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Levelling Down: The Distributional Consequences of Public Pay Caps

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  • Matthew Nibloe

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.

Suggested Citation

  • Matthew Nibloe, 2025. "Levelling Down: The Distributional Consequences of Public Pay Caps," RFBerlin Discussion Paper Series 2547, Rockwool Foundation Berlin (RF Berlin).
    • Handle: RePEc:crm:wpaper:2547
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    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J45 - Labor and Demographic Economics - - Particular Labor Markets - - - Public Sector Labor Markets

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