ECONOMIC INSIGHTS PUBLIC SECTOR PAY - AVOIDING THE MISTAKES OF THE PAST

Transcription

1 ECONOMIC INSIGHTS PUBLIC SECTOR PAY - AVOIDING THE MISTAKES OF THE PAST MARCH 2017

2 Conall Mac Coille Chief Economist Conall joined Davy as Chief Economist in Prior to that, he worked for eight years as a monetary policy adviser and senior economist at the Bank of England. He has also worked at the Economic and Social Research Institute, Dublin, and as a lecturer at the Dublin Institute of Technology. He received his BA and MA in Economics from University College Dublin.

3 CONTENTS PUBLIC SECTOR PAY POLICY UNDER SCRUTINY HOW BIG IS IRELAND S PUBLIC/PRIVATE PAY GAP? WHAT SHOULD THE PUBLIC SECTOR PAY COMMISSION RECOMMEND? PUBLIC SECTOR PAY THROUGH IRELAND S BOOM AND BUST ARE IRELAND S PUBLIC SECTOR PAY LEVELS HIGH BY EUROPEAN STANDARDS? CAN WE EXPLAIN THE GAP BETWEEN PUBLIC AND PRIVATE SECTOR WAGES? HOW SHOULD WE VALUE IRISH PUBLIC SECTOR PENSIONS? A MORE FLEXIBLE FORM OF PAY BARGAINING IMPORTANT DISCLOSURES REGULATORY AND OTHER IMPORTANT INFORMATION

4 EXECUTIVE SUMMARY In the first of our Economic Insights series of white papers, we consider the vexed question of public sector pay in Ireland. The overwhelming evidence is that public sector pay rates in Ireland are unusually high relative to the private sector and by European standards. Hence, any successor to the Lansdowne Road agreement should limit pay rises. Also, given the uncertainty of Brexit, pay rises should be conditional on the on-going performance of the economy. Negotiations on a successor to the Lansdowne Road Agreement are set to begin in the first half of Ahead of these negotiations, the government has tasked a newly established Public Sector Pay Commission (PSPC) to assess appropriate pay levels. In this white paper, we consider the evidence on how Irish public sector pay levels compare with those of the private sector and with other countries. Our key findings on public sector pay The Public Sector Pay Commission must highlight gaps in pay and pension provision Our view is that public sector pay (including the positive impact of increments) should at most rise in line with the private sector. Ideally, the pay gap should close over time. Public sector pay rises should also be conditional on the on-going performance of the economy and tax revenues, guarding against the risks from Brexit, corporate tax reform and other economic uncertainties. ππ Average public sector wages are 47,400 in Ireland, 40% higher than in the private sector before allowing for differences in pension entitlements and job security. ππ At most, around half of this pay gap (20%) can be attributed to differences in education, experience, qualifications and other factors. ππ ππ ππ ππ In the United Kingdom, average public sector wages are 26,300 almost exactly in line with the private sector ( 26,200) and lower than in Ireland. Ireland s public/private pay gap is high by European standards, similar to southern European countries. Lower-paid public servants benefit most from the pay gap. The public sector enjoys retirement benefits that need to be taken into consideration. Our calculations indicate that a private sector worker would need to save 590,000 to buy an annuity that matched public sector career-average salary pensions of 11,300 per annum. At current annuity rates, a pension that provided 22,000 of annual income (above the contributory pension) would cost 1 million. 4

5 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST PUBLIC SECTOR PAY POLICY UNDER SCRUTINY Once again, the issue of public sector pay looks set to dominate the newspaper headlines. The newlyestablished PSPC is set to report on how public sector pay levels compare with those of the private sector and relative to other countries. The report is intended to provide critical, evidence-based insights to inform fresh negotiations, scheduled to begin in the first half of 2017, to replace the existing Lansdowne Road Agreement. The Commission s report is bound to be contentious. Most objective analyses have found public sector pay levels are unusually high relative to the private sector. These include studies by the Central Statistics Office (CSO), Economic & Social Research Institute (ESRI), European Central Bank (ECB), European Commission (EC) and many other economists. Calls for a new form of public sector pay setting have also reflected a dissatisfaction with the current opaque bargaining arrangements. The Irish Small and Medium Enterprises Association (ISME) has called for pay setting to be removed from the political arena. Many economists are concerned that the government s fiscal position could be damaged if it gives in to demands for pay restoration 1. Minister for Public Expenditure and Reform Paschal Donohoe has directed that the PSPC will have to examine the value of public sector pensions. This is the first time public sector pensions will be considered in the context of a pay agreement. The PSPC report will also surely draw attention to the worrying fact that less than 50% of private sector workers have any private pension provision. The Irish Congress of Trade Unions (ICTU) has said that while international and public-private pay comparisons could inform public service pay policy in the longer term the priority should be on restoring public sector pay rates to Celtic Tiger era levels. Most objective analyses have found public sector pay levels to be unusually high relative to the private sector 1 See interview with John Fitzgerald, 5

