At the Public Convenience?:
The Role and Impact of the Pay
Review Bodies
Peter Dolton
Royal Holloway College, University of London
Based on work with
Gerry Makepeace
Oscar Marcenaro
and
Adeline Aw
1
Two Main Questions
What determines PRB Recommendations?
PAPER: What determines Public Sector Pay Review Body
Decisions in the UK? with Adeline Aw.
What has been the effect of PRBs?
PAPER: The Impact of the Public Sector Pay Review Bodies
in the UK. with Gerry Makepeace and Oscar Marcenaro.
2
Outline of Talk
1. What are PRBs – why do they exist?
What are their remits
2. Do we have an Economic Theory to explain them?
3. What determines PRB Recommendations?
4. What has been the effect of PRBs?
5. What are the challenges for the future of PRBs
3
1. What are PRBs??
4
Pay Review Bodies (PRBs):
Doctors and Dentists Review Body (DDRB),
Senior Salaries Review Body (TSRB), the
Armed Forces Pay Review Body (AFPRB),
Nursing and Other Health Professions (NOHPRB),
Prison Service Pay Review Body (PSPRB),
School Teachers Review Body (STRB).
Police Review Board (PAB)
5
Motivation
‘After the hearing the arguments of the parties concerned the
Tribunal retired and the Chairman outlined a possible
decision for consideration by his colleagues. I recall with
great vividness how, when asked whether I agreed with his
proposal, I was aware only of a sensation of a great void
opening: for one cannot decide whether the salary of a
particular post should be increased, or how great the increase
should be, unless one has some principles from which to
start.’
Baroness Barbara Wootton (1954) ‘The Social Foundations
of Wage Policy’.
6
PRB Remit
To reach recommendations having regard to:
1. Need to recruit, retain an motive staff.
2. Regional/local variation in labour markets
3. Government Departments output targets for the delivery
of services.
4. Government Department’s expenditure limits.
5. Government’s Inflation target.
7
Key Features of PRB Activity
•Based on mutual consent of the parties
•Independent in their decisions
•Ensure Fair Play & equal attention to the evidence.
•Free to determine their own methods of working.
•Theoretically not determined by an ‘Envelope of Money’
8
PM- Gordon Brown @ TUC Conference –
Brighton 10th Sept 2007
Talking about the upcoming public sector pay round being
restricted to below inflation rises:
‘This government will always put stability first and there will
be no loss of discipline, no resort to the easy options, no
unaffordable promises and no taking risks with inflation.
So let me be straightforward with you: pay discipline is
essential to prevent inflation, to maintain growth and create
more jobs.. and so that we never return to the old boom and
bust of the past.’
9
Advantages to PRB System
•Avoid strikes and conflict
•Can be more efficient than collective bargaining with many
rounds of negotiations.
•‘Objective’ – gains trust of employees
independent assessment of evidence.
•Government can be seen as ’not to blame’ for a low pay
award.
10
Main Problems of PRBs
•De facto constrained by Expenditure Limits
•If not constrained then inflationary.
•If Government Departments step outside the PRBs and do
contract deals separately –e.g. GPs and Consultants.
•Not very easy to give differential awards by job, region etc.
•Not very easy to introduce PRP or relate remuneration to
productivity in this setting.
•How can we create incentives in public sector delivery?
11
2. Do we have an
Economic Theory of
PRBs?
12
Is there a Economic Theory of Public Sector Pay?
Assume :
Demographically determined inelastic demand.
13
Figure – The Labour Market for Teachers
Wa
D
Q
Q
14
Is there a Economic Theory of Public Sector Pay?
Assume :
Demographically determined inelastic demand.
Government Budget Constraint.
15
Figure – The Labour Market for Teachers
Wa
D
E
Q
Q
16
Is there a Economic Theory of Public Sector Pay?
Assume :
Demographically determined inelastic demand.
Government Budget Constraint.
Homogenous Supply & Government Sets Wages.
17
Figure – The Labour Market for Teachers
D
Wa
S
W a
Wga
E
Qg
Q

Q
18
Is there a Economic Theory of Public Sector Pay?
Assume :
Fairly inelastic demand.
Government Budget Constraint.
Powerful Monopoly Union.
19
Figure – The Labour Market for Doctors with a Monopoly Union
D
Wa
W2
W1
U
W
*
E
Q
Q1 Q2 Q

20
3. What Determines
PRB Remit Pay?
