Since late 2021, inflation in the UK has risen to a level not seen in 40 years. With incomes failing to keep pace, this has led to a fall in real incomes. This has led to calls from trade unions for the government to increase public sector wages in line with inflation to protect real earnings. This explainer outlines how public sector pay is set.
The public sector consists of all workers employed by the state – whether central government, the devolved governments, local authorities or other government agencies and public bodies. But it excludes organisations such as museums and universities which receive significant taxpayer funding and are often viewed as public services but are private sector organisations.
The number of people employed by the public sector decreased by nearly 8% from the peak in absolute terms in 2009 to 2016. The number then started to rise again, thanks to the demands that Brexit and covid placed on the public sector. There are now just 1% fewer people employed by the public sector than there were in 2009.
However, public sector employment as a proportion of all people working has remained on a slight downward trajectory (fractionally increasing during the pandemic) because of faster employment growth in the private sector.
However, these overall trends mask significant variation in employment trends within the public sector. The NHS employs 23% more people than it did in 2009 for example. By contrast, the armed forces are around 20% smaller and local government has shrunk considerably too, having lost around a third of its workforce – almost a million employees – since its peak in 2009.
The total public sector pay bill was around £220 billion in the 2020/21 financial year – with central government pay costing about £150 billion and local government about £70 billion.  Public sector pay accounts for around a quarter of all government spending. 
Trade union membership – and collective bargaining, when employee pay and conditions are agreed in negotiations between employers and trade unions – is higher in the public sector than the private sector. However, the proportion of workers in both sectors who belong to a union has been in steady decline for many decades. In 2021, only 12.8% of private sector employees and 50.1% of public sector employees were members of trade unions – both record lows. Trade union membership peaked in prevalence in 1979, when 52.4% of those in employment (or 13.2 million people) belonged to a union.  This proportion declined steadily thereafter, reaching 21.7% (or 6.9 million people) in 2016. 
Pay review bodies
The government ultimately decides the level of public sector pay (or in the case of public services such as the NHS which are devolved, the devolved governments set their own arrangements). However, there is a lengthy process – involving independent pay review bodies – that informs the final government decision.
Around 45% of public sector staff are covered by pay review bodies. These cover: most NHS staff, including doctors and dentists, the armed forces, prison staff, teachers, the police, the National Crime Agency, and senior public officials. The latter includes judges, senior civil servants, senior members of the armed forces, senior police officers, and the most senior NHS managers.
Pay review bodies all follow a similar procedure when advising the government on pay. First, the relevant secretary of state issues a remit letter to the pay review body covering sectors overseen by their department (so the home secretary would cover the police and National Crime Agency remuneration review bodies, for example). Normally, secretaries of state will use their remit letter to formally request recommendations on employee pay and ask pay review bodies to consider certain objectives such as affordability, recruitment and retention and the state of the wider labour market. When the government has an overarching public sector pay policy that overrides the pay review bodies process (see below), secretaries of state will ask for the views of the pay review body on how to implement this overarching policy.
Following this, pay review bodies then receive evidence from a range of sources, such as trade unions and employers on issues relating to pay and retention. At this time, the government also submits its formal pay offer. This is a detailed series of proposals on the future level of pay for specific groups of employees. For example, HM Prisons and Probation Service’s submission to the Prison Service Pay Review Body for the ongoing 2022/23 pay round contained 12 separate proposals covering all staffing grades, increases in grades, restructuring of pay bands and allowances.
In light of this evidence, pay review bodies then make a recommendation to the government on the level of pay. The UK government determines when it will respond to and publish the reports of pay review bodies.  Secretaries of state usually respond to pay review body recommendations through issuing a written ministerial statement in parliament.
The recommendations of pay review bodies are usually accepted by the government. However, there have been times when the government has over-ridden their recommendations – for example, imposing public sector pay caps or even freezes. Public sector pay was frozen for two years from 2010 for all but lower-paid staff and awards were limited to an average of 1% between 2013 and 2017. Public sector wages were frozen during the 2021/22 pay round due to the coronavirus pandemic, meaning public sector workers received the same pay in 2021/22 as in 2020/21. The only exceptions were those earning less than £24,000 a year, who were guaranteed a pay increase of at least £250, and NHS workers.  Remit letters sent by secretaries of state to pay review bodies took account of this and asked for advice on how to implement the £250 rise for lower paid workers.
Other pay settlements
The situation is a little different for public sector workers who are not covered by pay review bodies.
For civil servants not in the Senior Civil Service (who are covered by the Senior Salaries Review Body), individual departments set the pay of their officials, according to guidance issued by the Treasury and Cabinet Office.  Bonuses (known as non-consolidated performance payments) are awarded annually to staff based on their performance at an individual, team or organisational level. 
Local government staff (with the exception of schoolteachers) are also not covered by pay review bodies. Decisions on pay for these workers are agreed between employers and trade unions through the National Joint Council for Local Government Services. 
The devolved governments set pay policy for public bodies under their control.
In the 2021 spending review the chancellor announced that the independent pay-setting progress would resume following the pandemic related pay pause and pledged that “public sector workers will see fair and affordable pay rises”. 
Recommendations from pay review bodies are expected in summer 2022, which will inform pay rises for the 2022/23 financial year. As the pay review bodies do not report until after the financial year has started (which is in April), any pay increases will probably not be implemented until the autumn but will possibly be backdated to the start of April.
Historically, public sector workers earned more than workers in the private sector of the same age and with the same qualifications – this is known as the public sector wage premium. However, since the financial crisis public sector pay has risen less quickly than private sector pay on average, thanks to the pay restraint policies implemented by the coalition government and subsequent Conservative governments. ONS analysis in 2016 found that public sector workers actually earned 1% less than private sector workers, adjusting for age, occupation and job tenure. 
Over the last year private sector pay growth has significantly outstripped that in the public sector. Total pay (that is, including bonuses) across the economy as a whole was 6.8% higher between February and April 2022 compared to the same period in 2021. However, public sector pay increased by only 1.5%. 
The ability of departments to increase public sector pay is limited by the funding they receive from the Treasury. Departmental budgets are currently determined by the settlements each received in the autumn 2021 spending review. The Treasury has indicated that no more money will be made available for pay, despite inflation having risen more than was anticipated at the time of the spending review.  Higher inflation since the autumn means that departmental day-to-day budgets (half of which goes on public sector pay) are now set to increase by 2.9% in real-terms over the three-year spending review period (rather than the 3.3% increase that was expected in October). If departments increase public sector pay more quickly than they had been planning when budgets were set in October, then that would reduce spending available for other aspects of service delivery.
The OBR forecast in March that nominal wages across the economy as a whole would increase by an average of 5.3% this year. This gives a rough indication of what pay increase public sector workers could receive if they left their jobs for the private sector. If departments do not match pay increases with forecast wage increases across the economy as a whole then this could exacerbate recruitment and retention problems – a point acknowledged by the government itself in submissions to some pay review bodies.
Trade unions are also putting pressure on the government to increase wages in line with inflation. Forecasts of inflation have been continuously increased this year as the below chart shows. The Bank of England expects inflation to peak at 11% in October when the energy price cap is next updated. Given the government’s stance on pay, it is very unlikely that public sector workers will receive pay increases that will match inflation.