Public sector pay strategy 2023 to 2024

Annex A Economic Context

Earnings and inflation

Nominal median monthly earnings in Scotland grew 0.8% in January 2023 to £2,225. The monthly figures can be volatile, and over the past year earnings have grown 6.4%. However, adjusting for inflation, which was 10.1% in January, real median earnings fell 3.3% on an annual basis. This is the twelfth consecutive month of negative real terms growth, emphasising the cost –of living challenges that continue to face individuals and households.

Public and private sector pay comparisons

The last year has seen UK public sector pay growth fall behind that in the UK private sector, although this followed a period during the pandemic when private sector pay fell.

On average, the UK public sector pay is higher than in the UK private sector, this has tended to be the case since at least the early 2000s. As shown in Figure B below, the gap closed in 2007 but then widened again after the financial crisis. The gap then narrowed again in the lead up to the pandemic, and in the latest year average public sector earnings have fallen below private sector earnings.

Source: IFS

In Scotland, public sector pay tends to be higher than in the UK and has a slightly different relationship with the private sector compared to the UK. The average full-time public sector worker in Scotland tends to earn more than the average private sector worker, even before controlling for factors such as age, qualifications, and experience.

Figure C shows comparative information on public and private sector average wages between Scotland and the rest of the UK (rUK), utilising the Annual Survey of Hours and Earnings dataset.

Source: Annual Survey of Hours and Earnings

In comparison to the rest of the UK, our approach to Public Sector Pay has resulted in Scottish public sector workers receiving between 4% and 6% higher salaries on average over the last 3 financial years. We expect that to increase once data from 2022-23 is released in 2023.

Private sector outlook on pay for 2023-24

Looking ahead, the Bank of England’s Agents’ pay survey suggests that private sector companies expect wage settlements in 2023 to be similar to those for 2022, at around 6%. Private sector employer benchmarking data of 384 employee groups from XpertHR suggests:

“Private-sector employers awarded a median 3.7% basic pay rise over the 12 months to the end of August 2022. Over the coming year, employers are predicting that pay awards will sit at 5%, 1.3 percentage points higher. The last time XpertHR's headline measure of pay awards in the private sector was at 5% was in the year to the end of April 1992.”

Labour market

The labour market remains tight, with vacancies in Scotland still above pre-pandemic levels. The latest labour market statistics for November 2022 to January 2023 in Scotland show there were 2.7 million people in employment with the employment rate rising by 2.0 percentage points over the year to 76.5% and 88,000 people were unemployed with the unemployment rate falling 0.7 percentage points to 3.1%.

The RBS Report on Jobs for February signalled that growth in demand for staff remained positive (at 54.6 where above 50 represents growth) but had slowed to its softest rate in two years. For businesses seeking to recruit, supply side challenges in the labour market have also continued with candidate availability (labour supply) falling in February (39.6). Alongside underlying challenges of skills shortages and Brexit, recruiters cite the uncertain outlook, cost of living crisis and fear of recession as key factors weighing on the movement of labour.