Two Labour Markets, One Economy - Why Public and Private Sector Pay Differs in the UK

8th January 2026

Debate about public- and private-sector pay in the United Kingdom is both persistent and politically charged. Claims that public-sector workers are "overpaid" clash with counter-arguments that years of restraint have eroded living standards for nurses, teachers and civil servants.

The truth lies somewhere between these positions. On average, pay in the public sector is currently slightly higher than in the private sector — but this headline figure masks deep structural differences in how the two labour markets operate.

Understanding the gap requires moving beyond slogans and looking at workforce composition, pay structures, job security and the role of the state as an employer.

The Headline Picture - A Modest Public-Sector Pay Premium

On simple comparisons, median full-time pay in the UK public sector is modestly higher than in the private sector. This typically amounts to a gap of around 5-7 per cent, depending on the year and the measure used. At first glance, this suggests that government workers are better paid than their private-sector counterparts.

However, this comparison is not like-for-like. The public and private sectors employ very different kinds of workers, and raw averages conceal more than they reveal.

Workforce Composition: The Most Important Factor

The single biggest reason public-sector pay appears higher is who works in the public sector.

Public-sector jobs are heavily concentrated in:

Professional and technical roles (doctors, teachers, engineers)

Regulated occupations requiring formal qualifications

Older and more experienced workers

Full-time roles with structured career progression

By contrast, the private sector includes:

A much wider range of low-paid service jobs

More part-time and insecure work

A smaller share of roles requiring postgraduate or professional qualifications

When economists adjust for education, age, experience, occupation and hours worked, the public-sector pay premium shrinks sharply, and in some analyses disappears altogether. In other words, public-sector workers are not necessarily paid more because the state is generous, but because they are, on average, more qualified and more experienced.

Pay Structures: Compression Versus Extremes

Another key difference lies in how pay is distributed.

Public-sector pay is:

Compressed: smaller gaps between low and high earners

Governed by national pay scales

Subject to collective bargaining and pay review bodies

Private-sector pay is:

Highly dispersed

More responsive to market forces

Characterised by very high pay at the top and low pay at the bottom

This means that while a typical public-sector worker may earn slightly more than the median private-sector worker, the highest earners are overwhelmingly in the private sector. Executives, financiers, senior consultants and tech leaders earn sums that have no public-sector equivalent. At the same time, many of the lowest-paid jobs in the economy are also private-sector roles.

Job Security and Risk: Pay as a Trade-Off

Pay is only one part of compensation. Public-sector jobs generally offer:

Greater job security

Lower risk of redundancy

More predictable hours

Stronger employment protections

Private-sector jobs often involve:

Greater exposure to economic cycles

Higher redundancy risk

More variable hours and pay

Performance-related rewards

Economic theory suggests that workers accept lower pay in exchange for greater security. In practice, this trade-off is imperfect, but it helps explain why public-sector wages do not fluctuate as sharply as private-sector wages during booms and recessions.

Pay Restraint and Political Control

Public-sector pay is not set by markets alone; it is also shaped by fiscal policy and political decisions. Over the past 15 years, pay freezes and caps have held down public-sector earnings, particularly during austerity and the post-pandemic inflation surge. As a result, real-terms pay for many public-sector workers fell substantially.

Private-sector pay, while more volatile, has often adjusted faster to inflation and labour shortages. This has led to periods where private-sector pay growth outpaces public-sector pay growth — even if average levels remain similar.

Pensions and Total Compensation

One area where the public sector still has a clear advantage is pensions. Defined-benefit pension schemes remain common in the public sector but are now rare in the private sector. These pensions are valuable, but their benefit is long-term and often discounted in public debate, which focuses narrowly on wages rather than total compensation.

However, recent pension reforms have reduced generosity compared with past decades, narrowing — but not eliminating — this gap.

A Difference Rooted in Structure, Not Excess

The UK's public-private pay gap is not primarily the result of public-sector overpayment or private-sector exploitation. It reflects structural differences in workforce composition, pay setting, risk, and institutional design. The public sector pays relatively well for mid-level and professional roles but poorly at the top; the private sector does the opposite.

This creates a persistent tension. Public-sector employers struggle to recruit and retain specialists who can command much higher salaries elsewhere, while private-sector workers at the lower end face weaker protections and lower pay.

Public- and private-sector pay in the UK cannot be meaningfully compared using headline averages alone. The modest public-sector pay premium largely reflects the types of jobs and workers involved, not systematic overpayment. Differences in pay structure, job security, political control and pensions all contribute to a complex and often misunderstood picture.

Ultimately, the debate about public-sector pay is less about who earns more, and more about what kind of labour market the UK wants — and how much it is willing to pay for stability, professionalism and public service in an economy driven increasingly by inequality and risk.

Scotland
In Scotland, the public-private pay divide has particular significance because the public sector accounts for a larger share of total employment than in the UK as a whole. Health, education, local government and devolved public bodies play an outsized role in the Scottish labour market, especially outside the Central Belt's main cities.

This means that public-sector pay decisions made by the Scottish Government have a disproportionate impact on household incomes, regional economies and inequality. In many rural and post-industrial areas, public-sector roles provide some of the most stable and relatively well-paid employment available, making them central to local economic resilience.

At the same time, Scotland faces acute recruitment and retention pressures in key public services. While average public-sector pay may appear competitive on paper, Scotland competes in a UK-wide labour market for professionals such as doctors, engineers, IT specialists and senior managers — many of whom can command significantly higher salaries in the private sector, particularly in London and the South East.

Devolved control over pay allows Scotland to pursue a more progressive approach at the lower and middle ends of the pay scale, but tight budget constraints limit flexibility at the top.

The result is a familiar tension: a relatively compressed and egalitarian pay structure that supports fairness and regional stability, but can struggle to attract and retain scarce skills in an increasingly mobile and unequal UK economy.