Head to Head: Local pay, Local Growth

October 15, 2012

Recent months have seen a growth in calls for an end to national pay bargaining in the public sector. Ed Holmes of Policy Exchange argues that more localised pay would help re-balance the economy, reduce the deficit and spur local jobs growth.

There are lots of myths around about creating more locally-facing pay in the public sector. We cannot even agree on what it is called (the term ‘regional pay’ is consistently used, despite its being ruled out from the start by the Chancellor). Much of this is built on fear of changes whose specifics have not been outlined yet and it is important we get these details right. Nevertheless, there are several reasons to embrace reform.

The present system of paysetting is not fit for purpose. Public sector staff are largely rewarded on the basis of nationally-set payscales, meaning pay is generally exactly the same for a given type of worker. This causes several problems. One is that it is unfair to families whose cost of living varies widely – around 12.6 percent higher in the South West than the North East, or 13.5 per cent higher than in Wales. In specific roles, failure to reflect local labour markets mean underpayment for some jobs and overpayment for others. Where pay is set too low, academic studies have linked it with high vacancy rates and turnover causing higher fatality rates in hospitals and lower exam results for schools in deprived neighbourhoods. Where pay is too high, there is evidence it ‘crowds out’ the private sector by bidding up wages and making it difficult to recruit good staff. Another issue is that annual pay progression is based on time served rather than performance. To take the example of teachers, the proportion moving up the main payscale each year is nearly 100 percent, despite the theoretical condition of satisfactory performance. This is linked to lower productivity and morale than the private sector (reflected in things like sickness absence). A locally-facing pay system could address these problems.

Trade Unions in particular have argued that a locally-facing system would reduce employment and mean deprived regions would lose out. Were reforms to ensure that public workers were remunerated at the same level as their equivalents in the private sector (accounting for things like age, gender, qualifications, local areas, hours and pensions), we would make a huge saving: some £6.3 billion a year. If this money were simply returned to the Treasury, this could indeed have an adverse impact on deprived areas. These payments have had a big role in making transfers between rich and poor regions and very few would oppose this continuing. The problem is pay is a very inefficient way of making them: largely supporting additional consumption rather than investment which would have a long-term impact on job creation. Our Report, Local Pay, Local Growth, proposes an alternative. To ensure that poorer regions do not lose out, we set out a means of reinvesting the money through job creation and infrastructure projects. This would create at least 288,000 jobs – and in some of the most deprived regions of the UK.

It has also been suggested that more local arrangements would be too complex or expensive. But this need not be the case. Sweden’s national pay system transitioned over several years to a model which is much more responsive at a local and even individual level without being too cumbersome. Effective systems of performance management, budgeting and benchmarking can be adapted from best practice in the UK private sector, where annual performance reviews, performance-related bonuses, ‘spot salaries’ for more skilled staff and absence of incremental uplift all contribute to a much more flexible system. Such reforms cannot be achieved overnight. But by grasping the opportunity now we can begin to create a paysetting system which is fairer, better for public services, employment and the economy as a whole.

This article originally appeared on IPA’s website

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