6 HOW BIG IS IRELAND S PUBLIC/ PRIVATE PAY GAP? The average Irish public sector wage was 47,400 in 2016, 40% higher than in the private sector. At most, around half of this pay gap (or 20%) can be attributed to differences in education, experience and qualifications. Average public sector pay in the UK is 26,300 ( 30,800) almost exactly in line with the private sector and far below levels in Ireland. Ireland s public/private sector pay gap is on a par with southern European countries such as Italy, Greece, Portugal and Spain. The public sector also enjoys retirement benefits that need to be taken into consideration. On our calculations, a private sector worker would need to save a 590,000 pension to match the same 23,000 paid per annum to public sector workers when they retire on a career-average salary scheme. The figures are higher for those with defined benefit pensions linked to their final salary. Figure 1: Irish and UK public/private sector wages, 000s s Private Sector Ireland United Kingdom Source: Central Statistics Office; Office for National Statistics Public Sector Table 1: Irish and UK average annual earnings Public sector Private sector Average annual earnings Ireland 47,400 33,900 UK ( ) 30,800 30,700 UK ( ) 26,300 26,200 Average hourly earnings Ireland Source: Central Statistics Office; Office for National Statistics 6

7 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST There is a wide distribution of wage rates across the public sector (see Figure 2 and Table 2). An Garda Síochána had the highest average pay in 2016 at 64,700, followed by semi-state companies ( 53,300) and education ( 47,600). The Defence Forces had the lowest average pay in the public sector at 42,000 but were still above the 33,900 private sector average. A key point here is that we are looking at what is actually paid to workers. Pay scales in the public sector are often unrepresentative of actual earnings due to a myriad range of allowances, reliefs and other payments. Figure 2: Average public sector earnings by sector 000s An Garda Síochána Semi-State companies Education Total Public Sector Health Civil service Regional bodies Defence Regular Earnings Irregular Earnings Source: Central Statistics Office The average Irish public sector wage was 47,400 in 2016, 40% higher than in the private sector Table 2: Earnings across the public and private sectors ( ) Source: Central Statistics Office Annual Earnings Hourly Earnings Annual Earnings Hourly Earnings Public sector 47, Private sector 33, Defence 42, Hotels & Restaurants 17, Regional Bodies 43, Other Services 24, Civil Service 45, Admin & Support 27, Health 45, Wholesale/Retail 28, Education 47, Construction 38, Semi-state 53, Transport 39, An Garda Síochána 64, Professional & Scientific 44, Information & Communications Industry 44, Finance 54, ,

8 WHAT SHOULD THE PUBLIC SECTOR PAY COMMISSION RECOMMEND? We believe the PSPC must grasp the nettle of acknowledging that public sector pay rates in Ireland are high by international standards and compared to the private sector. Therefore, any successor to the next Lansdowne Road Agreement should ensure the following: ππ ππ ππ Growth in public sector pay per employee (including the positive impact of increments) should at most only match pay rises in the private sector. The value of pensions should be included in any comparison of public and private sector pay. Any planned multi-year pay rises must be conditional on the performance of the economy. Ideally, the public/private pay gap should be allowed to close over time. However, because the pay gap is larger for lower-paid public servants, this will be politically difficult to achieve. As a second-best option public sector pay growth should be limited to ensure the gap does not widen over time. In this vein, some of the steam in the debate on public sector pay could be ameliorated if a value is put on public sector defined benefit pensions. The Department of Finance has argued that wage setting should be as flexible as possible. We agree. Any multi-year agreements on pay must be made conditional on the on-going performance of the Irish economy and tax revenues. A flexible agreement would be prudent given the risks posed by Brexit, questions on the sustainability of corporate tax revenues and the inherent volatility that is always faced by a small open economy such as Ireland. There is also a question on whether centralised wage agreements for the public sector are appropriate. In the UK there are separate processes for different parts of the public sector which may help prevent inappropriate relativities between sectors imposing an additional rigidity on pay. In this vein, some of the steam in the debate on public sector pay could be ameliorated if a value is put on public sector defined benefit pensions. 8

