The Sunday Times and the public and private sector

An article in last week’s Sunday Times comparing pay and conditions in the private and public sector has caused controversy, with charges that the comparisons made were unfair.

Since I helped the Sunday Times reporter to locate the figures used for the comparison, in the interests of transparency I attach below the test of the memorandum I sent him.
The Sunday Times sought and was given permission to say that the figures had been validated by Straight Statistics. In the published version this was changed without permission to read that the analysis had been validated, a different matter.
Straight Statistics is keen to engage with journalists writing stories that call for some familiarity with statistical sources. In future we will operate a policy, suggested by Ben Goldacre, of publishing the advice we have given - after the story is published - so that readers can see if it was followed or ignored.
The memorandum sent to the Sunday Times read as follows:
The Parliamentary answer I sent you gives the figures for median weekly pay 1997-2008, updated with the 2009 figures, which I got from the same source: The Annual Survey of Hours and Earnings (ASHE). They use median earnings: ie there are as many people earning less than this than there are earning more. Figures using average (mean) earnings would tell a different story, because earnings at the top of the scale are much higher in the private sector, which raises the private sector mean.
The ASHE figures imply a large and growing gap in median earnings. But to make a fair comparison, one has to compare like with like. The public sector workforce is better educated - in 2009, 38.5 per cent are graduates, vs 20.2 per cent in the private sector, while at the bottom end only 4.0 per cent of the public sector workforce have no qualifications, vs 8.4 per cent of the private sector.  (Source: Labour Force Survey.)
So if you take account of the higher skill levels in the public sector, the large apparent gap is explicable. Graduates in the public sector in 2009 are paid less than they are in the private sector, those with A levels are paid the same in both public and private, and those with lower qualifications (GCSEs or less) are paid more in the public sector. (There is a paradox here: graduates get paid less in the public than in the private sector, but public sector pay is higher because it employs more graduates.)
That doesn’t make a very simple story, I’m afraid.
Pension comparisons are tricky, too. A much higher proportion of public sector employees are in defined benefit (DB) schemes, which pay pensions based on years of service and final salary. According to the Institute for Fiscal Studies, 76.5 per cent of public sector employees belong to such schemes, against only 17.0 per cent of private sector employees.
However, if we compare just DB schemes, the annual accrual of pension rights is worth about 25 per cent of salary for a public sector worker, and around 20 per cent for a private sector worker (Disney, Emmerson and Tetlow, IFS). This means that public sector workers are accruing benefits more quickly than those in private sector DB schemes – the main reason being a lower pension age (60) in most public sector schemes vs 65 in private sector schemes. Putting it simply, a public sector employee in a DB scheme earning £20,000 a year would have a total remuneration package including pension of £25,000 a year: a private sector employee a total package of £24,000 a year.
We can combine these two factors – greater membership in DB schemes in the public sector, and greater accrual rates – to work out what public sector pensions are worth, on average. IFS did the calculation for its 2008 Budget report and concluded that to compare public sector and private sector pay rates, one must add 12 per cent to public sector pay to account for the better pensions. So that’s the bottom line: public sector pensions are worth another 12 per cent of pay, on average.
Lifetime Earnings
It’s hard to find anything meaningful on this, but PricewaterhouseCoopers did an interesting paper earlier this year, The Tortoise and the Hare, which compares imaginary public and private sector employees. It concludes that the public sector employee does better, over a lifetime.