Some public wages are more equal than others
‘Twenty-five economists have written to George Osborne, urging the chancellor not to give up on his attempts to end national pay bargaining.’
Financial Times, May 18
Beware economists writing letters, that’s what I say.
I know, but in this case they have a point. We have an odd system in this country under which people doing the same job in a different part of the country are paid very different wages. What’s stranger, this inequity isn’t the result of some unstructured, decentralised process: it’s agreed in national public sector pay negotiations.
Eh? I thought that national pay negotiations were designed to make sure that pay was the same across the country, except perhaps for London and the south-east?
I suppose it depends what you mean by “equal”. “Equal” by what measure?
“Equal” by receiving the same amount of money, of course.
Ah, I understand. By the way, I’m thinking of taking on a butler. I wondered if you might fancy doing the job for £1,000 a year.
£1000 a year? What sort of a salary is that?
It’s an excellent salary – for 1950. After all, you said that two salaries were equal if they involved payment of the same amount of money. What I’m offering you is equal to a very good salary: £1000.
But we’re not living in 1950.
I’m confused. I thought you said that two salaries were equal if they involved payment of the same amount of money. What I’m offering you is equal to a very good salary.
In 1950.
But you don’t care about such things. It’s the same amount of money: £1,000.
This is ludicrous. Things were a lot cheaper in 1950.
Of course they were, but you’ve told me that’s just not relevant to you. I disagree; I think that it makes no sense at all to talk about a salary in terms of pounds unless you take into account what those pounds can buy. You can’t eat money, after all – and you can’t live in it, either. £40,000 a year is a nice salary in Hull. It will buy very little in Chelsea. It seems to me we might want to take that into account when we consider what to pay public sector workers.
Are you saying that public sector workers are overpaid in Hull and underpaid in Chelsea?
Possibly, although an even more fundamental question is whether public services in either Hull or Chelsea are able to recruit enough good people to function properly. There’s more going on here than the cost of living – there are other factors that make a job attractive or unattractive. For instance, Hull has found it hard to recruit experienced teachers in recent years, regardless of whether a teacher’s salary goes a long way in Hull. This is yet another reason to negotiate salaries locally rather than nationally.
But if regional pay bargaining raises pay in places like Hull, won’t that merely raise the gap between the underpaid private sector and the overpaid public sector?
Hang on. “The public sector” is not a caste into which people are born. People will move in or out of public service depending on how well it is paid, among many other things. It’s not very meaningful to say that “statisticians are overpaid in Cardiff” or “nurses are underpaid in London”. Much more useful is to recognise that if nursing isn’t competitively remunerated in London then it will be hard to get good nurses. They’ll live elsewhere, or choose different careers.
That’s the theory. Is there any evidence?
There is some – for instance, a study by the economists Emma Hall, Carol Propper and John van Reenen showing that fatality rates in the NHS are higher in areas where staff are paid less relative to the private sector. That seems to be because a lot of staff in high-cost regions are either agency workers or overpromoted as a way of getting around pay constraints.
Wouldn’t cutting public sector pay in Hull merely drain money out of Hull?
Let’s assume that regional pay bargaining would mean lower public sector salaries
in Hull – which is a big assumption. In the short term this would be bad for Hull, but introducing regional pay variation won’t be a short-term project. In the longer term, inequalities in the housing market would probably increase. Services in Hull – restaurants, hairdressers and the like – would suffer because public sector workers would have less money to spend. But local firms competing in national or global markets would benefit because they would have access to smarter workers for lower salaries. In the long term I suspect this would be good for the regions but I don’t think anybody can be too sure of that.
Osborne is just going to use this as an excuse to pay people less in Hull.
Don’t be ridiculous. George Osborne doesn’t need an excuse.
Also published at ft.com.
6 Comments
Mervyn says:
Way back in 1975 I was paid an employment transfer allowance to stay in London after graduating as I originated from “deprived” north Devon, this was in addition to London Weighting. All I can see is that any return to a more regional pay structure will encourage the more mobile to fly to the south-east thus pushing up housing costs etc there and justifying even higher remuneration. Where would it end?
22nd of September, 2012Tom says:
There is very strong evidence, read Christopher Cook in the FT, that teachers in London achieve outstanding results compared to teachers in the rest of the country. What a perfect opportunity to get their wages down and use the money to increase pay in Hull! A knock-on benefit might be to reduce rents slightly in London as teachers in the capital downsized to afford their cornflakes.
This won’t happen. The question is why?
I have my prejudices but I’ll keep them to myself for now but it is those prejudices that make those of us in the North sceptical about regional pay.
22nd of September, 2012Matt Tymon says:
As an East Lancashire born teacher currently residing in West Sussex, I can see the arguments for this case but only by fighting the ‘don’t mess with our pay’ urge that strangely only pops up when the word cut is mentioned and not increase! There are a range of factors that affect where public sector workers choose to work and remuneration is only one factor. Job security, vocation and family ties would be as important in most circumstances and the sector is only as migratory as any other industrial sector only with more outlets available. Regional pay bargaining makes sense to me in West Sussex, but I can imagine those in East Lancashire would be crying unfair. And you are right, Osborne doesn’t need an excuse. How about regional pay bargaining for MPs based on the current location of their common sense and dignity (Andrew Mitchell!).
22nd of September, 2012Gareth says:
The short run assumptions are merely an expression of Keynesian stimulus spending in a depressed economy. In other cases:
1) if public sector budgets remain fixed in Hull, despite the pay cuts, the amount of public spending would remain the same, but could go on different things. Aggregate spending remains the same.
2) if public sector budgets are cuts, we get a reduction in the tax burden on the private sector, e.g. via lower council tax, thus the private sector can spend more, and aggregate spending remains the same.
In fact, Keynesians think multipliers on current spending (wages) are lower than other types of spending, so doing pay cuts and using the saved money on capital spending would increase aggregate demand.
22nd of September, 2012Nick says:
This seems to me to only look at one side of the equation. Increased wages in already high cost areas would increase the unit cost of delivering the service to which they relate. Would we accept that people in those higher cost area would receive fewer or poorer services or would we, as we currently do with the NHS, increase the funding to meet the higher wage bill. If the latter we are in a local inflationary spiral. Fundementally what you have failed to address is what drives such a stark divide in living costs between regions. Regional pay in the public sector will simply reinforce this difference not reduce it.
23rd of September, 2012Another Gareth says:
So if you’re a skilled person in Hull you should stick around when all the restaurants go bust and the busiest shopfront is the jobcentre. When your partner loses their job and ends up underemployed because there’s nothing equivalent within commuting distance. Think of the long run when you can look forward to reduced real wages and all the best staff in your local services being heavily incentivised to move south.
Sorry Tim, you’re not really selling it to me there! The fact that you had to talk about healthcare in London to find a positive rather gives the game away. At least you’re honest about the real motivation and I can’t blame Londoners for wanting the best public servants.
I’m not sure local pay can work without localised tax rates (on individuals and business) and local prices for goods and services (most UK retailers are chains which set national prices). Possibly also local laws on planning, labour, etc. (see US states).
Perhaps the economists are right and the north is beyond help. At the very least net movement of people south should help GDP growth since they’ll magically become ‘more productive’ in financial terms when their pay goes up.
I do worry that this is going to add to the battle brewing between desire to keep growth going in the south-east and the desire never to build anything new within sight of a south-eastern voter’s house! In the long term I don’t see how that can’t be a drag on the economy.
26th of September, 2012