Research published today from Policy Exchange reveals the gap between public sector and private sector pay is still rising.

Despite private sector workers losing out during the recession, public sector workers have seen their advantage grow.

The analysis, from the centre-right think tank shows despite the coalition's attempt at pay restraint, public sector salaries continued to rise as late as December 2010. That was despite pay for many workers in the private sector falling even before inflation is included - meaning that many private sector workers will have seen drastic cuts in their standard of living.

This study shows the public sector 'premium' - the additional pay a typical public sector worker receives over a private sector worker - is now up to 35% calculated on hourly pay. For typical annual pay the premium is up to 16%.

This new research updates previous work from Policy Exchange which showed that 2009 was the first year in which average pay for public sector workers as a whole was now on average higher than for all private sector workers.

Public sector pay premiums rose in every part of the earnings distribution in 2010 apart from at the very top. Pay shrank (even in cash terms) for the bottom 30% of private sector workers.

The public sector pay gap continued to increase up to December 2010 in spite of pay freezes. This is true when you consider the gap between the typical (median) hourly pay of a public and private sector worker, and also when accounting for differences in the composition of the workforces.

Public sector incomes have grown at double the rate of the private sector since 2002.

Since the start of the recession, the hourly pay premium for the typical public sector worker has increased. After taking into account differences like age, experience and qualifications, the hourly pay premium for a public sector worker was 8.8% as of December 2010. This almost doubled from 4.3% two years earlier.

The public sector pay premium for a typical worker increased in every region of the UK between 2009 and 2010 (except Yorkshire). As in 2009, the largest premium was found in Wales and then the North West. In Scotland, the North East, the North West and Wales, a typical public worker can expect to be paid a fifth more than the typical private sector worker.

The only group where private sector pay is actually higher than the public sector is for the top 10% of earners.

Policy Exchange director Neil O'Brien said: "Public sector pay has got hugely out of control. There is pressure on budgets like never before because of the deficit. If the unions want to preserve their members' jobs they have to realise that pay is an issue which will have to be looked at.

"This is an issue of fairness. It is unreasonable and unfair to expect private sector workers to make all the sacrifices. We need a much better-balanced system of public pay, with organisations like the NHS and schools given greater freedom to vary pay so they can attract staff but also get value for the taxpayer."

The report makes a series of recommendations, including:

• Local pay-bargaining and an end to national strike ballots. This would create a situation in which it might make more sense for local union officials to seek better deals than the national one could provide. This would allow us to follow the example of Sweden, which combines organisational-level negotiation of terms and conditions with workplace or individual negotiation of pay.
• Replace the two-year pay freeze on individual salaries with a freeze in the total pay bill for public sector organisations. This would allow different tradeoffs to be made between headcount reductions and pay cuts in different regions and sectors, saving jobs and promoting efficiency.
• Reforming public sector pensions. This would involve imposing an increased public sector pensions levy (as in Ireland) and transitioning new public sector workers onto defined contribution pensions, as in the private sector.