Raises Have Arrived…In the Public Sector

The UK’s National Health Service is the latest public-sector outfit to offer big pay bumps. Will the private sector follow suit?

Ancient prophets once wrote that seven years of feasts would get followed by seven years of famine. These stories pushed the idea that neither good nor bad times last forever. But now reality is mimicking the parables.

For the last seven years, the one million-plus workers in the National Health Service, the U.K.’s state-funded health system, have received just a 1% raise annually. But this month the U.K. government agreed to raise wages 6.5% over the next three years, more than doubling the recent annual increases.

Experts say it’s a sign that the public sector has to become more competitive in the booming economy to attract and retain people. “The government was in a situation where they couldn’t go on with low raises any longer,” says Benjamin Frost, Korn Ferry’s global manager for reward products. If the UK continued the small increases of the past, then there’d be serious recruitment problems for the health service, he says.

Britain’s public and private sector workers haven’t seen much in the way of wage growth. Indeed, since the financial crisis a decade ago, wages haven’t kept up with inflation in many western nations. Employees could begrudgingly accept the income stagnation when there weren’t many open jobs.

But now, with low unemployment and strong economies in much of the West, many public-sector employees look around and see other job options. The NHS itself has recently had a problem with staff leaving in droves, and new recruits aren’t arriving from other parts of the European Union in the numbers they had in the past, Frost says. The labor crunch has become an issue on the other side of the Atlantic, as well. This spring, North Carolina, Arizona, Oklahoma, and West Virginia boosted compensation significantly for teachers after years of negligible increases.

But the size of raises isn't the only noteworthy development; at least in the UK, they are getting doled out in a novel manner, with those who are paid the least money seeing the highest percentage gains. Those at the top may get nothing. Ever since the financial crisis much of Britain’s populace is increasingly concerned with the gap between the least paid workers and those with the heftiest pay packets, says Mark Thompson, Korn Ferry’s Senior Client Partner Reward & Benefits Solutions in the UK and Ireland.

The social pressure to squeeze this pay gap will mean that this year's budget for salary increases will get spent disproportionately on those paid close to minimum wage. That will be true whether they work in the public sector or the private sector. Executive increases will be rarer. “That is the zeitgeist,” says Thompson.