Why the UK Chancellor’s regional pay initiative not a solution to depressed regional growth…

Mark Langhammer disputes George Osborne’s idea (set out in his Autumn statement) that local pay bargaining is the way to go, drawing on a recent report from NIPSA he argues instead that “localised pay bargaining would be inefficient, costly, wasteful and likely to increase pay disputes, a fact well recognised in the private sector.”

The Osborne/Cameron ideological initiative is based on a poor grasp of the facts. Osborne argues that “while private sector pay is set in accordance with local labour markets, public sector pay is usually set on a national basis”.

This couldn’t be more wrong. The main determinants of pay remain skill and qualification levels, not regional geography. Research by Incomes Data Services shows that large, multi-site private companies tend towards national pay structures with variations for London and the South East.

BT and Waterstone’s, for instance, have national pay with inner and outer London allowances. British Gas has five pay bands, three of which are in London. Some large supermarkets operate zonal pay structures – with four or five band structures common – but again, these relate to a hierarchy of inner and outer London, the South East and then the rest.

This pattern reflects the fact that, outside London and the South East, there is little difference in earnings between regions. Only £48 separates median weekly earnings of the highest and lowest earning regions. National pay structures work well without differentiating between North Berwick, Newcastle, Newport, Nottingham or Newtownabbey.

It’s worth looking at this piece by Ryan Bourne from the Centre for Policy Studies in London which cites London’s exceptionally high salary costs as a primary reason for bringing in localised pay settlements. He claims that “in Wales, the average hourly wage in the public sector is 30% higher than the private sector, whereas in London average private sector pay is 6% higher than public sector pay”, and produces this graph (which, for some reason does not include Northern Ireland):

Interestingly Bourne notes that ‘even after controlling for factors like age, education and qualifications obtained, these significant variations still hold’. Yet it might have been more useful then to graph the differential after applying the controls, not least because Langhammer claims that the gap evident in Bourne’s graph (for Northern Ireland at least) can be explained by a high differential in skills and qualification levels in public as opposed private sector employment:

The public sector has more professional workers, such as teachers and doctors, with higher numbers of experienced career employees whose wages have grown with age. The private sector employs more unskilled, temporary staff in low waged, insecure, service “McJobs”. This has been magnified by outsourcing of lower paid roles, such as cleaning and catering, from the public sector.

That’s an argument that would have to be made on a region by region basis, but it certainly holds for large parts of the de-industrialised north of England, which now subsists on public sector employment and localised service industries. The issue of creating new private sector opportunity is the question which remains generally unanswered, by this and by the previous government.

Making public sector pay less attractive may simply exaggerate the exodus of talent from the regions to London and the South East which can barely take the inflow as things stand. In this situation, despite a general welcome from the IOD, it looks more like the cash grab from the regional Sammy Wilson claimed it was…

NR Greer writing earlier in the News Letter disagreed:

It is unclear whether regional pay rates would apply to all public sector employees, or just to those in departments that still report directly to Westminster, but it has been confirmed that any money saved will be retained within the Northern Ireland budget, to be spent or squandered as the Assembly sees fit.

The public sector spin is to focus on the plight of nurses and teachers and to compare them with bonus happy bankers. The excesses of the financial fraternity do invite contempt, but a more useful comparison would be between the senior and middle managers in government and in business.

In the NI Health Service there are 10 chief executives taking home over £100,000, and several near or over the Prime Minister’s £142,000 salary, plus many other managers on or near six-figure salaries. The same pattern is repeated in every branch of government and in the local councils across the province. [Emphasis added]

Taking up the challenge, Langhammer responds:

An IDS study of FTSE 100 companies showed UK company directors enjoyed a pay rise of 49 per cent, taking their average earnings to almost £2.7m. Covering salary, benefits and bonuses, their pay hike was even higher than the 43 per cent increases enjoyed by chief executives.

In Barclay’s, top pay is now 75 times that of the average worker. In 1979 the multiple was 14.5. Over that period, the lead executive’s pay in Barclay’s has risen by 4,899 per cent from £87,323 to £4,365,636!

Now, there’s a pay differential that’s worth doing something about!

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