Local pay for local people

Chancellor George Osborne is due to outline his budget plans on Wednesday

"Totally irresponsible... and half-baked". It doesn't sound like the Scottish government is going to adopt the proposal for matching public sector pay to local pay rates.

This follows briefing ahead of Wednesday's Budget at Westminster that wage rates for at least some public sector workers in most parts of England are going to be frozen until they fall into line with private sector pay.

This shouldn't come as a surprise. It was flagged up by Chancellor George Osborne in his autumn statement, though it seems to be coming the way of public sector workers rather faster than previously thought. He then asked for pay review bodies to report back to him by July.

It's fair to say it looks half-baked while we only have some selective media briefing to go on. But is it "totally irresponsible", as finance secretary John Swinney claims?

Well, there are arguments for bringing local/regional pay rates for public sector workers into line with those in the private sector, and some are better than others.

More jobs

The case that seems to be getting aired this weekend is that it would help the private sector. And sure enough, private sector employers have been complaining that they've struggled to attract quality recruits in their area while there is a premium being paid by the public sector.

That premium widened with the downturn, as private sector pay rates fell, but the current freeze on public sector pay is eroding that gap.

There has also been an attraction when choosing between public and private sector jobs when pensions have been compared. But that difference is also being eroded, as the terms are tightened on public sector schemes.

So the Treasury proposals could be presented as being good for the private sector creating more jobs, which would be A Good Thing.

Depressing demand

But it can be counter argued that they would be doing so at lower levels of pay, and poorer conditions. And the effect on a local or regional economy of relatively well paid public sector workers having their pay squeezed down to private sector levels could be a sucking of demand out of that economy: Not A Good Thing.

For example, you could ask the good people of the Western Isles if they want to see public sector pay reduced to local private sector levels. Not only is the public sector a big and vital part of the Hebridean economy, but the spending power of those public servants is essential to private companies there. It would hurt.

That, roughly speaking, is the main thrust of John Swinney's response to the pre-Budget briefing. It would hit confidence among public sector workers, he says, and confidence is what we need right now.

He also argues: "This move could potentially penalise public servants in Scotland and damage public services - increasing regional pay disparities and resulting in spending cuts to pay for higher public spending in London and the south-east - hindering our efforts to share growth across all of the country".

Mr Swinney could, however, have welcomed the move, as it could make some parts of the country more attractive for re-location of government jobs out of the south-east of England.

Higher fatalities

There is, meanwhile, another case for making public sector pay more flexible, in relation to the private market.

John Swinney says the proposals would hit confidence among public sector workers

It is that the public sector can't always and everywhere compete for quality staff. In London, for instance, the Institute for Fiscal Studies (IFS) reckons the private sector pays the premium, at least for male staff. And if limited to national rates, albeit with some London weightings, economic hotspots such as London can't pay enough to recruit and retain the right people, nor to pay them enough to compete in the local housing market.

There is some evidence that can impact on the quality of services. Research at the London School of Economics, published in 2008, shows that where hospitals could not get the staff they needed on national rates, they went to agency staff, whose pay is not regulated.

The result, the research suggests, is that the quality of care went down - so much so that a 10% private sector pay premium in the area around the hospital was associated with 4-8% higher fatality rates for those admitted with acute myocardial infarction (chosen for the economists' research purposes).

And it's not just London and south-east England that is the UK's economic hotspot. Scotland has wide variations in its economy and living costs, meaning a teacher's or health worker's salary goes much less far in Edinburgh or Aberdeen, neither of which has weighting added to salaries.

Scotswomen at a premium

Whether you think it's a good or a bad thing, there are significant practical problems with this proposal to bring public sector pay into line with local or regional private sector pay. One is that very flat growth in pay over the next few years make it hard to have any significant impact on the differentials. On much faster rising pay, London pay could stretch ahead, while elsewhere, it doesn't rise as fast. But if the effect is to be achieved by waiting for hotspot pay to rise, it could take a long time.

More significant than the wait for weighting is that it's a much more complex picture than you might think. The IFS has calculated how much of a pay premium public sector workers enjoy in the nations and regions.

In blunt terms, according to the Green Budget the IFS published in December, the hourly wage rate of a public sector worker is 24% higher than in the private sector. But then they discount for the greater experience and higher education levels to be found in the average public sector worker, and that premium falls to 8%.

It's a premium at its widest among the lower paid. In other words, lower-paid workers do relatively well out of government employment.

The IFS analysis then varies around nations and regions. In south-east England, there's hardly any premium. In Wales, it's at around 18%.

They've also found very wide gender differences. After allowing for experience and qualifications, the public sector pay premium for men is 5%, while for women it's 11%.

For Scotswomen, the public sector offers the highest pay premium of any part of the UK, reaching nearly 20%. But Scottish men in government jobs have a pay premium over the private sector of around 6%.

Devolution dimension

More complex still: different lines of work have different premiums. Male secondary teachers do best, when compared with similarly qualified men in the private sector, and most of all in England's East Midlands. Publicly-employed prison officers are closest to their private sector equivalents. That may reflect the competition from private prisons, forcing public and private pay to converge. Firefighters are also close to private pay.

So simply imposing a "regional" pay differential on all public sector workers would be a very blunt, and potentially very unfair policy instrument. And it could have difficult consequences in terms of career progression taking people around the country.

Not complicated enough yet? Then, there's the devolution dimension. The IFS calculation suggests Scotland would be one of the least affected areas by the process being proposed, at least for men.

After London, which alone has a pay premium giving an advantage to those in the private sector, only south-east and east England have a smaller male public sector pay premium than Scotland.

More for hotspots

But then, the introduction of different pay in different parts of the UK could see a gap open up between devolved and reserved roles within Scotland.

Those in HM Revenue and Customs, the Department of Work and Pensions or civilians in the Ministry of Defence could find themselves disadvantaged by being employed by a UK department if, as seems likely, John Swinney refuses to let this process impact on devolved services, such as health and education.

So a health service administrator won't see her pay downgraded to bring her into line with the private market in her home town. A Good Thing, right?

But two questions about that? Is her salary the most efficient use of taxpayer funds, if a lower, locally-set market rate could save money and could be used either to employ more people, pay those in economic hotspots more, or to improve services in other ways?

And isn't it a bit odd that a Nationalist government would be keen to keep Scotland linked into UK national pay bargaining?