The Staggers

The New Statesman’s rolling politics blog

Four questions Osborne must answer before introducing regional pay

Why has the Chancellor jumped the gun of an independent review?

By Ed Cox Published 18 March 2012 11:15

Why has the Chancellor jumped the gun of an independent review?

The budget leak about introducing more localised pay-setting for civil servants in a number of government departments is not a great surprise. The Treasury has been toying with regional pay issues since the IFS reported that earnings are 10 per cent higher for men and 15 per cent for women in the public sector in Wales, Scotland and Northern Ireland.

What is surprising is that such an announcement should pre-empt the findings of the Independent Pay Review Bodies' review, commissioned by Mr Osborne, which is due in July. If the Chancellor is to jump the gun in this way then he needs to address four big questions.

1) Is there evidence that public sector pay rates have a direct effect on private sector wages and job creation in regional economies?

While few dispute evidence of a pay gap, changing the current system would appear to be based upon the principal assertion that high public sector pay rates in weaker local economies are making it difficult for private sector companies to recruit staff. It is not difficult to find disgruntled employers who are prepared to endorse this line of thinking but policy by anecdote is a dangerous business and there is no substantive evidence that this is the case.

What limited evidence there is on the impact of public-private pay gaps - an LSE report on the impact of pay differentials on hospital performance - highlights pay effects on depressing performance in high wage areas, but this is an altogether different argument.

2) Will the pay gap will close without further government intervention?

In his first budget as Chancellor, George Osborne announced a public sector pay freeze which he has subsequently extended to last over three years. In preliminary analysis carried out by IPPR North, this in itself would appear to be sufficient to close the gap by 2015. If the government needs to embolden its approach then it must provide evidence that additional measures are needed above and beyond the pay freeze already announced.

3) Has the Chancellor screened out a raft of unintended consequences?

Perhaps the greatest concern about reducing public sector pay is the risk of depressing weaker economies still further. The government's argument that public sector jobs were crowding out the private sector is looking increasingly flawed as Northern economies experience a double dip jobs recession and unemployment touches 10 per cent across the North.

In fact, public sector cuts have hit the public and the private economy hard and what is needed is stimulus not further constraint. Furthermore, squeezing pay risks a race to the bottom which ultimately undermines productivity and reduces the competitivity of Northern economies exacerbating the North-South divide.

4) If localising pay is such a good idea, then why are private companies doing the reverse?

In one of the more interesting interventions on this debate, the Incomes Data Services have produced a report looking at the use of regional and local pay by the private sector. They find that the only real regional pay variations that exist are between London and the South East and the rest of the country.

Furthermore, aside from housing costs in the Greater South East, the cost of living across the country is converging. For this reason, most large national and multi-national private sector companies are moving away from complex regional, zonal and local pay structures which breed resentment and reduce productivity, in favour of simpler systems which top-up London pay.

If the Chancellor is serious about stimulating growth in less prosperous places then perhaps he should look to grow investment and productivity outside London rather than precipitate a race to the bottom in places that are poor enough already.

Ed Cox is Director of IPPR North

Tags: Budget 2012

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21 comments

Sun, 2012-03-18 17:27 — Lucidus (not verified)

One example was public-sector wages in Wales were 18% above comparable private-sector jobs. Assuming that private-sector wages locally kept pace with inflation of 2% p.a., the public-sector wages would have to be frozen for eight years before they came to the same level. Of course, if private-sector wages didn't match inflation then it would take even longer.

I can't see that wage freezes for such a long time would be sustainable.

Sun, 2012-03-18 19:32 — Natacha Kennedy (not verified)

I live in London and work in the public sector. My salary is well below those of comparable private-sector employees. By Osborne's logic I should receive a substantial rise in pay.

Mon, 2012-03-19 17:15 — frances smith (not verified)

@steve lockett

if you look on right move you can find a three bedroomed house, with garden, for £140,000 in harlow.

that is comparable to anywhere else in the country. and it has a regular train service to london.

stop whinging about high house prices in the south east, you can't all live in notting hill.

Sun, 2012-03-18 20:13 — Brian Thomas (not verified)

It is nothing more than a very very cynical policy to divert the best Doctors/Teachers/Nurses to those areas of the country that can afford to pay the highest wages while those who can't will suffer a greater paucity of capable services.

Absolutely disgusting and is the most open attack on the public sector yet and the services that they provide.

Sun, 2012-03-18 20:50 — Graeme Hancocks (not verified)

In my working life I have worked for:

Large private organisation for 12 years (including abroad).
For large public sector organisation (NHS) for 19 years.
For myself as self employed for last few years.

