Pay gap widens between public and private sectors

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Growth in public sector pay is outstripping the private sector at the fastest rate for more than a decade, according to official figures yesterday which also showed unemployment has fallen to a 28-year low.

Growth in public sector pay is outstripping the private sector at the fastest rate for more than a decade, according to official figures yesterday which also showed unemployment has fallen to a 28-year low.

Wages for state employees rose at an annual rate of 5.6 per cent in August, more than twice the rate of inflation and the strongest growth since October 2001. It contrasted with a picture of static growth in the corporate sector where wage increases were stuck at 2.9 per cent.

The Office for National Statistics said the gap of 2.7 percentage points was the largest since November 1992 when public pay growth was running at 7.3 per cent.

They are the latest figures to show the wider impact on the economy from the Government's massive investment programme. Recent GDP data showed public sector inflation running at 7.6 per cent, prompting accusations by the Conservatives that Labour was "taxing, spending and failing".

The Government is under pressure to deliver on its multi-billion pound spending increase on public services in terms of visible improvements to health, education, transport and law and order.

Public sector pay growth has been rising for the past 18 months, although the ONS said some of the recent surge in the public sector was influenced by low figures a year ago. Ciaran Barr, chief UK economist at Deutsche Bank, said: "This reflects the surge in public spending and thereby public sector workers over recent years."

According to the latest figures, public sector employment has risen by 181,000 over the last year while 135,000 manufacturing jobs have been axed, indicating the importance of the public sector to the current strength of the UK economy.

Economists from ING Financial Markets said: "While markets debate the likelihood of a 'jobless recovery' in the US and Europe, strong public sector hiring in the UK has provided an important offset to private sector weakness."

Despite the surge in public pay, there is little threat that yesterday's figure will trigger a rise in interest rates. Across the whole economy, growth in average earnings was 3.4 per cent in August, well below the 4.5 per cent that the Bank of England informally sees as the maximum compatible with hitting its 2.5 per cent inflation target.

In fact, with taxes and inflation rising at a combined rate of 3.8 per cent in August, households are suffering a fall in wages in real terms.

Vicky Redwood, an economist at Capital Economics, said: "These figures are another signal that there is no urgency for the Bank to push interest rates up any time soon."

The number of people out of work and claiming benefits fell by 1,900 in September to 929,800, the lowest level for the claimant count since September 1975. This was a smaller fall than analysts had expected and the preferred measure of unemployment that includes all people out of work and looking for work, rose by 5,000 over the three months to August. Total employment fell by 9,000 to 27.90 million.

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