George Osborne’s treasured policy of introducing regional and local pay in public services has always looked like a house of cards, and new evidence published today finally brings it tumbling down. A new report from expert labour market analysts shows that his central justification for introducing the policy is palpable nonsense.
In his 2011 Autumn statement, Osborne claimed regional pay would be
“a significant step towards creating a more balanced economy in the regions of our country that does not squeeze out the private sector.”
He went on to claim that national pay bargaining in the public sector
“. . . hurt[s] private sector businesses that need to compete with higher public sector wages; lead[s] to unfair variations in public sector service quality; and reduce[s] the number of jobs that the public sector can support.”
The short-hand name given to this theory was “crowding out”.
On hearing of “crowding out” most people scratched their heads and wondered. Some tried to think of the last time they’d heard a private sector employer complain about having to compete with the pay of teachers and doctors. Others questioned if public sector pay structures might be less damaging to the economy than, say, draconian cuts or a rise in VAT. But understandably, people assume that the Chancellor of the Exchequer knows what he’s talking about. Even Osborne’s detractors didn’t think he’d propose a major reform of this type without robust evidence to back it up.
And so it was that pay review bodies were sent away to come up with proposals for introducing localised pay structures that would avoid crowding out private sector investment and employment. Right-wing newspapers duly repeated the theory as though it were the gospel truth and Ministers took to the airwaves to do the same. For a short time at least, “crowding out” entered public discourse as a respectable and believable economic phenomena.
Since both the Autumn statement and the subsequent budget, regional pay has begun to unravel. Shortly after the Autumn Statement, UNISON published research which showed that private sector employers that operate across the UK generally use national pay bargaining with London and South East weighting. Or in other words…precisely what the public sector already does. Earlier this year, the TUC published evidence showing that regional pay could cost local economies £10 billion a year. By May 2012, the growing weight of evidence even began to get through to Osborne’s coalition colleagues. The Deputy Prime Minister was moved to give assurances that the government would not “rush headlong in imposing a system from above.” In recent months there have been mixed reports, with some Government sources claiming the policy would be dropped and others that it was sticking by its plans.
But what has never happened is a full, systematic analysis of the Government’s central justification for introducing the policy in the first place. To really kill off this zombie policy for good, we have to kill off the pernicious idea of “crowding out”. Now we have the evidence to do just that.
UNISON commissioned Income Data Services, a highly respected and independent labour market research organisation to investigate crowding out. IDS have now published their report “Crowding out: fact or fiction?” and it makes very interesting reading. Taking the North East and the South West as regional case studies the report systematically debunks the idea that public sector pay determination needs to be localised to enable more competitive recruitment in the private sector.
This extremely detailed and comprehensive report makes the following points about Osborne’s crowding out thesis:
- Public and private sector employers aren’t competing for the same workers. There will be few areas where there is a direct competition for skills between the public and private sectors. For example, In the South West there are 184,000 managers and senior officials in the private sector, this is compared to 35,000 in this category in the public sector. Equally, the public sector employs far more professional and technical workers (like nurses, doctors and teachers) than the private sector. The different sectors are employing different people with very different skills – so nobody is getting crowded out.
- Crowding out theory cannot work when unemployment is high. For crowding out to work, employers would need to be competing over the same groups of workers and those workers would need to be in short supply. The report concludes “The current weak labour market means that there is widespread availability of labour and companies seeking to recruit are finding large numbers of applications.”
- Private sector pay doesn’t vary hugely across regions. Contrary to government claims, private sector pay levels do not vary significantly between regions outside London and the South East. A shop assistant in the South West gets pretty much paid the same as a shop assistant in the North East – just like public sector workers.
- Private sector job creation and job losses appear to be completely unaffected by public sector pay: IDS monitored examples of job creation and job losses in the North East and South West over the course of the first half of 2012. They found no cases of job creation or losses in either region to be affected by public sector pay levels. In their words “It is just not on the radar.”
- Public sector employment isn’t crowding out, its supports the local population. The study shows that levels of employment in the public sector track the level of the local population. The number of nurses, local government workers, teachers and doctors is a reflection of how many people live in a particular area. Far from crowding out their jobs, this supports the education and health of private sector employees.
The Government is still insisting that it is interested in hearing “serious evidence” regarding regional pay. This report from IDS represents the end of any intellectual respectability that “crowding out” theory may have once had.
Given that this is the reason why the government introduced the policy in the first place, it doesn’t get more serious than that.