9 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST PUBLIC SECTOR PAY THROUGH IRELAND S BOOM AND BUST In recent decades, public sector wages in Ireland have been set by centralised wage agreements known as Social Partnership. The first agreements were part of a broader package of economic reforms, supported by the Tallaght strategy where the Fine Gael party supported Taoiseach Charles Haughey s Fianna Fáil minority government. These early agreements delivered modest pay growth and limited industrial unrest during the 1990s. By the turn of the millennium, centralised wage bargaining was seen as an intrinsic part of Ireland s economic progress. However, Social Partnership became synonymous with excessive increases in public expenditure during the Celtic Tiger period. The public sector pay bill more than doubled from 8.9 billion in 2000 to 21.1 billion by 2008 and grew even faster than the economy, rising from 8.2% of Gross Domestic Product (GDP) in 2000 to a peak of 12.2% in 2009 (see Figure 3). The 2002 benchmarking exercise will go down as the nadir of the Social Partnership era. Despite little evidence that public sector wages had been left behind by the private sector, the Public Service Benchmarking Body awarded an enormous 8.9% rise in pay on average across the public sector. In fact, a study by former Davy Chief Economist Jim O Leary and colleagues showed that public sector workers were paid 13% more than their private sector counterparts in 2001 (after accounting for differences in education and qualifications), showing little had changed since the early 1990s. Not for the first time, the political narrative trumped the facts on public sector pay. Figure 4 shows that average public sector earnings grew from 31,800 in 2000 to 48,000 by 2007 a 50% increase widening the gap with the private sector. The financial crisis led to an inevitable correction in public sector pay under The Financial Emergency Measures in the Public Interest (FEMPI) acts. These included a pension levy (worth 7% of pay on average) and a straight pay cut of 6% implemented in In 2013, public sector workers earning over 65,000 received a further 6% pay cut. Figure 3: Ireland s public sector pay bill and public sector employment s Billion Public Sector Employment - Full Time Equivalents (left axis) Public Sector Pay Bill (right axis) Source: Central Statistics Office; Department of Public Expenditure and Reform 0 9

10 However, despite these cuts, Figure 4 shows that average pay in the public sector in 2016 was 47,400, just 4.2% below the 2009 peak of 49,500. A recent study by University College Cork economists found that the pay of the bottom 25% of income earners in the public sector actually rose by 7.4% 2 but fell by 4.9% for the top 25%. These figures highlight the positive impact of increments (automatic pay rises linked to years of experience) and various reliefs and allowances on public sector pay levels. Incomes have not fallen as sharply as the headline reductions under the FEMPI acts. The PSPC will have to judge calls for pay restoration in light of these facts. Perhaps the most telling summary statistic is that the overall size of the public sector pay bill is expected to rise to 20.6 billion in 2017, a level last seen in This is despite total employment in the public sector currently at 368,100, down from a 427,300 peak in Figure 4: Average annual earnings public sector and total employment s Public Sector Total Employment Source: Central Statistics Office; Department of Public Expenditure and Reform Actual public sector pay levels have not been cut as sharply as the headline FEMPI measures suggest 10 2 See An Analysis of Public and Private Sector Earnings in Ireland, by Justin Doran, Noirin McCarthy and Marie O Connor, School of Economics, University College Cork. 3 The Department of Public Expenditure and Reform indicates there were 298,200 full-time equivalents in the public sector at the end of 2015, down 7% from 320,400 in 2008.

