Local pay in the Budget? A recipe for unfairness and inequality
Over the last few days there have been reports that the Chancellor is considering introducing regional or local pay for some public sector workers in the Budget.
As colleagues have blogged before, public sector pay supports local and regional economies, ensures fairness and transparency and promotes equal pay. Moving away from this to a system that would entrench the North-South divide for generations is unfair, inefficient, makes no economic sense, will increase inequality and is simply not supported by the evidence. A move at this stage would also pull the rug from under the independent pay review bodies, who have already been asked to investigate the question and won’t report until July.
The issue of local and regional pay rears its head every few years under Governments of different persuasions, but usually goes quiet when the complexities and risks are exposed. This time round, the Government fired the starting pistol in the Autumn Statement, when the Chancellor asked the public sector pay review bodies to look at how public sector pay could be made “more responsive to local labour markets”
Four of the independent pay review bodies are currently conducting these reviews , gathering detailed evidence from unions and other stakeholders, and are due to report in July. The TUC has just submitted formal evidence, as have the health unions that make up the NHS staff side.
These reviews don’t cover the whole public sector workforce (see here for more details), but their investigations will gather evidence and views to inform decisions about future policy. Any move to introduce local pay in the Budget – however limited – would be in bad faith, undermining these reviews and the independence of the pay review bodies.
In the TUC’s evidence to the Office of Manpower Economics, which supports the pay review bodies, we argue a series of points.
Our starting point is that paying nurses, teachers and Jobcentre staff less in the poorer parts of the UK is simply unfair. The jobs require the same level of skills and qualifications as they do in wealthier areas, and can be more challenging in low income areas where public sector workers have to deal with the consequences of inequality such as poorer health. Most people would say that it is fairest to pay people for what they do, not where they live.
It is also clear that local pay will damage the economy: cutting public sector pay in the poorer areas of the country will take money out of people’s pockets that they would otherwise spend on private sector goods and services, causing a knock-on effect on the whole economy as demand is choked off in sectors like retail. For instance, if local pay led to a 1 per cent pay cut in the North West, this would take £190 million out of the regional economy – and that is before the multiplier effect on the private sector is factored in.
Far from making it easier for private companies to take people on, it would weaken the economy in the very areas where the recovery is at its most fragile. It is not credible to suggest that the public sector is crowding out the private sector when the latest figures show there are an average of 5.6 unemployed people per vacancy – a figure that is much higher in poorer parts of the UK such as West Dunbartonshire (31 claimants per vacancy) and Middlesbrough (23 per vacancy).
Third, the evidence for local pay does not stack up. Outside London and the south east of England, there is in fact little difference in earnings between regions. Regions tend not to have homogenous labour markets, but to have pay “hotspots” within regions, which are similar to hotspots elsewhere in the country. IDS research based on ASHE data finds that, excluding London and the south east, the median weekly earnings for full time employees in April 2010 only differ by £48 between the lowest and highest paying regions.
Advocates of local public sector pay argue that private sector pay is set in line with local labour markets. In fact, IDS found that big multi-site private employers like supermarkets generally have national pay arrangements with some local additions to reflect the higher cost of living in London and the South East: very similar to the flexibilities that already exist in the public sector. Rather than geography, the main determinants of pay levels are skill level and qualification level, and large private companies often use international rather than local pay data.
Fourth, local pay is inefficient. At the moment it is not clear whether the Government is looking to localise the process of pay bargaining as well as pay itself. If bargaining is localised it will mean replicating the evidence-gathering and negotiating process in thousands of public sector employers, taking up significant time and resources and requiring skilled input. Local managers will either be diverted into dealing with these complex negotiations instead of managing services, or will turn to expensive consultants to provide support, further building up costs… or both.
And actually applying local pay, whether or not it is bargained locally, is fraught with difficulties. Would pay be determined by where someone works or where they live? Would it be measured against local housing costs and if so would it be the rented or owned prices? How would rural areas with higher travel costs be compensated?
There is also a big equality risk to local pay. The current national pay systems such as Agenda for Change in the NHS have been developed with detailed equality-proofing in mind. Localising pay, especially bargaining, could increase the risk of unequal pay and expensive and time consuming equal pay challenges.
Finally, one of the arguments used by supporters of local pay has been that there is a gap between public and private sector pay. We have written about this many times (see here, here and here for some examples), highlighting the differences between the sectors: yes, median pay in the public sector is higher than in the private sector, but that disguises important differences between the sectors: more people have higher qualifications in the public sector (doctors, teachers); the gap between top and bottom pay in the public sector is smaller than in the private sector, as is the gender pay gap; and higher paid people are paid less in the public sector. The real difference is endemic low pay and out-of-control top pay in parts of the private sector.
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