Moving towards greater regional differentiation of public sector pay would save money in two key ways:
- In low-cost regions, staff wouldn’t have to be paid excessive salaries. Public sector staff in London are paid a small premium but given the much lower living costs, many staff outside London are often significantly better off than those doing the same job in London.
- In high-cost regions, organisations wouldn’t have to hire expensive agency staff unnecessarily. In the NHS in particular they are often used because in richer areas with higher costs of living, trusts struggle to recruit the staff they need while offering national pay rates. So they hire agency staff where pay isn’t restricted. But that can have other adverse effects beyond the additional expense of hiring agency staff instead of permanent employees.
Introducing local or individual pay bargaining would also have two important beneficial side effects:
- It would reduce the crowding out of the private sector in poorer regions.
- It would improve standards and even save lives in richer areas of the country. With the cost of living much higher in the South East but pay for healthcare staff, for example, not sufficiently different to that in regions where the cost of living is lower, standards are compromised. A study for the London School of Economics found that centralised pay bargaining was having a significant effect on heart attack death rates. For a 10 per cent rise in wages outside the health service (a 10 per cent richer area), the heart attack death rate went up by between 4 and 8 per cent.
In 2012, Policy Exchange estimated the saving available at £6.3 billion. After adjusting for the Office for Budget Responsibility’s forecast for decline in the public sector pay bill, we estimate that this saving would fall to around £5.8 billion by 2020. Big public sector unions are extremely attached to centralised pay bargaining for obvious monopsonistic reasons. It also gives national trade union leaders prestige and importance. But tackling this problem has to be part of a package of reform to make public sector pay and pensions more affordable for taxpayers.