Delivering Better Public Services May Require Reforming Public Sector Pay, Not Just Raising It

29th September 2024

Each part of the public sector faces its own challenges, but recruitment and retention issues loom large.

The public sector pay bill was £270 billion last year and so even small changes in pay can have large impacts on public spending. In accepting independent Pay Review Body recommendations, the government has agreed to pay rises this year averaging 5.5%.
Although well ahead of inflation, this is close to the recent growth rate of pay in the private sector.

While overall pay rises often make headlines, less focus is placed on the structure of public sector remuneration. Getting this right is also vital for the public finances and for the delivery of public services. And in many parts of the public sector, both the level and structure of remuneration are not fit for purpose.

Recruitment and retention problems abound, especially (but not only) among higher-paid groups whose pay has fallen behind that of private sector comparators over the last 15 years or so. Pay in the public sector is particularly low compared with private sector comparators in London and the South East. Public sector pensions remain far more generous, and expensive, than those in the private sector. There is a good case for carefully rebalancing remuneration away from pensions and towards pay.

These are some of the key findings of new research from IFS, published today as part of the IFS Green Budget, funded by the Nuffield Foundation and produced in association with Citi.

Other key findings include:

Higher-paid public sector workers have fallen down the overall earnings distribution in the last 15 years. The pay of the average doctor has slipped from the 95th percentile of the hourly pay distribution in 2007 to close to the 90th percentile in 2023. Average schoolteacher pay has fallen from the 87th percentile to the 81st percentile over the same period. In general, lower-paid public sector workers have not seen their relative position in the earnings distribution decline to the same extent, with the big exception of entry-level police officers, whose pay has fallen from the 34th percentile of the earnings distribution in 2014 to around the 26th percentile in 2023.

Each part of the public sector faces its own challenges, but recruitment and retention issues loom large. For example, recruitment into secondary school teacher training is well below target and fewer than half of vacancies were filled in recent hiring rounds for District Judges. Retention of staff is an issue for many public services, including the prison service (which saw 13% of staff leave in 2023), the Armed Forces and the senior civil service (where a quarter changed roles or departments, or left the SCS entirely, in 2022-23).

The NHS has not experienced a worsening in recruitment or retention compared with pre-pandemic, but vacancy rates for nurses and midwives remain high (8%). More than a third of public sector employees work in the NHS, so decisions on NHS pay are especially important for public spending. A key challenge will be expanding the NHS workforce to meet the demands of an ageing population. The NHS is also aiming to move away from its increasing reliance on immigrant workers.

Increasing public sector pay in line with forecast average earnings growth could add around £6 billion per year in real terms to the pay bill by 2028-29. Closing the gap that has opened up between public and private sector workers since 2019 could result in a pay bill £17 billion higher than today. Increasing the size of the workforce – as may be required to deliver improvements in public services – would cost even more.

Public sector pensions remain extremely valuable relative to private sector comparators. But many lower earners opt out to avoid (relatively) high employee contributions needed to participate. Amongst workers in the public sector, 13% of those earning £10,000 to £16,000 a year opt out of their pension scheme, more than twice the rate among those earning over £31,000 per year (6%). There is a good case for increasing flexibility in pension arrangements and carefully rebalancing public sector remuneration away from pensions and towards pay.

Magdalena Domínguez, a Research Economist at the Institute for Fiscal Studies and an author of the report, said, "Each area of the public sector faces specific challenges, though recruitment and retention are common concerns. The teacher vacancy rate is twice the rate it was pre-pandemic. The leaving rate of prison staff was 13% in 2023, and there is huge churn in the senior civil service. In the NHS, there is an increasing reliance on international recruitment to fill posts. These challenges mean public sector pay will need reforming and, for some, increasing in the coming years.'

Andrew McKendrick, a Research Economist at the Institute for Fiscal Studies and an author of the report, said:

‘There continue to be big geographical differences in how well public sector pay compares with private sector pay. Public sector pensions remain far more valuable than those in the private sector, but significant numbers of lower-paid staff miss out as they cannot afford to make the required employee contributions. Gaps in pay between the two sectors are often bigger, and recruitment problems worse, for higher-paid groups such as judges and senior civil servants. Government needs to structure remuneration to make sure it is getting the right people in the right roles to help deliver public services. That might mean carefully rebalancing away from pensions and also towards higher-paid professions.'

Authors at the Institute for Fiscal Studies
Jonathan Cribb
Associate Director
Jonathan is an Associate Director and Head of Retirement, Savings and Ageing sector, focusing on pensions, savings and later-life economic activity.

Magdalena Dominguez
Research Economist
Magdalena is a Research Economist at the IFS. Her research focuses on issues related to the economics of crime, networks & place-based policies.

Andrew McKendrick
Research Economist
Andrew is a Research Economist in the Education and Skills sector. He focuses on education, health and nutrition and the impact of government policy.