Local pay is back in the news again. Time for an up-dated version of a post from earlier in the year:
1. Public servants in poorer regions to get lower pay
we are told by the Guardian. Misleading, at best, but captures the
sentiment of many. In fact, what details we have suggest that this will
be local, not regional and that pay will not be cut. Instead, once the
pay freeze stops there will be higher wage increases in some areas than
others. One way to do this would be to look at areas where it's
difficult for the public sector to recruit high quality staff and allow
wages to rise more there. Another would be to use finer grained data on
(increases) in costs of living. Either of these would be better
represented as 'public servants in high costs areas to get more pay'.
2. The most direct impact will be to raise the quality of public good provision in high cost areas. Colleagues at CEP, for example, suggest that low public sector wages in high costs areas lead to worse outcomes in the NHS.
More preliminary evidence finds the same effect for schools and
policing. Of course, addressing this through higher pay increases in
high cost areas raises the possibility that these services would
deteriorate in the poorer areas. Again, evidence from the NHS
suggests this may not be a major concern because the effect is
'non-linear'. The bad effect of national wages in high cost areas are
not offset by better outcomes in low cost areas (probably because higher
quality staff in the high cost areas move to the private sector, rather
than moving to the public sector elsewhere in the country).
What about the indirect costs on the local economies of disadvantaged
areas? Here, we have very little evidence. In the short term, you could
argue that the major issue in these areas is demand rather than supply.
But these are not short term changes we are talking about - the
differentials will tend to emerge only in the long term (as small
differences in pay increases work through). It's also reasonable to
suggest that longer term higher public sector salaries do create a local
distortion that works against the private sector. Here there is a clear
Higher public sector wages provide a demand stimulus to local service
sectors. This likely offsets the distortion on the supply side (which
comes from the fact that they have to pay higher wages to compete with
the public sector). On the other hand, manufacturing (and other tradable)
industries which don't serve local markets lose out because they don't
benefit from the demand stimulus, but do get hit by the supply side
distortion. Preliminary evidence from my own research on public sector
employment suggests that these effects can be economically important. In
short, high public sector pay may 'distort' local economies (towards
local services away from manufacturing) and make them more 'dependent'
on the public sector than they would otherwise have been. [Update]: I am not saying which of these costs-benefits dominate. Indeed, we have very little evidence on which to base such a judgement - despite persistent claims by people on either side of the debate.
4. What about 'fairness'? Personally, I prefer to think in terms of equal reward for equal work - which means that wages should
reflect the local cost of living (something this move tries to
achieve). Others may have different views - although I am unclear in
what sense equal pay is in any
sense 'fair' in this specific context even if there may be other reasons
for supporting it more generally (e.g. for male and female workers
doing the same job at the same firm).
5. On the subject of
fairness, it seems reasonable to think that the negative effects of
national pay in high cost areas are disproportionately experienced by
poorer families. Partly because they will be the ones earning this pay,
partly because they can't opt out of poorly performing public sector
services. Again, personally, I think this is a bad thing [Update: to clarify - the poor being hit hardest is a bad thing]
6. [Update:] One frequent reaction is that this is 'only an issue' for London and the South East. I would suspect that this is not the case and that recruitment difficulties occur in other higher cost areas. But even if this is 'only' an issue for the 'south' it's worth remembering that a large proportion of the population live in those areas.
7. [Update:] If local pay did change to reflect local costs, this might strengthen the argument for moving public sector employment out of London and the SE because it increases the cost advantages.
balance, I think the case for local pay looks strong although, as the
reaction of many make clear, the politics are likely to be nasty