What is a public sector pension worth?.. and are public sector workers overpaid relative to the private sector?
News Item dated 10 March 2009.
 Are public sector workers overpaid? And do they get large pensions? Broadly, the answers are (respectively) ‘No' and ‘Yes' according to new research on the value of public sector wages and pensions relative to the private sector by Professor Richard Disney, CPE Director.
A first piece of research estimates public sector wage differentials and their changes over time
for men and women in the United Kingdom using the New Earnings Survey. It
presents estimates that are robust to unobservable workforce characteristics and
that also show the impact of policy changes and cyclical factors. The methodology
also allows an examination of the extent to which discrepancies in public and private
sector pay induce changing relative qualities of the sectoral workforces. The key finding is that the public sector workers do attract a small wage premium, which has been steady over the past 20 years.
A second piece of research addresses the related issue of the generosity of public vs private pension provision. Accruals in defined benefit (DB) pension plans for public and private sector workers in Britain are estimated, using typical differences in scheme rules and sector-specific lifetime age-earnings profiles by sex and educational group. The central result is not just that coverage by DB pension plans is greater in the public sector, but that median pension accruals as a % of salary are almost 5% higher among DB-covered public sector workers than covered private sector workers. This is largely driven by earlier normal pension (retirement) ages. For workers of different ages in the two sectors, marginal accruals also vary as a result of differences in earnings profiles across the sectors. The differences in earnings profiles across sectors should induce caution in using calculated coefficients on wages from cross sections of data in order to estimate sectoral wage effects.
News Item dated 10th March 2009.
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