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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  • cynic2

    When you try to analyse this its almost impossible. As an example, many civil service jobs in NI are heavily over specified. Why do quite junior clerical staff need a degree on entry, for example? Its also different in different parts of the civil service – look at the NHS where, to be fair, there has been quite a good reform programme.

    In the end the simple way to test this is to compare pay levels for specific jobs. The NICS figures are at

    http://www.dfpni.gov.uk/proposed-pay-scales-offer-4march11.pdf

    A basic storeman or security guard in NICS starts on £18k and can go up to £22k. Thats starting at £9 / hour. The going rate in the real economy is about £7 – £8 with many working on the minimum wage. That doesn’t allow for the NICS perks of index linked pension and amazing sick pay and insurance. Bear in mind too that the salary paid to a security guard in NICS can be at or above the level paid to a graduate working in a customer service call centre in Belfast!

    Above those basic grades stands a huge pyramid of grades all differentiated by a few thousand. Why? Most modern organisations have 4 to 5 grades from top to bottom – I think the Civil Service probably has 12 to 15!

    And this wont change. Why? Because those at the top of the pyramid depend upon a high paid base to inflate their own pay. And our politicians know that so many people work in the public sector that any change will be deeply unpopular.

    The Westminster Government needs to slowly but firmly wean them all off this. They cant outsource much of the work as under TUPE the firms taking the contracts would simply inherit NICS staff with inflated salaries.

    The best way is a long term freeze until pay rates drop into line with the private sector . Unless of course the Executive would like to do something dramatic in terms of reform. Silly me. Dont hold your breath.

  • Old Mortality

    There is also a strong moral argument in favour of regional pay which is not addressed.
    Why should a middle manager in the private sector anywhere in the UK be paying tax at 40% in order for an NHS executive in NI to be paid more than £100,000 when they would probably be prepared to do the job for £75,000? Excessive pay in the public sector also diverts talent from the private sector where it might be more productively employed.
    The examples of national pay cited by NIPSA Langhammer are irrelevant. They are all either former nationalised industries or retailers, neither of which is the kind of business we should be encouraging in NI.

    “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.”
    Nothing better exemplifies the sense of entitlement that animates apologists for public sector pay. In NI, the state is effectively the sole employer of doctors and teachers. It should not be paying them any more than is necessary to ensure an adequate supply of their skills. And why should people get paid more simply because they’re older?

  • Frustrated Democrat

    The simple fact is that Civil Service pay and conditions in Northern Ireland far exceed those in the private sector and this is distorting the local labour market.

    Why are people in the private sector unable to afford a pension paying excessive amounts in tax for those in the Civil Service with a gold plated pension?

    Everyone including those in the Civil Service know it is overstaffed and inefficient, Alex Attwood confirmed this when he said it is not about efficiency or service to the public it is about maintaining jobs, when referring to the DVLA and Sammy Wilson follows him in the same vein.

    We need to dramatically reduce the number of people in the Civil Service and get their pay back into line with the private sector, it may take a couple of decades and include increases in the private sector and well as freezes in the civil sector but we have to face the harsh realities if we want to return Northern Ireland to some semblance of economic reality.

    No amount of protectionism will change that reality.

  • OneNI

    Mick your article is ambiguous about where any savings might go – and yet Owen Paterson and the Treasury has made it clear it would be up to NI Executive

    http://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/210m-saved-in-regional-pay-rates-shakeup-wonrsquot-be-swiped-from-stormont-by-the-treasury-16135194.html

    Essentially this gives NI politicians the freedom to set pay but they would rather duck responsibility and slag of Westminster instead.

    Interestingly I think the public are increasingly seeing through such pathetic nonsense

  • Mick Fealty

    I bolded the appropriate text.

  • Gopher

    I just recieved my annual shakedown through the post today it goes by the name of the “rates”. I work two weeks for nothing to support 26 district councils and all their employees who are on a higher average wage get sick days and can strike when they feel like it with no repercussions and have a government support for any such action . The joys of devolved administration.

    The Assembly is a complete cash drain if they cant get the civil service in check give me back direct rule.

  • IJP

    Great piece, Mick.

    Mark Langhammer is a thoughtful contributor to any debate.

    I do wonder if people are talking across each other a little. For all the talk of “regional pay”, there is a distinct lack of clarity about what that means in practice and against what it will be measured. The only thing which is clear is that pay will not be reduced in absolute terms, but rather frozen (again, even “frozen” requires definition) until it is “corrected” (whatever that means).

    You can’t help but think this is yet another example of the Coalition Government coming up with a principle which is sound, but then refusing to listen to anyone when it comes to actual delivery of it. Ask Andrew Lansley how that works out…

  • Old Mortality

    IJP
    ‘I do wonder if people are talking across each other a little. For all the talk of “regional pay”, there is a distinct lack of clarity about what that means in practice and against what it will be measured.’
    All it needs to mean is that pay is frozen until such times as the public sector in any area has difficulty in recruiting and retaining staff. Ideally, the next time the PSNI recruits, there will be far fewer than 50 applicants for each position.

    ‘Ask Andrew Lansley how that works out…’
    It didn’t work out once doctors realised that, unlike the reforms of the previous government, it wouldn’t put more money in their pockets. The only alternative to reform, crude though it may be, is to bear down on costs in the NHS, particularly pay.

  • andnowwhat

    I think the game the tories are plating is an interesting exercise in psycology. Just as the noughties had us all panicking about our social wealth by getting in debt, we are now collectively falling for a divide and rule policy that sets public against private sector, regions against regions and the working against the unwaged.

    My abiding memory of the boom was my private sector friends laughing at us in the public sector and all that wasted education.

    No doubt due to the mess the unions became in the 70’s/80’s, ordinary private sector workers turned on tghe unions and left themselves open to vagaries of their employers and markets. This worked grand for some sectors and not so well in others. The “race to the bottom” is fast becoming a cliche of our times but it is also a call for an awakening to those who are buying in to the game.

    A good employer is a fair employer and adheres to the old social contract of a fair day’s pay for a fair day’s work. I would assert that any employer who does not pay a fair wage with decent conditions for their employees has no reason to regard themselves as any sort of as success, just take a look at the awakening of the latter Victorian era as epitomised by Quakers etc. This is an employers responsibility just as an employee’s is to work as best as they can for their wages.

    With regards to pensions, we all know what happened there, the collapse of private pensions thanks to risky portfolios, something the public sector pensions did not indulge in.

    I’m suspicious of the regional pay as an early set up for the private sector taking over currently public sector services. The clue was the nonsense that public wages are stopping people taking private jobs. Not only are public jobs finite but many areas (most notably the civil service) have had a recruitment freeze for some time (which has led to large amounts of money being wasted on agency staff). Actually, we had tryst service in the northern board report that they had problems recruiting staff because people were going to the local Tesco (pretty sure it was in the Ballymena area). The result of this case was that a quadraplegic (promise not to go off on one again) could not go home and had to “bed block” at a cost the NHS and to an awaiting patient.

    Lastly, we are at risk of becoming The United Kindom of London, the South East and the Rest