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Wednesday 22 September 2010

Six figure salaries and other outliers

Somebody asked me in an earlier comment why I was incensed by the number of people earning over £100,000 in the public sector. Well they are a relatively small number, but they are a number earning salaries out of all proportion to their importance.

Let us assume for a moment (and it is admitedly a poor assumption but it helps us put things in perspective) that the level of pay in the public sector conforms to a normal distribution. Now I will be the first to admit that wouldn't be the case and you could come up with some other statistical distribution, but this works for the purposes of understanding.

Now we know that the public sector wage bill is around £175 billion and there are 6.051 million public sector workers, which means that the average cost of employment is around £29,000. We also know that due to the minimum wage there are no full time equivalent employees earning less than £14,000, so the difference between £29,000 and £14,000 would be about the same as 3 standard deviations, or one standard deviation is about £5,000. Which means that anyone earning more than £100,000 would be about 14 standard deviations higher than the mean, which implies a probability far closer to zero than the observed 38,000 / 6.051m = 0.6%.

Now I am not saying that salaries should be determined by statistical analysis or that they should be consistent with any particular statistical distribution, but it is clear that after the last Labour government there is a considerable amount of kurtosis (fat-tailness) with senior public sector workers choosing to pay themselves on a different scale to the rest of the public sector.

As John Redwood pointed out, in the private sector workers and management generally work to cut costs without whingeing about loss of services to customers if they can't keep their prices up. Would that the same applied in the public sector.

5 comments:

Bill Bell said...

This is somewhat unfair (and the use of statistical analysis in this article is bordering on the fatuous).

If you were to weight jobs by the importance of the role, ie the social significance, size of budget, importance to the national economy, etc, then I would argue that pay at the top echelons of the public sector should be much higher.

The private sector always argues (often following the award of some splendid bonus+pension+golden handshake to some inept former CEO) that you have to pay to retain and attract the top talent. Given the importance of the role of the public sector in the business of running the country, surely the same argument can be made there?

Also, your argument about working to cut costs has some merits but under GB efficiency savings were permanently being squeezed out of the civil service. Your perception is that the civil service is full of fat cats paying themselves vast bonuses and doing fuck all but the primary recipient of the Labour government's later largesse were private contractors (via various development contracts and off balance sheet arrangements), temporary contractors and transfer payments. The civil service has been squeezed by successive governments for some time and it doesn't look like this will stop anytime soon.

Alex said...

The private sector argument about attracting the top talent is patently false because of the relative scarcity of people who are attracted away from the top of big companies - nobody wants to pay more for their services.

The amount that is required to pay somebody is marginally more than they would otherwise demand elsewhere and perhaps less than might be require to some overqualified candidates. hence there should be a continuum of salaries and the idea that some people should be paid many. many multiples of the average is clearly wrong.

I don't disagree that there were some very poor public sector contracts. I know several where the government is paying hundreds of millions or billions more than they should, but there is also a lot of inefficiency left in all levels of the public sector, and many people in the public sector admit it. The suggestion box for public sector cuts was filled mostly by suggestions from public sector workers.

Bill Bell said...

"The amount that is required to pay somebody is marginally more than they would otherwise demand elsewhere and perhaps less than might be require to some overqualified candidates. hence there should be a continuum of salaries and the idea that some people should be paid many. many multiples of the average is clearly wrong."

Indeed, apply the same argument to finance and you come up with a very valid reason why bonuses at banks could be taxed more heavily to enforce restraint (well, at deposit-takers and systemic firms anyway, hedge funds and 'advisers' should be able to pay what they like).

Any chance giving some anonymised examples of those public sector contracts? Apologies for the somewhat vituperative tone of the comments recently but I can't stand it when Tories crow about their achievements, I'm sure you've had a similar feeling about Labour voters for the last decade.

Alex said...

Indeed, apply the same argument to finance and you come up with a very valid reason why bonuses at banks could be taxed more heavily to enforce restraint (well, at deposit-takers and systemic firms anyway, hedge funds and 'advisers' should be able to pay what they like).

I wouldn't disagree with that, except that it depnds on what type of income we are talking about. If if doesn't put capital at risk then any bonus should be outside such a scheme. If traders etc are so good at their jobs they should have no problem raising capital. If they can't that implies they are living off passive tax payer supported bank equity.

Any chance giving some anonymised examples of those public sector contracts?

One very recent example is an advisory group formerly within the NHS that has been outsourced to a consulting firm, taking one third of the staff and performing one third of the work before the outsourcing, but at 3 times the cost, a 90% decrease in efficiency.

Another very well known example is the RAF in-flight refuelling contract, a PFI scheme to supply 13 Airbus A330 aircraft under a 30 year PFI scheme ata cost of about £1billion per aircraft. The problem is that the planes only cost about £100million each even with military avionics and refuelling pods, and they will not be heavily used so the maintenance costs should not be substantial.
I reckon something over 50% of the revenues is profit to the PFI consortium.

Bill Bell said...

I appreciate that the public sector is inefficient in certain respects, but in other respects it is extremely efficient as a result of its size and central planning.

Interestingly, this is how I interpreted Philip Green's paper on efficiency. The government should consolidate its procurement to maximise its negotiating power when purchasing goods. This is an excellent and obvious point, however to execute, would involve further centralisation and bureaucratic resource allocation, which is anathema to the New Labour/Cameronite belief in decentralisation and public sector reform (eg, getting GPs to run their own surgeries).

Why are issues like the RAF in-flight refuelling contract (I've heard anecdotally that the training PFI contract is another risk free fee-fest) not picked up by the NAO? Is there some kind of come back or kicker in these deals that allows the government to renege on particularly egregious contracts?