Growth and locally-facing public sector pay

Oct 1, 2012

George Osborne’s efforts to make pay in the public sector more locally-facing are in difficulties. From Conservative MPs fearing their constituencies would lose out in terms of public spending to trade unions vigorously contesting any reform effecting national pay bargaining, it might seem easier to abandon the whole project.

This would be to waste a big opportunity, however. Pay in the public sector is a major issue for the labour market, the economy and public services. When we talk about the state of our local school or hospital, or high unemployment, rarely is it mentioned that most of the budget of that school or hospital will be spent on employing staff, or that in some areas more than 40 percent of the workforce is in the public sector. When we think about getting Britain’s public finances back on track, or generating economic growth, the £180 billion a year spent on the public sector paybill (around an eighth of our GDP) and the fifth of the workforce it employs, should be front of our minds. This makes the rather prosaic-sounding issue of how pay is set in the public sector of vital importance.

The problem is that the current system is entirely unfit for the modern age. Pay for most public sector staff is determined by centrally determined national pay scales, with annual progression based on time served rather than the local labour market, the employee’s performance or the cost of living. This causes several problems, foremost one of fairness. It leads to some staff being paid more than their counterparts in the private sector, some less. Failure to reflect the cost of living leads to unfairness between public workers (for example, a typical family’s cost of living is 12.6% higher in the South West than the North East, or 13.5% higher than in Wales). Perhaps most importantly, it has a damaging effect on public services where pay is set too low: leading to higher vacancy rates and turnover associated with higher fatality rates in hospitals and lower academic outcomes for students in deprived neighbourhoods. Conversely, where the national pay rate is set too high, private sector employment may be ‘crowded out’ by bidding up the cost of wages and making it difficult to recruit key staff.

Failure to reward good performance is also linked to lower productivity and morale than the private sector (reflected in things like sickness absence). 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. There is also the issue of the cost. If we were able to reform public sector pay so that workers were paid that of their equivalents in the private sector, we would make a huge saving: some £6.3 billion a year.

Reform must be done carefully, however. If these savings returned to the Treasury, it would likely ‘suck’ public spending out of deprived regions: an economically (as well as politically) damaging outcome. National pay structures play a big role in redistributing money from rich to poor regions and very few would oppose this. The problem is that pay is a very inefficient way to make these transfers – largely funding additional consumption rather than investment. Policy Exchange’s new report, Local Pay, Local Growth, sets out a strategy to rectify this. In order to ensure poor areas do not lose out, we propose reinvesting any savings back into those communities through more effective methods of job creation, such as infrastructure or regional growth funds. This would generate multipliers of growth in other sectors and create jobs in some of our most deprived communities. At a minimum (taking a very high cost of £33,000 per job created as a benchmark) we could create 288,000 additional jobs: up to half the people claiming unemployment benefits in some areas. To ensure cost control, we examine the Swedish paysetting model, which transitioned over several years to a system which is much more responsive at a local (and even individual) level. To ensure staff are fairly paid for their contribution, we propose replacing automatic pay scale progression with performance related pay frameworks used in the private sector.

None of these reforms can be achieved overnight. Previous attempts, such as Gordon Brown’s in 2003, largely ran into the quicksand due to concerted trade union opposition. But given its huge potential, both to improve our public services in a time of tight budgets and to create jobs which the UK sorely needs, grasping the nettle of public sector pay reform is an opportunity too good to miss.

This article originally appeared on The Bow Group’s website

Author

Ed Holmes

Ed Holmes
Senior Research Fellow for Economics & Social Policy, 2009-2013 Read Full Bio

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