Follow the Leader? The Interaction between Public and Private Sector Wage Growth in the UK

Scrutiny of public sector pay in the United Kingdom has never been higher since the introduction of a pay restraint in 2010 and the subsequent divergence between public sector and private sector earnings growth. Pressure is... [ view full abstract ]

Scrutiny of public sector pay in the United Kingdom has never been higher since the introduction of a pay restraint in 2010 and the subsequent divergence between public sector and private sector earnings growth. Pressure is building to do something about this. This paper examines what has happened to public and private sector wage increases over the last 30 years. It addresses the fundamental question of which sector leads and which follows in terms of earnings determination. We also examine whether the public sector pay restraint since 2010 has pushed public sector wages off their equilibrium path. These questions are of fundamental importance as the government potentially faces the balance between increasing wage inflation or severe fiscal funding problems.