All have had their positives and negatives, upsides and downsaides. But generally the most positive - finacially and emotionally rewarding - has been working for myself. The hardest - the least rewarding finanically and emotionally - was the public sector.

I really feel for those who work in the public sector who being demonised by this government.

Sun, 2012-03-18 20:52 — Mr Danger

"I live in London and work in the public sector. My salary is well below those of comparable private-sector employees. By Osborne's logic I should receive a substantial rise in pay."

Yes that is what Osborne thinks.

"It is nothing more than a very very cynical policy to divert the best Doctors/Teachers/Nurses to those areas of the country that can afford to pay the highest wages while those who can't will suffer a greater paucity of capable services."

Utter nonsense. The point is to have pay reflect cost of living, i.e. to equalise pay.

Sun, 2012-03-18 21:26 — Fraziel1

@brian benjamin, me thinks that you talk shite.When people talk about public sector pay being higher than private that DOES NOT INCLUDE CIVIL SERVANTS!

Just to be clear for the right wing twats on here, the average civil service salary in 2010 was under 18k a year. let's just repeat that. UNDER 18k.

The average uk salary is approx 25k. Other public sector workers are paid more than private but not civil servants who are very poorly paid. This is a thatcherite policy that will keep areas of low pay and high unemployment from ever improving their lot.Osborne is doing it to dilute union power and to pay already low paid people even worse salaries.He will have a massive fight on his hands. However i do wonder if all those civil servants will get a big pay rise seeing as their pay compares so poorly to the private sector and other public sector workers.yet another reason to vote for independence in Scotland.

Mon, 2012-03-19 19:42 — Hugh Markey (not verified)

Someone a long way back said of the English that they like to hear nothing more than they are ruined.

Osborne has discovered the UK subject is still amenable to a little masochism.

Photo Op

Sun, 2012-03-18 22:13 — Mr Danger

"Just to be clear for the right wing twats on here, the average civil service salary in 2010 was under 18k a year. let's just repeat that. UNDER 18k."

I just read on the Public and Commercial Services Union website that it is £22,850. And that's unadjusted for the generous pensions.

Sun, 2012-03-18 13:17 — REPay (not verified)

IPPR North...regional pay is the logical result of nationally unfunded public sector pensions, the need to pay key workers more in the expensive south east, and to rebalance the economy from the Eastern Bloc levels of state employment in the Labour heartlands. Remember the days when 25% of the workforce in Liverpool lived of the Corporation. Dou your IPPR colleagues at HQ get London weighting?

Tue, 2012-03-20 16:31 — Bill (not verified)

Never mind the percentages for the time being, and check out the Dorset Echo. Those fools are having the money picked right out of their pockets by unelected criminal council pen-pushers.

Mon, 2012-03-19 21:53 — Arthur Williamson (not verified)

This is just a tactical move by the Tories to suppress the pay for ALL public sector staff throughout the country.

First, they look at regions such as the North of England, Wales and Scotland, then argue that the cost of living there is significantly cheaper than London and the South East, therefore public sector staff in the cheaper-to-live areas should endure pay restraints.

Next, the Tories wait a few years, then look at the variations in pay, and the verdict will be something like...."it`s not fair to see the public sector staff in the North East of England working equally as hard as their counterparts who live less than 200 miles south, yet those who live further south are earning significantly more in salary". Consequently, the Tories decide the public sector staff in the South will take in turn in suffering pay restraints.

Mon, 2012-03-19 00:58 — M.Cleary (not verified)

I think something to bear in mind here is that irrespective of whether the policy is fair and makes economic sense (which overall it probably is and does), it is going to have a disproportionate effect on areas of the country like the North-East which depend heavily on the public sector for jobs. These areas are already experiencing slower growth rates and higher unemployment than London and the South-East; were this change to go through now, this change would only serve to exacerbate these problems.

Sun, 2012-03-18 13:44 — BRIAN BENJAMIN (not verified)

The SOCIALIST/COMMUNIST CABAL of blaire/brown,

created so many, at least 1,000,000 plus,

of NON-JOBS, that is jobs in which there is no perceivable benefit, other than to the 'NON-WORKED-FOR-PAYPACKET' receivers.

my head-of-dept-social-security/pensions-preston friend.

states THAT 50% OF HIS OFFICE STAFF, COULD STAY AT HOME MONDAY TO FRIDAY, WITH NO DIFFERENCE BEING MADE TO THE OUTPUT OF THAT OFFICE.

