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Pay compression in the NHS (and beyond)

Observation

Arguments over public sector pay deals later this year are inevitable. Against a backdrop of soaring inflation and falling living standards, government departments and pay review bodies are faced with an unenviable task. Government spending plans, agreed at the Spending Review last autumn, were fixed in cash terms at a time when CPI inflation was forecast to be 3.7% over the 2022−23 financial year. The Bank of England now expects inflation to peak at 10% this autumn. Those spending plans cannot accommodate pay awards at anything like the current rate of inflation.

Top-ups to those plans seem unlikely given that the Chancellor, Rishi Sunak, has indicated that he would like to see the ‘marginal pound’ go towards tax cuts – or perhaps other forms of cost of living support – rather than higher public service spending. Resources will therefore be stretched. Public sector workers are almost certainly facing below-inflation pay awards (and so real-terms pay cuts). The big and contentious question is how far below.

Public sector pay compression

These decisions are made all the harder by the fact that many public sector workers have already experienced real-terms reductions in pay over the past decade or so. This is especially true for the most highly experienced and the highest-paid in the public sector.

Within the NHS, for example, hospital consultants – the highest-paid NHS staffing group – experienced a 12.2% real-terms reduction in their average annual full-time earnings between August 2010 and August 2021. In contrast, clinical support staff (for whom average pay in 2010 was less than one-fifth the average for hospital consultants) experienced a real-terms pay cut of 2.8% over the same period. Those working in ‘hotel, property and estates’ roles within the NHS saw a 1.0% real-terms pay cut. Midwives, who on average earned almost twice as much as those roles in 2010, had their pay cut by 9.9%. The picture, on the whole, is that the more highly paid a staffing group was in 2010, the bigger the pay cut they experienced over the subsequent 11 years. This is summarised in Figure 1.

This has led to a compression of the pay distribution within the NHS. A similar pattern can be observed in schools, where the most experienced teachers suffered an 8% real-terms pay cut between 2007 and 2021, versus 4−5% for new and less experienced teachers. Across the public sector as a whole, when pay has been frozen in cash terms – as it was in 2011−12 and 2012−13, and again in 2021−22 – the lowest-paid have been exempt from the freeze and given cash pay awards. This, too, has contributed to pay compression in the public sector.

Note: Mean earnings per full-time equivalent (FTE) is calculated by scaling up mean earnings per person in line with the FTE share implied by the ratio between basic pay per person and basic pay per FTE. Fitted line calculated using weighted least squares. Real-terms pay is calculated using CPIH.

Source: Author’s calculations using NHS Staff Earnings Estimates, NHS Workforce Statistics and ONS series L522.

What does this mean for this year’s public sector pay deals?

Looking ahead to the pay decisions due over the summer, where might – and where should – scarce resources be targeted? The challenge for policymakers is that there are multiple, conflicting forces at play.

On the one hand, in a high-inflation environment, with growing concerns about living standards and fuel poverty, the government might be tempted to offer bigger pay increases to the lower-paid workers in the public sector. These workers – some of whom will be on the national living wage – are likely to face a higher rate of inflation than their higher-paid counterparts and are likely to be the ones struggling most with the cost of living. There are obvious political risks associated with NHS workers, in particular, experiencing a big hit to their living standards following the pandemic. Higher pay awards would help these workers and their families weather the difficult economic times ahead. Focusing pay awards at the bottom end of the distribution would be a continuation of the policy precedent set since 2010.   

But this is precisely the difficulty. That precedent means that more experienced and more senior public sector workers have already seen bigger pay cuts since 2010. Continuing on that path would further compress the distribution of pay within the public sector. This could create problems with retention of the experienced workers crucial to service delivery, and could lead to a situation where individuals are reluctant to take on additional training or management responsibilities because the financial returns for doing so are so meagre.

In the NHS, that might mean doctors deciding that the extra pay for becoming a consultant is not enough to compensate for the extra administrative burden – perhaps making a career as a specialty (or SAS) doctor with fewer non-clinical responsibilities more attractive. In schools, if a step-up in responsibility brings only a modest pay rise, some teachers may be less keen to go for a promotion. Similar stories could be told for the police, the civil service and local government. Private sector firms have raised similar concerns, after having compressed pay scales in response to increases in the national living wage.

In addition, it is far from obvious that public sector pay is the right tool to address the problem at hand. If the government wishes to provide support to low-income households suffering economic hardship, there are plenty of better-targeted policy levers available – not least through universal credit – which would apply across both public and private sectors.

We might instead think that reward systems in the public sector ought to be focused on recruitment, retention and morale, in order to ensure the most effective delivery of public services. Following this reasoning might lead one to conclude that pay awards would be best targeted at the areas struggling most with retention, or at the roles that have suffered the greatest pay cuts since 2010 (which may not be those at the lower end of the pay scale). At the least, it might suggest offering a flat pay award in order to avoid narrowing pay differentials any further. The trade-off is that pay awards would be less targeted at the low-paid, who are in most need of financial support in the current climate – though, again, this is a problem better addressed through the benefits system.  

No easy options

There is no easy way to square this circle in a world of high inflation and squeezed departmental budgets. The eight pay review bodies, which cover around 45% of all public sector workers, will consider these issues in their reports and recommendations, to be published over the summer and autumn. They may well recommend that pay awards be focused on the low-paid, on cost of living grounds. That would be understandable, but not necessarily the right policy choice: public sector pay is an extremely blunt tool with which to tackle the cost of living crisis. Better-targeted levers are available. And, another round of pay compression would not be risk free – especially if pay in the private sector gallops ahead over the coming months and years. Delivering on the levelling up agenda, making up for lost learning during the pandemic and clearing the NHS elective backlog will require the best efforts of millions of skilled public sector workers. Getting public sector pay deals right is a key part of attracting, retaining and motivating them.

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