Public sector workers receive a 10% “premium” over the private sector, said Philip Hammond, who said colleagues should not be leaking cabinet talks.
The chancellor refused to comment on reports he said at a cabinet meeting that public servants were “overpaid”.
Mr Hammond told Andrew Marr the question of overpayment was “relative” but the 10% premium was a “simple fact” once pensions were taken into account.
John McDonnell said Labour would end the 1% cap on pubic sector pay rises.
The shadow chancellor said his party had set aside £4bn on an annual basis to bring pay in line with inflation.
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Pay rises for most public sector workers are set by independent pay review bodies, but have effectively been capped at 1% each year since 2013.
Before that, there was a two-year freeze on pay for all but the lowest-paid workers.
The government has come under pressure over the policy since the general election, with some Conservative ministers speaking out in favour of lifting the cap.
On the BBC’s Andrew Marr Show, Mr Hammond was asked about a Sunday Times report claiming he had said public sector workers were “overpaid” compared with the private sector.
‘Job at hand’
He said he was not going to discuss what was and wasn’t said in a cabinet meeting.
“I do think on many fronts it would be helpful if my colleagues – all of us – focused on the job at hand,” he said.
Mr Hammond said public sector pay had “raced ahead” of the private sector after the economic crash in 2008, and that – when pension contributions were not taken into account – the gap had “now closed”.
But he said public sector employers made “very generous contributions” to workers’ pensions, meaning the public sector “are still about 10% ahead” in terms of pay.