WHAT PRIVATE RUN COMPANY COULD SUCCEED WITH A 100% OVER-STAFFING RATIO.

The socialists, allowed the RUTHLESS BANKERS/MONEY BARONS, VIA THE VARIOUS ''EMPLOYING-COMPANIES'' TO EXPORT MILLIONS OF JOBS TO THE 'SWEATED-LABOUR-FACTORIES' OF THE 3RD WORLD.

AND IT WAS ''THE EVIL-TWIN' BROWN, WHO REMOVED THE WATCHDOGS, ON THE BANKING SYSTEM, AS A FIRST ACT OF HIS OFFICE IN 1997, AND WE HAVE SEEN WHAT HIS REULTS HAVE BEEN,

RUINATION AND POVERTY FOR THE ENGLISH AND THEIR ECONOMY.

WHY IS HE, NOT DRAGGED IN FRONT OF PARLIAMENT, AND MADE TO EXPLAIN HIS OUTRAGEOUS BEHAVIOUR

TO MAXIMISE BOTTOM LINE COMPANY PROFITS.

not only are there too many NOT-SO-CIVIL-SERVANTS, but they are paid far to much money in salary and benefits

Mon, 2012-03-19 09:26 — Bill (not verified)

Remember a job lost from the civil 'service' is money saved for the country, and anybody who pays council tax is part of the problem.

How on earth have the least useful people in the country managed to get the best pay and a job for life. I don't know why these people think they are special, probably a defence mechanism; but this job for life nonsense is destroying the country. Give a twit a job and let them proceed with impunity in
an organisation which has honed it rules in their favour over many decades so that nobody is ever to blame for anything.
Civil servants need to learn from their mistakes. Denying that they ever make a mistake does real harm. Look at those parasites in Corby
who will not admit that toxic waste harmed those children. I ask you, what scum could behave like that. And this slime is supported by a legal system that has no mechanism for weighing probabilities. Not surprising as the laws of logic were only laid down in 1854, and the legal system has based itself on precedent since the dark ages.

Mon, 2012-03-19 11:24 — Steve Lockett (not verified)

Furthermore, aside from housing costs in the Greater South East, the cost of living across the country is converging.
EXCEPT FOR HITTING AN ICEBERG,THE TITANIC'S MAIDEN VOYAGE WAS A SUCCESS.

Mon, 2012-03-19 11:49 — The Law (not verified)

The policy will be economically insignificant for at least two years since the top increase for any pay band is 1%. Unless they cut rates (not going to happen) or increase for some areas (not going to happen) the differentials by the end of this Government's term will be minimal and not help create any jobs. Just sounds like more public sector bashing.

Mon, 2012-03-19 12:19 — Bill (not verified)

Why are there so many Labour politicians based in the legal 'profession'. Now I know solicitors can speak and have good memories, but a lifetime of following man made rules which often defy logic, will ossify anybodies brain.

If the law made any sense why isn't it repeatable and predictable. Probable because it is an anti-science, and in fact a form of voodoo designed to impress without being able to stand close scrutiny. Einstein once said that if a person can't explain a thing a plain English, they don't really understand it. This is true of both bureaucracy, and any legal system that is based on precedent.

Thu, 2012-03-22 01:17 — Fraziel (not verified)

@ Mr Danger, you could not have read that as it's not true. post the link.The vast majority, in the hundreds of thousands, of civil servants are in the AO grade and the max salary for anyone on an ao grade in DWP ( by far the biggest department)is currently under 19k. Salaries start at about 14k.

Thu, 2012-03-22 01:25 — Fraziel1

I stand corrected. its below 18k for admin grades and £22k over all. Still over 2k less than private sector average. here is the link.
http://www.pcs.org.uk/en/news_and_events/facts-about-civil-and-public-se...

Sun, 2012-03-18 16:16 — Indu Pendent (not verified)

"then why are private companies doing the reverse"

Private sector businesses move jobs to the most competitive location. Given the weak job market in Wales relative to London, it shows Welsh people are too expensive to employ. A hard but true fact.

@Ed Cox

You need to finish the sentence...
"private companies doing the reverse but are moving jobs to the most profitable locations. The high cost of Welsh labour makes the region unattractive for business"

Labour could have taken a long term strategic view and established Wales as a key administrative data processing region. It is beautifully located at the end of the M4 corridor - the state could have established processing functions for public sector work but these functions could have then sold on services to the private sector. There is no reason why British companies supported by a progressive government can not compete with India.

Instead, the last government inflated the public sector costs and made any kind of public/ private joint venturing unworkable - it has destroyed jobs in Wales and in the UK.