11 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST ARE IRELAND S PUBLIC SECTOR PAY LEVELS HIGH BY EUROPEAN STANDARDS? Average pay in Ireland is close to the European average. Figure 5 illustrates that annual gross earnings for a single person in Ireland at the average wage equalled 34,800 in 2015, 6% below the euro area average of 37,100. However, net earnings were 13% above. This highlights that the income tax burden for average and lower earnings is not actually that high but rises sharply for higher earners. Figure 5: Average annual gross and net earnings, single individual, no children, 100% of average earnings in s Luxembourg Netherlands Germany Belgium Finland Austria France Euro Area Ireland Italy Spain Malta Greece Slovenia Portugal Latvia Estonia Slovakia Lithuania Gross Earnings Source: Eurostat Net Earnings Unfortunately, cross-country comparisons of public sector pay levels are rare. The most recent comprehensive study was by the European Commission in It found that Ireland s publicprivate pay gap was relatively large at 33% compared with 10.5% on average across the euro area. The gap between public and private sector pay in Ireland was the sixth-largest across the euro area, only smaller than southern European countries such as Portugal, Cyprus, Italy and Greece. Eurostat does provide annual earnings data for European countries at the sectoral level. Table 3 illustrates average earnings for three sectors in which public sector workers are located. Notably, average earnings in Ireland s public administration and defence ( 51,700), education ( 56,300) and health and social work ( 46,400) are the highest across the range of euro area countries in Table These sectors may contain some private sector workers, particularly in the human health sector. 11

12 Table 3: Average annual earnings by sector, 2014 ( 000s) Source: Eurostat Public administration and defence Education Human health and social work activities Ireland Netherlands Belgium n.a Austria n.a Finland Germany Euro area France Cyprus European Union Italy Spain Portugal n.a Slovenia Malta Estonia Slovakia Lithuania Latvia The Organisation for Economic Co-operation and Development (OECD) provides deeper comparisons. For example, the OECD s Education at a Glance 2016 publication found that Irish teachers starting salaries were below the OECD average. However, after 15 years experience, Irish teachers salary levels are significantly above the OECD average, the sixth-highest across the countries illustrated in Figure 6. The black dots show that the top of the salary scale in Ireland is also among the highest in the OECD. after 15 years experience, Irish teachers salary levels are significantly above the OECD average 12

13 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST Figure 6: Teachers salaries in lower secondary education in public institutions USD PPPs (Purchasing Power Parities) Luxembourg Germany Salary after 15 years of experience/minimum training Starting salary/minimum training Source: OECD Education at a Glance, 2016 Unfortunately, the OECD s last international comparison of public sector pay rates including Ireland is now quite dated (taken from its Government at a Glance 2011 publication). Netherlands Canada United States Ireland Australia Denmark Japan Belgium (Fl.) Belgium (Fr.) Korea Spain Austria England (UK) New Zealand OECD average EU22 average Norway Scotland (UK) Finland Portugal Sweden Slovenia France Mexico Italy Israel Turkey Chile Poland Greece Hungary Czech Republic Slovak Republic Salary at top of scale/minimum training Nonetheless, it confirms the same pattern Ireland has high public sector wages by international standards. Table 4: Compensation of public sector employees, $000s, at purchasing power parity Source: OECD Government at a Glance, 2011 OECD survey average Ireland % Difference Ireland s position across the survey Medical Specialists % 1 st out of 16 Nurses % 4 th out of 19 Senior Managers (D2) % 4 th out of 21 Middle Managers (D3) % 7 th out of 22 Middle Managers (D4) % 6 th out of 18 Secretarial (a) % 10 th out of 21 Secretarial (b) % 14 th out of 19 Economists % 6 th out of 21 Statisticians % 3 rd out 13 13

14 CAN WE EXPLAIN THE GAP BETWEEN PUBLIC AND PRIVATE SECTOR WAGES? A common criticism of measuring the public/private sector pay gap is that it does not compare workers on a like-for-like basis. Some jobs such as members of the defence forces and An Garda Síochána do not exist in the private sector. There are also other differences in their characteristics: public sector workers tend to be older, have longer length of service, are more likely to be a member of a trade union and have a third-level degree. Table 5: Average characteristics of public and private sector employment in Ireland Public Private Age (years) Length of service with current employer (years) 15 9 Hours worked per week Trade union membership, % total 79% 19% Shift Worker, % total 20% 16% Third-level degree or higher qualification, % total 38% 23% Source: Central Statistics Office, National Employment Survey 2010 The extent of the public/private pay gap in Ireland has been the subject of many economic studies. These studies aim at finding characteristics that explain the public/private sector pay gap such as higher education levels or qualifications among public sector workers. The part of the 40% pay gap that cannot be explained is referred to as the underlying pay premium after accounting for differences in characteristics. Table 6: Estimates of Ireland s public/private pay premium Boyle, McElligot and O Leary (2004) 13% Murphy, Ernst and Young (2007) 10% Kelly, McGuinness and O Connell (2009) 26% Foley & O Callaghan (2009) 10%-21% European Central Bank (2011) 19% Central Statistics Office (2012) 6%-19% Kelly, McGuinness and O Connell (2012) 17% European Commission (2013) 21% Central Statistics Office (2017) 5% Source: Davy 14

