Public-private sector pay differentials in a devolved Scotland



Public-PRIVATE Pay Differentials

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In the United Kingdom, wage setting has been characterised by the principle
of comparability between public and private sector pay for the last 100 years or so.
A paramount aim of governments has been to guarantee equal pay across sectors.
This commitment played a particularly crucial role in the late 1940s when the public
sector was expanded significantly due to the nationalisation of former private
industries, as Bender (2003) reports. In the second half of the 1980s, however,
many of these nationalised industries were re-privatised and the role of trade
unions diminished. At the same time the principle of comparability of wages was
replaced by the comparability of the growth rates of the average wage. Pay Review
Boards, first introduced in the early 1970s to review wages and pass
recommendation to the government, were extended to cover further occupations.
Wage bargaining was further decentralised in the early 1990s.

However, devolution has not intensified this trend. While some public sector
occupations in Scotland are negotiated at a Scottish rather than a UK-wide level
(e.g. central government, local authorities, teachers, and prison officers) for still a
large number regional flexibility in pay setting is limited (e.g. police and fire-services,
universities, and UK government departments with a presence in Scotland).
Additionally, hybrid systems are operated in areas such as the NHS.

The principle of pay comparability should assure that the public-private sector
wage differential in the UK is rather small. However, the ambiguous existence of
pay differentials found in several empirical studies may indicate a lack of
enforcement of these policies. Studies for the UK on sectoral wage differentials are
scarce.

A number of empirical studies based on micro-level data have been published
in the last two decades or so drawing on mainly four different data sources: the
New Earnings Survey (NES) (Elliott and Murphy 1987, Gregory 1990, and Elliott
and Duffus 1996), the General Household Survey (GHS) (Rees and Shah 1995 and
Disney and Gosling 1998), the British Household Panel Study (BHPS) (Bender and
Elliott 1999) and more recently the British SCELI survey (Bender 2003). These
studies vary significantly in methodology, scope, and findings.

At the same time there is a noticeable lack of studies on earnings differences
across UK regions. In the only UK-wide study Henley and Thomas (2001) show
that private and public sector employment are weakly positively correlated across
British regions using BHPS data. However, they also find evidence of significant
regional differences in public-private sector pay gaps. In a second study which
has evolved in parallel to this paper Elliott et al. (2004) analyse pre- and post-
devolution earnings differentials for Scotland using data from the Labour Force



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