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Pay gap between public sector and private sector is widening, says IDS

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A gap has emerged between the level of pay awards in the public and private sectors, according to the latest analysis of pay settlements from the Incomes data Service (IDS).

The median pay award for the private sector in the three months to the end of April 2011 is 3%, while in the public sector it is zero.

The private sector median has risen since the last analysis period, driven by an increase in the number of higher-end deals. A quarter of private sector awards in this analysis are above 3% (up from 2.2% in the last analysis published in May), and over a tenth are above 4%.

Many of the higher-level awards are in sectors including the car industry and parts of utilities, where awards are once again much closer to levels pertaining before the recession.

The private sector median mainly reflects a rise in manufacturing pay awards, for which the median has risen to 3% in the three months to April, from 2.5% in the last analysis period. Meanwhile, the median pay award in private services has fallen slightly to 2.8%, from 2.9% in the last analysis period.

The latest analysis period includes public sector settlements for the first time this year. April is a key month for public sector pay reviews and the latest figures begin to show the effects of Government policy on public sector pay. The median pay settlement for the public sector is zero, with all but one of the pay awards in this sector resulting in a freeze on basic pay. The median for the whole economy remains at 2.5% for the fourth consecutive analysis period, despite the addition of these freezes.

The median and upper quartile figures for the whole economy have remained stable since the start of the year. However, the lower quartile has fallen to 1.5% having previously been at 2% since January. The number of zero or low awards in the public and not-for-profit sectors has been the main cause of this fall. Of the settlements in the lower quartile (those below 1.5%), all but four are at public sector or voluntary organisations. The proportion of pay freezes and awards below 2% up following the addition of these settlements.

While the average pay award is 2.3%, the weighted average in the three months to the end of April is just 0.1%, reflecting the impact of low or zero awards at public sector organisations, which make up the largest employee groups in the sample.

In the private sector, settlement levels have risen gently as the economy recovers, though they still remain below the level of inflation overall. This chimes with the Bank of England agents' latest summary of business conditions, which found that pay awards are typically slightly higher than a year earlier, 'reflecting profitability over the past twelve months'. Also, inflation remains above 5% on the measure typically used to benchmark annual pay reviews, pushing up expectations about pay rises.

On the other hand, unemployment is still comparatively high, and despite an uptick in employment, the labour market remains fragile, with concerns about job cuts in the public sector. Coupled with broader worries about the economy, this might prompt companies to sit tight on cash that, in a period where business expectations were more upbeat, might go into investment and/or wages.

Ken Mulkearn, editor of IDS Pay Report, said: "While our headline figures show pay settlements remain stable, the whole-economy median obscures a wider reality and clear differences between the public and private sectors. The latest figures show that private sector pay awards are where we thought they would be this time of the year, reflecting a degree of recovery in profitability and higher levels of inflation. However, the picture for 2011 is not yet complete and the outlook is difficult to assess."