15 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST Table 6 illustrates a range of estimates of the pay premium. Some key messages from these studies are: ππ ππ The pay premium enjoyed by public sector workers grew through the Celtic Tiger period. The ESRI has estimated that the pay premium grew from 14% in 2003 to 26% in 2006, not surprising as rapid pay rises occurred following the 2002 benchmarking exercise. The pay premium is larger for lower-paid public servants. Figure 7 illustrates the distribution of pay in The top 10% of income earners in the public sector were paid 70,000 (or above), 9.5% higher than the 64,000 in the private sector. The median public sector wage was 42,000, 39% higher than the 30,000 in the private sector. The bottom 10% of public sector ππ workers were paid 22,000, 83% higher than in the public sector 5. In its most recent study, the CSO also found the underlying pay premium ranged from 20% for the public sector workers with the lowest pay to 5% at the median, with highest earners actually paid 7% below their counterparts in the private sector. On average, the underlying public sector wage premium is close to 20%, based on most recent studies. The most recent studies by the ESRI, ECB and European Commission suggest that the pay premium is close to 20%. We have discounted the smaller estimates made by the CSO, including its most recent estimate of 5%. Figure 7: The distribution of annualised earnings across the public and private sectors s Bottom 10% 25th percentile Median 75th percentile Top 10% Public Sector Private Sector Total Employment Source: National Employment Survey 2010 UK public sector pay levels are set almost exactly in line with the private sector despite sharing similar characteristics to their counterparts in Ireland. 5 The ESRI found in 2006 that senior public sector workers earned 10% more than their private sector counterparts, but lower grades earned 24-32% more. 15

16 This is because the CSO s approach goes beyond educational attainments, qualifications and profession. The CSO s study suggests the publicprivate pay gap is explained by differences in trade union membership and nationality. Hence, the CSO s estimates of the underlying pay premium are lower than those of the ESRI, ECB, European Commission and other studies that chose not to consider trade union membership or nationality as a determinant of pay. Therefore our view is that, at most, only half (20%) of the pay gap can be explained by differences in experience, age, education and qualifications. This is probably an upper limit. In the United Kingdom, public sector pay levels are set almost exactly in line with the private sector despite sharing similar characteristics to their counterparts in Ireland. For example, the CSO s estimates show that on average trade union membership is associated with 10% higher pay. Therefore, in the CSO s methodology, a significant proportion of the pay gap is explained not by membership of the public sector per se, but rather by higher levels of trade union membership within the public sector (79%) vis-à-vis the private sector (19%). However, this is circular logic. Trade union membership or nationality may help explain the pay gap but clearly cannot justify higher pay for similar roles in the public and private sectors. In any case, these statistical estimates of the underlying wage premium should be taken with a pinch of salt. They are derived from statistical models of how wages are determined in Ireland alone. A recent European Commission paper takes a broader view, finding that wages in Ireland were exceptionally high compared with other European countries even after accounting for differences in workers characteristics. Furthermore, the European Commission found that the pay premium of 20% in Ireland was the largest across 26 European countries. 16

