According to a Policy Exchange report highlighted by the Telegraph, public sector workers are 40% better off than their private sector counterparts, if wages are taken on an hourly basis and pensions are included. This is a longstanding claim on the right, used to justify attacks on public sector pay and pensions. The problem is that neither the numbers, nor the narrative, are on the level.

1. The report doesn't compare like with like. Public sector workers are more skilled on average than private sector workers. This has always been the case, but the tendency has been increased in recent years as low-skill jobs have been contracted out, and the public sector incorporates more graduates.

2. Taking into account skill, even the author of a previous Policy Exchange report admits that the pay gap shrinks to a mere 2% for men and 4% for women.

3. Some of the difference arises due to superior bargaining power for unionised public sector workers. A study led by David Blanchflower, a former member of the Bank of England's monetary policy committee, found that this had been increasing in recent years, in part due to the counter-cyclical effects of union-bargaining. The decline in union density in the private sector, not public sector avarice, has reduced the relative incomes of private sector workers.

4. Not all surveys find any pay "premium" for public sector workers. A 2008 survey for Nottingham University finds no significant pay premium for public sector women. In fact, the relative pay of public sector workers has declined since the 1980s, owing to a contraction in public sector investment.

5. Much of the current difference arises because of the slump in private sector pay due to the recession. As the Sunday Times Rich List has recently shown, the rich have rebounded from the recession with an increase of 18% in their wealth in the last year, but the majority of workers are expected to suffer a real terms loss of income for the fourth consecutive year. There is no reason to expect public sector workers to suffer for this. The natural solution would be to improve private sector pay.

6. Public sector pay and employment has a counter-cyclical effect on the economy. At a time of sluggishness in the economy, it makes no sense to target those sectors of the economy that are sustaining demand.

7. There are other advantages to higher median public sector pay, in that it helps close the gender gap, which is approximately 29% in the private sector, compared with 21% in the public sector. The overall tendency is for the public sector to reduce inequalities between different groups of workers.

8. Public sector workers are already facing a pay freeze, beginning this year and lasting until 2013. This is being accompanied by the loss of up to half a million jobs and cuts to pensions which John Hutton, who led a review of public sector pensions, admitted were "fairly modest by any standard".

The Policy Exchange report compounds years of myth-making by the rightwing press and thinktanks, blaming public sector "greed" for a crisis created by the banks. There is little evidence of a substantial pay premium for public sector workers, and no reason at all why it should be considered a social ill.

• This article was amended on 10 May 2011. It originally referred to David Blanchflower as a former governor of the Bank of England, a position he has never held. This has now been corrected