Public sector pay rises will overtake private sector

Recent research in the UK indicates that, for the first time since late 2020, public-sector employers anticipate increasing pay faster than their private-sector counterparts. This shift follows government approval of significant pay raises in the public sector, funded partly by higher employer taxes, as reported by Reuters.

The Chartered Institute of Personnel and Development (CIPD) conducted a survey of 2,000 employers between September 18 and October 9. The survey revealed that the median expected pay rise for the public sector in the next 12 months has climbed to 4%, up from 2.5% in the previous quarter. This new figure surpasses the median expected pay rise in the private sector, which remains at 3%. For the next three months, public-sector employers anticipate a median pay increase of 5%.

James Cockett, a senior labor market economist at CIPD, commented to Reuters, stating, “The recent substantial public-sector pay awards and the additional spending outlined in the latest budget have provided a significant boost to public-sector employers and their workforce.”

In July, UK Finance Minister Rachel Reeves announced pay increases ranging from 4.75% to 6% for millions of public-sector employees. These increases come after a period where public-sector pay growth lagged behind that of the private sector and struggled to keep up with rising inflation during the pandemic.

Cockett noted that private-sector companies now face escalating costs, which could impact their hiring strategies and wage adjustments. On October 30, Reeves introduced the largest tax increases since 1993, including a £25 billion ($32 billion) rise in employer social security contributions, alongside a 6.7% increase in the minimum wage.

Cockett warned, “These higher business costs may hinder growth, potentially leading employers to offer lower pay rises or adopt a more cautious approach towards investing in employee skills or hiring new staff.”

Official data set for release on November 12 is expected to show that annual growth in average weekly earnings slowed to 4.7% in the three months to September, down from 4.9% in the previous three-month period ending in August.

The Bank of England is keeping a close watch on wage growth as it assesses inflationary pressures in the economy. It recently indicated that any future interest rate cuts will likely be gradual, following a reduction of the benchmark Bank Rate from 5% to 4.75%.