17 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST HOW SHOULD WE VALUE IRISH PUBLIC SECTOR PENSIONS? The PSPC report will consider the value of public sector pensions. The equivalent market value of such defined benefit pensions has soared over the past 10 years as annuity rates have fallen. Figure 8 illustrates that the annuity rate for a single male aged 65 years to buy a fixed income of 10,000 per annum fell from 7% at the beginning of 2008 to 4.1% at the start of The market value of such an annuity has soared from 143,000 to 245,000. The fall in annuity rates has reflected both historically low interest rates but also improvements in life expectancy. Interest rates will rise when the Federal Reserve and ECB eventually tighten their monetary policies. However, life expectancy will continue improving. So annuity rates are unlikely to rise back to levels seen 10 years ago. Put simply, public sector pensions are now worth more because they will provide a defined income over a longer period. Figure 8: Annuity rates and capital values for single male, 65-years, 10,000 p.a. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 280, , , , , , , , , % 100, Market Value Annuity Rate Source: Davy; Factset In Table 7 we illustrate that the current annuity rate for an index-linked pension for a 65-year-old male is 2.18% (with a 50% reversionary pension to the spouse). We have chosen this annuity rate as it most closely matches public sector defined benefit pensions. Under the career average salary scheme, new recruits to the public sector are entitled to a pension that, combined with the contributory Pay Related Social Insurance (PRSI) pension, provides them with 50% of their average income. Average public sector earnings currently equal 47,400 and the contributory pension provides 12,390 of annual income. Hence, the average public sector pension for 40 years service would provide an additional 11,300 of income per annum. At current annuity rates, buying such a pension (together with the lump sum payment) would cost 590,000. If annuity rates rose to 3.27%, the capital value would fall to 416, This annuity rate is for a non-index lined pension so the capital value cannot be directly compared to an equivalent defined benefit public sector pension. 17

18 The contributions to achieve such a pension pot depend on the expected rates of return. Table 7 shows optimistic, base and pessimistic scenarios where rates of return vary from 3%, 4% and 5%. Here the required annual contribution varies from 7,600 to 3,300. At current annuity rates, the required annual contribution would be equivalent to 10-16% of average public sector pay. Table 7: Market value and contributions to match average public sector pensions Required annual gross contribution over 40 years Annuity rates Capitalised value 3% return p.a. 4% return p.a. 5% return p.a. Current market rate, 2.18% 589,358 7,589 5,964 4,646 Higher rate, 3.27% 416,606 5,364 4,216 3,285 Source: Davy calculations However, these calculations are extremely simplistic. The majority of existing public servants are still entitled to pensions linked to their final salary rather than the average salary. In these cases, it is pay at the end of their career that is relevant, well above the average of 47,400 illustrated above. Also, many public sector pensions are linked to public sector wages, which we would expect to grow faster on average than CPI (Consumer Price Index) inflation. Taking this benefit fully into account would increase the capitalised value of their pensions. In addition, because the public sector pension takes into account a fixed level of income the value of pension benefits rises sharply for public servants who have pay levels above the average. For example, a salary of 47,400 results in a pension of 11,300; however, a salary of 75,000 would result in a pension of 25,100. Effectively, a c.60% higher salary results in a c.120% higher pension. At current annuity rates, a pension that provided 25,000 of income per annum would cost significantly in excess of 1 million. Many public sector workers also have the option to retire on full benefits from age 60 (or earlier for some workers) or the ability to buy extra service at very generous rates. Of course, these estimates need to be seen in the context of the pension levy imposed on public servants who, like private sector workers, are asked to contribute to their pensions. Finally, public sector pensions are free of the risks facing employees in defined contribution schemes. Those left in private defined benefit schemes also face the threat of wind-up if they run unsustainable deficits. In summary, while valuing public sector pensions is highly complex, their worth is certainly far in excess of the contribution from the employee particularly for average and higher earners and should be taken into account by the PSPC. The majority of existing public servants are still entitled to pensions linked to their final salary rather than the average salary 18

