Should public sector workers be going on strike against demographics?

There's going to be some strange scenes over the next few months if the leaders of the public sector unions have their way. You're going to see a lot of people take to the streets to complain about medical advancements and the skills of doctors.

Make no bones about it, the Coalition government want this battle to go ahead. Should there be a strike, David Cameron will get a different human shield than Nick Clegg - the unions. Because whilst there are plenty of issues for which strikes are appropriate, pensions reform isn't one of them.

Because it's not the government's fault that life expectancy has increased by 20 years since the pensionable age was set at 65 (60 for women). It's not the government's fault that at the time the default retirement age was set at 65 one person's pension was paid by 5 taxpayers and now it's less than 2 taxpayers. It's not the government's fault that the unfunded cost of servicing our public sector pension liabilities of £1.2 trillion is now running at about £45 billion a year — in effect a second, hidden deficit.

This was the problem facing Lord Hutton (a former Labour Pensions Minister) when he was asked by the Coalition government to lead a Pensions Review. Last week the chief secretary to the Treasury, Danny Alexander, took up most of Hutton’s proposals by announcing that the retirement age of public sector workers — other than those in the army and the emergency services — will rise from 60 to 66, and that state employees will on average have to pay 3.2% more in pension contributions.

However, this change will not be applied to workers on less than £15,000 a year, and those earning less than £18,000 will have their additional pension contributions capped at 1.5%, so the usual appeals to compassion cannot be easily made. 

What's more while no existing public sector employees will lose any accrued rights — that would be both illegal and immoral — final salary pensions will gradually be replaced by those based on career-average earnings; but the most valuable aspect of the traditional public sector pension — that it will be index-linked and guaranteed by the exchequer, no matter how high future inflation rates — will remain.

Historically, these gold-plated pension plans, along with shorter hours, longer holidays and greater job security,  have been compensation for the lower salary one could expect in public service compared to those of equivalent rank or skills in the private sector.

However, 13 years of Labour rule saw public sector pay increased to the extent that recent research by the Policy Exchange think tank, based on figures from the Office for National Statistics, shows there is now a significant premium in pay for taxpayer-funded workers, whether measured by both mean and median annual salaries, or by typical hourly wage rates.

When you add the value of an index-linked final salary pension, the employment market is further distorted. Last year the Public Sector Pensions Commission, after a nine-month investigation, concluded that “the true value of the [unfunded] ... public sector scheme ... is over 40% of salary”. In other words, in order to acquire the same benefits in retirement, a private sector employee would have to pay 40% of his salary in contributions (his employer certainly won’t).

It's important we look at this further. Britain has a workforce of around 30 million workers. Around 25 million of those work in the private sector with 5 million the public sector. The average private sector employee has a pension pot of around £30,000 which is enough to buy an annuity on retirement at 60 of £900 a year.

So when Mark Serwotka, the leader of the Public and Commercial Services Union (PCSU) tries to attract our sympathy by pointing at the average pension of £6,000 a year that his members earn, bear that £900 a year figure in mind. Also remember that to get £6,000 a year means a pension pot of around £200,000 a year on the open market. The taxpayer has to provide that pension pot.

The question is, if the PCSU members (and, I have to say sadly, the teachers union members), won't pay the full market cost of their pensions, why should the nation's workforce, most of whom will not be benefitting from it, do so instead?

As I said earlier, there are many issues that  public sector workers could strike about. Job losses is one thing. Working conditions may be another. Teachers could walk out in protest at proposed cuts in educational provision. But instead the first strike may be about pensions reform. This is a massive mistake, and Ed Balls, the shadow chancellor, is spot on by saying that the Coalition government would rub their hands with glee if the public sector workers went on strike for this reason, as they would be able to claim the unions are harming the economic recovery, not the Coalition's policies.

Serwotka has tried out the familiar routine of declaring it it immoral that their members should pay for the consequences of a crisis caused by the idiocies of overpaid bankers. But they could throw all the bankers into the sea and not solve the pensions crisis.

Private companies have long ago stopped final salary pensions for their employees, as they would make them bunkrupt. With pensions, the government can't get trapped into promising its employees more than it could possibly recoup from the taxpayers.

There are two ways to solve the pensions crisis. Stop people living longer by turning back medical advancements and possibly well targetted euthanasia. Or we can get real and cut down the gap between the contributions public sector workers make to their pensions and how much they receive in income from their pensions.

Which one makes sense? Even though it reduces my own income in retirement, I know the answer.

