How can we accurately compare earnings in the public and private sectors? How can we be sure that we are comparing like with like? Simple comparisons of average pay can be quite misleading, and we need to look a little deeper.
The gap between mean earnings in the public and private sectors has been a near constant feature of economic policy debates in Northern Ireland for at least the last 20 years. However, much of this analysis is focused on estimates of the raw or unadjusted pay gap, that is a simple comparison of average wages. The goal of this paper is to take this analysis much further by exploring how the make-up of each sector affects what mean earnings are in each sector. This paper makes use of data from the UK Understanding Society survey in Northern Ireland to estimate an adjusted public private pay gap for Northern Ireland.
The scale and significance of the unadjusted public private pay gap is reduced by over 83% by accounting for observable differences in personal, job and workplace characteristics. Decomposing the unadjusted gap also shows that observable differences in these attributes account for the vast majority of this gap, while differing rates of return to characteristics play a significant but much smaller role. Overall observable differences in the workforce of both sectors can explain just under 80% of the raw gap in mean pay. These findings present a challenge to the persistent narrative that public sector wages in Northern Ireland are artificially high and that this is holding back the private sector.