21
600
550
500
450
400
350
year
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
300
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
300
350
400
450
500
Gross weekly wage (£)
550
600
Differences between fitted and actual earnings for
Public and Private sector workers; full time workers
aged 21-60
year
Fitted gross weekly wages Public sector
Actual gross weekly wages Public sector
Fitted gross weekly wages Private sector
Actual gross weekly wages Private sector
22
Evolution of PRB Pay Recommendations over 1971 –
2006
35
Recommendation
(% increase over previous yr)
30
DDRB
25
AFPRB
20
SSRB
PAMsRB
15
NAMRB
STRB
10
PSPRB
5
0
1971
1975
1979
1983
1987
Year
1991
1995
1999
2003
23
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
Actual Increase
(% increase over previous yr)
Evolution of Actual Pay Awards over 1971 – 2006
35
30
25
DDRB
AFPRB
20
SSRB
PAMsRB
15
NAMRB
STRB
10
PSPRB
5
0
Year
24
Table 2: Fixed Effects Panel Estimation of the Determinants of Pay Review
Recommendations
DEPENDENT VARIABLE
VARIABLE
PARAMETER ESTIMATE
P-VALUE
RPIFD
- 3.758***
(0.890)
0.000
FORECAST
0.320**
(0.165)
0.053
AEIFD
4.100***
(0.882)
0.000
UNRLAG
- 0.633***
(0.253)
0.012
PSGROWLAG
- 0.571***
(0.094)
0.000
WDLLAG
0.172***
(0.044)
0.000
LAB
1.655
(2.477)
0.504
BLAIR
- 6.153**
(1.515)
0.000
ELECT
0.337
(0.314)
0.284
POGAVE
0.122**
(0.042)
0.003
POGV
0.079
(0.070)
0.258
CONSTANT
7.178**
(3.045)
0.018
No. of observations
2
PRR
169
7
No. of groups
R [Within]
0.7189
Wald statistic [Χ
AIC
876.3
BIC
2
(11)]
41181.61
913.9
Note: Nonparametric bootstrap standard errors in parentheses.
*** denotes statistical significance at the 1% level, ** denotes statistical significance at the 5%
level, * denotes statistical significance at the 10% level.
25
Table 3: Fixed Effects Panel Estimation of the Determinants of Actual Pay Awards
DEPENDENT VARIABLE
ACT
VARIABLE
PARAMETER ESTIMATE
P-VALUE
RPIFD
- 2.247**
(1.105)
0.042
FORECAST
0.791***
(0.252)
0.002
AEIFD
2.506***
(0.522)
0.000
UNRLAG
- 0.427***
(0.171)
0.013
PSGROWLAG
- 0.619***
(0.225)
0.006
WDLLAG
0.051
(0.043)
0.240
LAB
- 7.284***
(2.326)
0.002
BLAIR
- 3.745**
(1.943)
0.054
ELECT
0.466
(0.322)
0.148
POGAVE
0.090
(0.068)
0.186
POGV
0.030
(0.042)
0.483
CONSTANT
4.217*
(2.381)
0.077
No. of observations
170 (unbalanced
panel)
No. of groups
7
R2 [Within]
0.6512
Wald statistic [Χ2(11)]
122374.87
AIC
862.4
BIC
900.0
Note: Nonparametric bootstrap standard errors in parentheses.
*** denotes statistical significance at the 1% level, ** denotes statistical significance at the 5%
level, * denotes statistical significance at the 10% level.
26
4. What has been the
effect of PRBs?
27
Compares the real weekly earnings of workers in:
(i) occupations covered by Pay Review Bodies (PRBs)
(ii) the remainder of the public sector (non-PRB)
(iii) private sector workers.
Summarises LFS data from 1993 to 2006.
28
Occupational sub-groups
PRB occupations
Doctors and Dentists
(Medical practitioners)
Nurses and other health professions
Nurses and Midwives
Practices Allied to Medicine (separate from Nurses)
School Teachers
Primary School Teachers
Secondary School Teachers
Prison Officers
Armed Forces
Police (Not PRB)
Not Senior Salaries Body
29
Occupational sub-groups
PRB occupations (8 groups including Police)
Other public sector workers are the non-PRB public sector.
All others are private sector workers.
30
LFS Data
Full time employees aged 20-60.
Great Britain
(Teachers England and Wales)
It summarises LFS data from 1993 to 2006.
Real weekly earnings.
Dummies for occupational group and controls for
compositional effects.
(Age (7 groups), qualifications (6 NVQ levels), region (11)).
31
Definition of occupations is based on SOC code.
List of SOC codes define public sector (see Nickell and
Quintini) e.g. General Administrators [100] [103], Local
Government Officers [102], Civil Service Executive Officers
[132], Fire service officers [153] etc
PRB occupations defined as associated SOCs e.g. Medical
Practitioners [220]
32
A model
Notation
Individuals i
Time t
Thousands of individuals (i=1,.., Nt) for each value of t .