The dismal science of getting disabled people into the workplace

It's hard to find a better reason why people call economics the "dismal science" than the fact that when Philip Davies MP says that disabled people should work for less than the minimum wage to increase their chances of being taken on by employers, he is backed up by economic theory.

In case you didn't know, here is Davies quoted directly on Thursday 16th June in the House of Commons:

"If an employer is looking at two candidates, one who has got disabilities and one who hasn't, and they have got to pay them both the same rate, I invite you to guess which one the employer is more likely to take on. Given that some of those people with a learning disability clearly, by definition, cannot be as productive in their work as somebody who has not got a disability of that nature, then it was inevitable that, given the employer was going to have to pay them both the same, they were going to take on the person who was going to be more productive, less of a risk. My view is that for some people the national minimum wage may be more of a hindrance than a help.If those people who consider it is being a hindrance to them, and in my view that's some of the most vulnerable people in society, if they feel that for a short period of time, taking a lower rate of pay to help them get on their first rung of the jobs ladder, if they judge that that is a good thing, I don't see why we should be standing in their way."

Reaction to this statement has been fierce. The Conservative party quickly distanced themselves from them and  Labour's Anne Begg, chair of the work and pensions select committee, called the remarks "outrageous and unacceptable", saying they showed "what a warped world some Tories....inhabit."

Yet, if you study basic Labour market microeconomic theory, you will know that Davies has a point. It sates that an employer, when deciding whether or not to take on a new employee will look at two numbers. One is the wage that person demands (the marginal cost of the unit of labour) and one is the monetary value of the goods or services that person provides (the marginal revenue product of the unit of labour). Should the latter be greater than the former, then they will employ that person. Should someone with a disability not be as productive, they are less likely to be taken on.

In the example Davies gives, a rational (in economic terms) employer, faced with two candidates, one with disabilities and one without, to whom they would have to pay the minimum wage, will choose the candidate who will be the most productive, as that is the only way to compare them, unless one of them accepts below the minimum wage, which they are not allowed to do.

I imagine Philip Davies will feel this is a similar argument to those who feel that maternity laws are making it less likely that a woman of child bearing age will get chosen for a job over other people, given the assumption is made that in the short term they may be less productive. Effectively, the argument goes, maternity laws are more of a hindrance than a help.

Davies believes he has some supporting evidence - he said he had talked to people with mental health problems when he met recently with the charity Mind, and he said they agreed with his analysis.

But that's because his analysis is basic microeconomic theory, and basic microeconomics is a science, and a dismal science at that. Because Davies has missed the point about what the National Minimum Wage is for.

The National Minimum Wage (NMW) is about dignity. It's about being paid a decent wage for the work you do. The reason it was necessary is that basic economic theory suggested that the equilbrium wage (where demand for labour meets supply of labour) should be paid and sometimes that equilibrium wage was so low that it was impossible to live off it. So a minimum wage had to be set above that equilibrium


The NMW also aimed to solve another problem, which was that of the "unemployment trap". In basic terms if the benefits you get are more than, equal to, or not much less than what you would get paid in work then you may as well stay unemployed and get paid to do nothing. So the NMW was seen as a "supply-side" policy as it incentivised people to join or rejoin the workforce.


Someone who is registered disabled will get disability benefit, and the wage they would earn in employment really needs to be far enough above the benefit to make it worthwhile for them to take a job.

Where Davies has a point though is that sometimes it's about getting that first foot on the job ladder and proving yourself. Many young people are sometimes prepared to work as "interns" for free for as long as a year to get themselves on the job ladder (even though that's normally funded by the 'bank of mum and dad'). Davies is suggesting that those with disabilities may want to be free to do the same without an employer breaking the law.

Recently, the Associated Press raan a story about the Ohio legislation that does exactly what Davies is suggesting. Despite the vitroilic reaction, the mother of an autistic man working for below minimum wage in Ohio said that her son's new job "allows him to have a purpose in life....he has a place to go and a reason to get up in the morning. I don't care about the money."

Also, a single adult under the age of 24 is entitled to benefits of around £70 a week, but the minimum wage would give him more than £200 a week. We talk about the need to be a significant difference between benefits and the lowest wage, well this may indicate that there is. So should the state be not allowing those who wish to earn say £140 a week (double benefits earning) to do so?

My point is, like most ideas in economics, there are two sides to this story. Despite the insults and rage Davies invited, should we really be dismissing his analysis out of hand?

In these times of mass unemployment do we not want as many people as possible in work? In this time of a massive deficit would we not prefer people in jobs earning and paying tax to people not working and paying benefits?

If so then we really should look at every option seriously, however unpalatable. Even though I will admit this one is particularly unpalatable.