers. More-experienced teachers have seen some of the largest real-terms falls in pay since 2010.

6. Police officers, in contrast to other areas of the public sector, have seen their pay deteriorate more for those lower down the pay scale. This is particularly true for constables on the bottom pay grade, whose pay has gone from being around the 34th percentile of the earnings distribution in 2014 to around the 26th percentile in 2023. Many police forces are still experiencing shortages of officers, despite the large efforts made by the Police Uplift Programme.

7. The prison service is on the front line of one of the most salient challenges currently facing the public sector - the severe shortage of prison places. In terms of staff, retention is the main challenge. The leaving rate of prison staff was 13% in 2023, with officers who had been in post for less than a year the most likely to leave. Although pay has remained stable in relative terms over time, and is in general higher than in ‘comparable professions', it is still low compared with the rest of the public sector and the wider economy.

8. People on ‘senior salaries' make up much less than 1% of the headcount of the public sector. In general, the occupations included in this group are not experiencing challenges to the same extent as other parts of the public sector, though this is not universally true. The largest of the groups - the senior civil service (SCS) – has seen pay fall in real terms by between 12% and 16% (depending on seniority) since 2013 and is characterised by a large degree of churn, with 25% of the SCS changing roles or departments, or leaving the SCS entirely, in 2022–23. Of those who leave, almost three-quarters are regarded as ‘regrettable’ losses. The judiciary (which is also covered in the ‘senior salaries’ remit) faces severe recruitment challenges, though retention is largely not an issue.

9. The Armed Forces have seen a planned big reduction in headcount over time. But the number of individuals choosing to leave before the end of their contracted period has grown above its pre-pandemic level. Although real-terms falls in pay are smaller than for other public sector occupations, members of the Armed Forces are generally unsatisfied with their pay. The Armed Forces are in receipt of one of the largest pay rises from the 2024–25 PRB recommendations, alongside doctors and the judiciary.

10. A substantial part of public sector workers’ remuneration comes in the form of generous defined benefit pension accrual. Members of these public sector arrangements receive, on average, an employer’s pension contribution that the government values at at least 23% of salary. Membership of these arrangements generally requires a significant employee contribution in order to participate. Lower-paid workers in particular are more likely to opt out given the size of these contributions: more than twice as many of those earning £10,000 to £16,000 a year opt out as of those earning over £31,000 per year (13% versus 6%). A recurring theme across PRB reports is concerns about the financial implications of high employee pension contributions needed to participate in the schemes and support for greater flexibility in the approach to pensions.

11. The challenges in recruiting, retaining and motivating public sector employees and the need for expansion of the NHS workforce in line with the ‘Long Term Workforce Plan’ mean that there will be pressure for public sector pay to rise faster than average earnings over the coming parliament. Based on March 2024 forecasts from the Office for Budget Responsibility, increases in public sector pay in line with average earnings over the next four years would, if the numbers employed remained constant, cost around £6 billion per year by 2028–29. If average public sector pay were to rise by 1 percentage point per year faster than average earnings for four years, the cost would rise to £17 billion per year by 2028–29. This would rise further if the public sector workforce increased in size.

Read the full report HERE
Pdf 43 Pages.