The Macro-Economic Implications of Changes in Public Service Pay Rates

The benchmarking process under the Programme for Prosperity and Fairness (PPF) was undertaken over many months, with the final report being completed in June 2002. This report recommended additional increases in public service pay that would amount in total to an 8.9 per cent increase in the public service pay bill. This note outlines the likely effects of such increases in wage rates in the public sector on the wider economy. These increases come on top of a rapid increase in wage rates in both the public and the private sector in recent years. The background against which these increases must be viewed is discussed in Section 2. The increases can be expected to affect the economy through a range of different channels, discussed in Section 3. The assumptions underlying this analysis are outlined in Section 4. The quantification of the relative importance of the different channels is undertaken in this paper using the ESRI's HERMES macro-economic model. This model allows the simulation of a range of different scenarios to test the sensitivity of the results to different assumptions. In Section 5 we consider the macro-economic implications of an increase of 8.9 per cent in public service pay. Because of the uncertainty that surrounds any such quantification, we consider the sensitivity of these results to varying a key assumption concerning the way the recommendations were arrived at. Finally, in Section 6, we draw some brief conclusions.