19 DAVY ECONOMIC INSIGHTS PUBLIC SECTOR PAY AVOIDING THE MISTAKES OF THE PAST A MORE FLEXIBLE FORM OF PAY BARGAINING A bigger issue is whether centralised wage agreements are the best way to set public sector pay. Having adopted the euro, the Irish government is left with limited tools with which to stabilise the Irish economy. This was most evident during the EU/IMF (International Monetary Fund) programme, when difficult sharp fiscal adjustments were implemented during the depth of the recession. However, the seeds of the bust were sown by overly exuberant public and private sector pay increases. As the recession unfolded, too much of the adjustment took the form of jobs cuts with less severe reductions in pay. It would be disappointing to see the mistakes of the past repeated. Once again, a perception has formed that the economic recovery has left public sector pay behind. However, the economy now faces the uncertainty of Brexit, and questions remain on the sustainability of the corporate tax revenue base. As in the Celtic Tiger era, it would be highly irresponsible to predicate multi-year pay increases on unstable tax revenues. In this context, a more flexible form of wage bargaining may be warranted. Such proposals have been made in the past. For example, MacCoille and McCoy (2001) argued that Ireland s centralised wage bargaining mechanism needed modification. They identified two flaws. First, agreements for multiyear wage increases did not reflect the uncertain outlook for the Irish economy. Second, Social Partnership did not provide a means to cope with an overheating economy. Others have argued for a more flexible approach. Donal De Buitléir and Don Thornhill (2001) advocated a gain sharing arrangement based on the economic outcomes, essentially envisaging a form of profit sharing in public sector pay agreements. Similarly, John McHale (2001) advocated the use of deferred compensation mechanisms within Social Partnership. More recently, the Department of Finance has expressed a preference that the wage setting process should be as flexible as possible to maintain competitiveness and growth. Given the risks facing the economy from Brexit, it may now be time to reconsider proposals for a more flexible form of public sector pay bargaining. There is also a question on whether centralised wage agreements for the public sector are appropriate. In the UK, there are separate processes for different parts of the public sector which may help prevent inappropriate relativities between sectors imposing an additional rigidity on pay. Given the risks facing the economy from Brexit, it may now be time to reconsider proposals for a more flexible form of public sector pay bargaining 19

20 IMPORTANT DISCLOSURES Analyst certification I, Conall Mac Coille, hereby certify that: (1) the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in this report. Investment ratings A summary of existing and previous ratings for each company under coverage, together with an indication of which of these companies Davy has provided investment banking services to, is available at Investment ratings definitions Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or in some cases company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor s decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Our ratings are based on the following parameters: Outperform: Outperforms the relevant E300 sector by 10% or more over the next 12 months. Neutral: Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months. Underperform: Underperforms the relevant E300 sector by 10% or more over the next 12 months. Under Review: Rating is actively under review. Suspended: Rating is suspended until further notice. Restricted: The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances. Distribution of ratings/investment banking relationships Investment banking services / Past 12 months Rating Count Percent Count Percent Outperform Neutral Underperform Under Review Suspended Restricted Source: Davy calculations 20 This is a summary of Davy ratings for all companies under research coverage, including those companies under coverage to which Davy has provided material investment banking services in the previous 12 months. This summary is updated on a quarterly basis. The term material investment banking services includes Davy acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.

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22 Share ownership policy Davy allows analysts to own shares in companies they issue recommendations on, subject to strict compliance with our internal rules governing ownaccount trading by staff members. We are satisfied that our internal policy on share ownership does not compromise the objectivity of analysts in issuing recommendations. Conflicts of interest Our conflicts of interest management policy is available at Distribution of research to clients of Davy Securities in the US Davy Securities distributes third-party research produced by its affiliate, J&E Davy. Davy Securities is regulated by the Central Bank of Ireland. Davy Securities is a member of FINRA and SIPC. Confidentiality and copyright statement Davy, Research Department, Davy House, 49 Dawson St., Dublin 2, Ireland. Confidential Davy Other important disclosures This report was completed at 5pm GMT on March It was issued at 8am GMT on March US Securities Exchange Act, 1934 This report is only distributed in the US to major institutional investors as defined by S15a-6 of the Securities Exchange Act, 1934 as amended. By accepting this report, a US recipient warrants that it is a major institutional investor as defined and shall not distribute or provide this report, or any part thereof, to any other person. 22

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24 Davy. Since The Davy Group is Ireland s leading provider of wealth management, asset management, capital markets and financial advisory services. We work with private clients, small businesses, corporations and institutional investors. Dublin Office Davy House 49 Dawson Street Dublin 2 Ireland T dublin@davy.ie Belfast Office Donegall House 7 Donegall Square North Belfast BT1 5GB Northern Ireland T belfast@davy.ie Cork Office Hibernian House 80A South Mall Cork Ireland T cork@davy.ie Galway Office 1 Dockgate Dock Road Galway Ireland T galway@davy.ie London Office 13th Floor Dashwood House 69 Old Broad Street London EC2M 1QS England T J & E Davy, trading as Davy, is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange and the London Stock Exchange. In the UK, Davy is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request J&E Davy. 113_12228/03/17