Some public wages are more equal than others

22nd September, 2012

‘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.

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