Wednesday, 21 March 2012

Public sector pay: the Chicken Licken model

As part of the Budget run-up, on Friday Britain’s labour movement was convulsed at the thought of the latest Osborne proposal: that national public sector pay rates might be scrapped.

, before we join the voices of the major trade unions and the TUC who are, understandably, trying to look out for their own interest group, as a party whose interests are not always identical to those of our union colleagues, it might behove us to take a few minutes to take a step back.

Now, while no-one would suggest we should be adopting the Tory Budget wholesale, smart opposition is about determining which bits to oppose. A regional bargaining system would likely increase some pay-rates, as well as decreasing (or failing to increase) others.

And it is surely difficult to argue that the current, entirely inflexible system of fixed national pay rates, which was put in place decades ago in a corporatist state era, is fit for purpose.

First, as the Treasury points out, there are absurd variations depending on where you live. In some places pay rates can be artificially up to 18% higher than their private sector equivalents. And furthermore, applying the only current regional exception to the national system, the addition of London weighting, the system even then visibly fails to attract, for example, enough teachers to schools in inner London because many cannot afford to live there. So some people are still not paid enough. Result: poor levels of public service.

Second, the obvious corollary is that, at the same time, others are overpaid for where they live. As the government points out, the overpayment of public sector staff discourages the private sector from starting up in some areas, meaning that some parts of the country become “public sector ghettoes” where the private sector is squeezed out because it doesn’t want to employ staff at an above-market wage. Result: private sector under-investment.

, really, because PCS’ Respect-supporting general secretary, Mark Serwotka – displaying, sadly, a crushing lack of economic understanding – claims that localising pay rates would institutionalise poverty“. In fact, it is precisely this kind of distortion which can cause a market failure, leading to a lack of jobs altogether. And there’s little that institutionalises poverty more than that.So, in short, some people get overpaid for where they live and some people get underpaid. The fixed national rate distorts the pay rate away from the “fair” cost of living in a region. Pretty obvious stuff really, in that unless the cost of living were uniform across the country – which it is not – this is always going to happen.

The obvious question: is it not, then, sensible, to vary pay rates across regions, as they do in many other countries with not quite as centralised a tradition as ours? Will the
sky really fall in, Chicken Licken? Why exactly should public sector workers be paid the same in the south east and the north west?

There is a third, more difficult-to-accept argument, and it’s this: if this is the right course of action, why did Labour not do it in thirteen years of government? Gulp. Looks like we might have to come clean on this one.

It is truly difficult to believe that no senior Labour figure had ever contemplated this in thirteen years, because it’s common sense. But here we get to the world of realpolitik and the British parliamentary system, which has only limited state funding and relies on funding from outside sources.

We, as Labourites, do not seriously expect the Tories to reform the banks, because…well, it’s obvious, isn’t it? Their funding comes from a number of city sources. True enough. However, the thinking that Labour might just be guilty of influence away from a course of action because of its union funding base is somehow anathema to us. That’s the kind of thing only the wicked Tories do.

Only it’s not true, is it?

So, I put it to you, m´lud, that senior Labour figures might well have contemplated scrapping national pay rates, momentarily. And, on doing so, would have almost as quickly shelved it, because of the political impossibility of selling it at party conference. But that doesn’t mean it’s wrong.

So far, Miliband has been silent on the subject, and Balls has said it would spark “anarchy” in pay rates (although Labour already introduced it in the courts service). Neither, at least, seems to have said it is unfair.

But to come out unthinkingly on the union side is to perpetuate a system which is obviously anachronistic. More to the point, it makes a mockery of our “fairness in tough times” agenda, because the current system patently is not.

Finally, such a position boxes us into looking after our friends in the public sector, deserving though they might be, against the rest of the country, who can go hang. Again. And an awful lot of the rest of the country is non-unionised and works in the private sector. What about those people?

In short, George Osborne has come up with a rather reasonable suggestion and, at the same time, he is inviting us to walk into his trap and oppose it.

Please, Eds, think.

