Public service employment and the public-private wage differential in British regions

Successive forms of regional policy in the UK have sought to support the maintenance and creation of public sector employment opportunities in relatively disadvantaged regions. Nationally negotiated public sector pay rates mean that the private-public pay gap is likely to be wider in lower demand regions. This will be reinforced by the relative absence of private sector employment crowding-out in such higher unemployment regions. This paper investigates the association between private and public sector service employment using panel data for British regions, and estimates regional public-private wage differentials using British Household Panel Survey data for 1991 to 1996. Across Britain, private sector employment growth is weakly positively associated with higher public service employment growth, but the association is stronger in Scotland and the North of England. The pattern of regional wage differentials found is consistent with lower crowding-out in higher unemployment regions. This suggests that regional government employment policy can have beneficial effects, providing there is sufficient segregation of private and public sector labour markets to ensure that higher pay in public sector service jobs does not undermine the labour market competitiveness of private sector employers.