Levelling Down: The Distributional Consequences of Public Pay Caps

Matthew Nibloe

No 2547, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

Abstract: Between 2010 and 2017, nominal wage growth in the UK public sector was capped at 1% for all workers earning above £21,000-the median annual salary in 2010. This paper examines the distributional consequences of this policy. We show that the cap reduced the return to observable characteristics in the public sector, coinciding with an 80% reduction in the public-private sector wage premium. Our counterfactuals suggest that the economy-wide hourly P90-P50 ratio would have been 3.5 percentage points higher had public sector returns to characteristics moved in line with the private sector. Since public workers are disproportionately female and concentrated in the North of Britain, the policy substantially increased both the gender pay gap and the North-South divide. Over the same period, the public sector experienced relative declines in the share of degree-educated workers, prime-age workers (aged 26-55), and high-skilled managers, further suppressing wage growth.

Keywords: Austerity; Public Sector; Pay Caps; Inequality; Brain Drain (search for similar items in EconPapers)
JEL-codes: J24 J31 J45 (search for similar items in EconPapers)
Date: 2025-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.rfberlin.com/wp-content/uploads/2025/07/25047.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:crm:wpaper:2547

Access Statistics for this paper

More papers in RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin) Contact information at EDIRC.
Bibliographic data for series maintained by Moritz Lubczyk () and Matthew Nibloe ().