This post first published at Labour Uncut


  1. Thanks - very thoughtprovoking.

  2. You´re most welcome, Sarah. In fact I have very little problem with unions doing what they perceive to be defending their members' interests, as in this case. Where we part company is over things they are *not* paid by their members to do (e.g. supporting unpleasant anti-democrats across the world).

  3. Very useful article, hadn't really thought of all the details in such a way until now. I still think the point stands that lowering pay in, say, the north east and raising pay in the south east goes some way to worsening inequality.

  4. Thanks. Well, it depends on what you mean by inequality: for me disposable income (income less cost of living) is a much better measure than income per se.

    The reality is that there will always be regional disparities in any country. I have no problem with intervening to change this, but think that subsidised investment is a better way than tinkering with pay rates. Problem with tinkering with pay rates is that you can cause a gap between labour supply and labour demand, leading to underemployment.

    Btw, many other countries already have regional pay structures, I don't have figures, but I would imagine the disparities between public and private sector would be significantly less as a result.

  5. As usual the issue depends on the details.

    I will use NHS as an example but the other public sector schemes are similar.

    The present system pays a premium in central London which was tripped from £2k to £6k in the big changes in 2005, out her London saw an increase from £1k to £2k.

    The last change in 2001 befor the major reforms of 2005 was to introduce a weighting of the order of £500 in areas outside London were house prices were more expensive than the cheapest part of London, the logic of which area to apply it to was accepted but it was applied in the discriminatory way of Nurses yes, (it gets good headlines) no to specialist staff in Pharmacy or Radiotherapy were we had a real difficulty recruiting, (it would not have made such good headlines!).

    The new pay system allows payment of premiums if a specific Proffessions is difficult to recruit either nationally or locally, and if it is difficult to recruit all staff in a local area.

    Using those flexibilities will over time increase salaries in the South East in a way the Unions are happy with as they can justify to their members as transparent, but doing it significantly means spending all the money available on those flexibilities, and nothing on pay for those in the North. Doing that when public sector including NHS got less than inflation RPI in 3 years 2008-10, then nothing 2011 and 12, then maximum 1% so a lot less than inflation in 2013. By 2014 another several years of zero increases in the North is not going to be sustainable.

  6. Over the 13 years we were in power, we put in place the most radical resructuring of public sector pay systems since 1948,

    The first priority was putting in a system to protect against equal value law suits, initially brought by unions, but later brought by no win no fee lawyers. That was done in all the different parts of the public sector, with some staff gaining, some losing but being protected for the first few years.

    The Treasury other priority was to put in geographic flexibility, it isas built into all the new pay systems, but the new systems were agreed by 2003-5, it then took till 2007 to transition exiting staff. At this point all things being equal Treasury and employers would have been agreeing to use some of the inbuilt flexibilities and paying extra in the South East, but the reality was Treasury was priority even before full effects of the crash was to rein in public sector pay, and we saw below inflation multi-year deals across the public sector in 2007-10, we have then had a 2 year pay freeze 2011 and 12, followed by a maximum of 1% in 2013, we will have seen 7 years of below inflation pay, the Private sector will have had a hard time as well but different parts of the private sector will have been under pressure at different parts of the 7 years.

    Paying nothing to the North for a few years to spend all available money boosting salaries in the South, will be difficult. Doing it more quickly would mean not holding the salaries in the North at present rates but actually cutting them in cash terms, now that would make the unions go nuts.

  7. Dan, very interesting indeed. I didn't realise it had proceeded so far already. I have no problem with softening the blow or phasing it in over a few years, my issue is simply that, long term, it's unsustainable to insist on national rates when there are such disparities. It distorts the system in a way which doesn't help the economy of poorer regions.

    What should happen is that jobs poor into regions with lower labour costs, which means employment goes up (as eventually do wages). You saw this effect (exaggeratedly) when West German companies poured into E Germany Czech Republic and Poland after the fall of Communism. Problem is for UK, because of wage rigidities like this, they are more likely to go outside the UK than inside it.


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