One value of t for each individual.
Dummies
PUB working in a non PRB public sector occupation
PRBo (o=1,.,O) in the ‘oth’ PRB occupation.
33
For each t
Yit=t+tPUBit+ootPRBoit+kktXkit+it
Xkit are the control variables (age, qualification, region).
ot
Pay(o’th PRB occupation) – Pay(private sector)
ot-t Pay(o’th PRB occupation) –Pay(non-PRB public sector)
34
Standard OLS assumptions and no X.
Differences estimator. Causal effect.
Standard OLS assumptions and X.
Ceteris paribus effect of occupation.
35
Panel model
Include fixed effects:
Yit=t+tPUBit +ootPRBoit+kktXkit+Ai+it
True panel - take differences and apply OLS.
Akin to a difference in differences estimator
(at, bt, dot) estimates of (t, t, ot)
Suppose dot-dok>0. Pay in the PRB occupation has improved
relative to private sector pay.
36
Basic argument
OLS gives inconsistent estimators for each year.
Asymptotic bias is constant from year to year.
(ie. Assume that the occupational decision does nto change
much between any two years – reasonable – not many
changers in the Panel element of the LFS)
37
Define the linear projections of Ak as:
Ai=PRIV+PUBPUBit+ooPRBoit+kkXkit+it.
Estimating equation for each year
Yit=(t+PRIV)+(t+PUB)PUBit+o(ot+o)PRBoit
+k(kt+k)Xkit +it
38
OLS estimates (at, bt, dot)
at estimates t+PRIV
bt
t+PUB
dot
ot+o
Consider estimates for two time periods.
Plim(at-ak) =t-k
Plim(bt-bk) =t-k
Plim(dot-dok)=ot-ok
39
Suppose dot-dok>0. Pay in the PRB occupation has improved
relative to private sector pay.
Suppose (dot-dok)-(bt-bk)>0. Pay in the PRB occupation has
improved relative to nonPRB public sector pay.
40
Comparisons with the private sector
Values of estimate (see handout)
Men with similar private sector men.
Women with similar private sector women.
41
Table : Effects of Working in PRB and Other
Occupations (Men)
Changes in weekly wages from year t-1 to year t
Non-PRB Public Sector (Men)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-9.4
-14.23 -16.08 -25.88 -27.46 -31.66 -34.94 -41.79 -60.68 -60.85 -59.12
1993 Non-PRB Public £9.4 less than private.
42
Occupational Wage Differences for Men 1993-2006
(relative to Private Sector)
400
300
Non-PRB Public
Sector
Teachers (primary
ed.)
Teachers (secondary
ed.)
Nurses & midwives
200
100
Practices allied to
medicine
Medical Practitioners
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
0
Prison officers
Armed Forces
-100
-200
Police
43
Occupational Wage Differences for 1993-2006 for Women
(relative to Private Sector)
400
350
300
Non-PRB Public Sector
250
Teachers (primary ed.)
Teachers (secondary ed.)
200
Nurses & midwives
150
Practices allied to medicine
Medical Practitioners
100
Prison officers
50
Armed Forces
Police
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
-50
19
93
0
44
Comparisons of PRBs with the private sector
Vertical distances in these figures to the axis show the extent
of the difference between any PRB group and the Private
sector.
Vertical differences between any PRB group and the BOLD
line of the Non-PRB line show the difference between each
remit group and the Non-PRB public sector.
45
Comparisons of PRBs with the private sector
Men have consistent negative differentials for:
Nurses and Midwives, Primary School Teachers,
Secondary School Teachers, PAMs and
Prison Officers (1997-2003)
SO Armed Forces, Police and Doctors have done well.
Women have a consistent negative differentials for:
Nurses and Midwives,
Primary School Teachers (1999-2002)
NOTE again Doctors have done well.
46
BUT
Such comparisons
PRBs with Private Sector
are arguably just Compensating Wage differentials.
This is not the Impact of the PRBs.
Also does not tell us what we want to know – we are looking
for a trend – DIFF-in-DIFF.
i.e. difference in occupation over time compared to difference
in NonPRB over time.
This nets out for unobserved heterogeneity.
47
DIFF-in-DIFF
IMPACT OF PRBs
48
Table : Effects of Working in non PRB Public Sector
Changes in weekly wages from year t-1 to year t
Non-PRB Public Sector (Men)
t-(t-1)
1993
1994
-9.4
-14.23 -16.08 -25.88 -27.46 -31.66 -34.94 -41.79
-4.83
1995
-1.85
1996
-9.8
1997
-1.58
1998
-4.2
1999
-3.28
2000
-6.85
1993 Non-PRB Public £9.4 less than private.
49
Table : Effects of Working in PRB
Changes in weekly wages from year t-1 to year t
Non-PRB Public Sector (Men)
1993
1994
-9.4
-14.23 -16.08 -25.88 -27.46 -31.66 -34.94 -41.79
t-(t-1)
-4.83
1995
-1.85
1996
-9.8
1997
-1.58
1998
1999
2000
-4.2
-3.28
-6.85
Secondary School Teachers
1993
1994
1995
1996
1997
1998
1999
2000
-43.6
-40.8
-32.5
-57.7
-56
-71.9
-79.4
-77.4
t-(t-1)
2.8
8.3
-25.2
1.7
-15.9
-7.5
2.0
Diff.
PRB
7.63
11.15
-15.4
3.28
-11.7
-4.22
8.85
50
Diff-in-Diff PRB Impacts Example for Male Secondary Teachers
compared to Non-PRB Public Sector 1993-2006
20
15
£ per Week
10
5
0
-5
93
19
94
19
95
19
96
19
97
19
98
19
99
19
00
20
01
20
02
20
03
20
04
20
05
20
06
20
Teachers (secondary ed.)
-10
-15
-20
Year
51
Diff-in-Diff PRB Impacts for Men 1993-2006
80
60
£ per Week
40
20
Teachers (secondary ed.)
Medical Practitioners
0
-20
93
19
94
19
95
19
96
19
97
19
98
19
99
19
00
20
01
20
02
20
03
20
04
20
05
20
06
20
Prison officers
Armed Forces
Police
-40
-60
-80
Year
52
Diff-in-Diff PRB Impact for Women 1993-2006
120
100
80
40
Teachers (primary ed.)
Teachers (secondary ed.)
20
Nurses & midwives
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
-20
19
94
0
19
93
£ per week
60
Practices allied to
medicine
Medical Practitioners
-40
-60
-80
Year
53
Conclusions to Impact Evaluation
No significant difference between any PRB group and the
NonPRB Public Sector average.
(Possible exception of the Doctors but then this was not a
PRB decision to give GPs and Consultants a new contract.)
54
5. What are the
Challenges for the
Future for the PRBs?
55
Challenges for the PRBs
• Not very easy to give differential awards by job.
56
Figure – The Labour Market for Teachers
D
Wa
S1
S2
Wga
E
Q1
Q

Q
Q2
57
Figure – The Labour Market for Teachers
D
Wa
S1
S2
W1
E1
W2
E2
Q

Q
58
Challenges for the PRBs
•
Not very easy to give differential awards by job.
• Not very easy to introduce PRP or relate
remuneration to productivity in this setting.
59
Challenges for the PRBs
•
•
Not very easy to give differential awards by job.
Not very easy to introduce PRP or relate remuneration to productivity in this
setting.
• How can we create incentives in public sector
delivery?
60
Challenges for the PRBs
•
•
•
Not very easy to give differential awards by job.
Not very easy to introduce PRP or relate remuneration to productivity in this
setting.
How can we create incentives in public sector delivery?
• How to take account of Pension Provisions in
deliberations.
61
Challenges for the PRBs
•
•
•
•
Not very easy to give differential awards by job.
Not very easy to introduce PRP or relate remuneration to productivity in this
setting.
How can we create incentives in public sector delivery?
How to take account of Pension Provisions in deliberations.
• Regional pay. – Is it a Cost compensation issue?
62
Challenges for the PRBs
•
•
•
•
•
Not very easy to give differential awards by job.
Not very easy to introduce PRP or relate remuneration to productivity in this
setting.
How can we create incentives in public sector delivery?
How to take account of Pension Provisions in deliberations.
Regional pay. – Is it a Cost compensation issue?
• Internationalisation of Labour Markets – The
Polish Dentist problem.
63
Challenges for the PRBs
• Not very easy to give differential awards by job.
• Not very easy to introduce PRP or relate remuneration to
productivity in this setting.
• How can we create incentives in public sector delivery?
• How to take account of Pension Provisions in deliberations.
• Regional pay. – Is it a Cost compensation issue?
• Internationalisation of Labour Markets – The Polish
Dentist problem.
64
Conclusions
Time Series 1971-2006
•Inflation, Earnings rises, Unemployment, Public Sector
Expenditure and industrial unrest all have a role to play in the
determination of PRB pay awards.
•Blair era is characterised by lower recommendations.
Cross Section (LFS) 1993-2006
•Conditional on attributes those in Public Sector are paid lower
that those in the private sector.
• PRBs have no real impact on Earnings from 1993-2006.
• But Different Conclusions for Different PRBs - depends on
which PRB is considered.
65