Last month, a letter from 25 top economists called on the government to end the practice of national pay bargaining, claiming it is worsening public services and making it harder for the private sector to recruit workers. They have faced opposition from Unions who insist the current system has served public sector employees well.
Professor Gianni De Fraja - one of the signatories to the letter - and Brendan Barber - General Secretary of the TUC - debate the merits of ending national pay rates.
Be sure to check back for the rebuttals from our debaters in the next few days.
Gianni De Fraja is Professor of Economics at the University of Nottingham, and part-time professor of Public Economics at the University of Rome “Tor Vergata”. He is a graduate of the universities of Pisa, Siena and Oxford, and has previously held posts in Bristol, York, and Leicester and visiting posts in Tokyo, Bonn and Barcelona. He has written around 60 papers in the leading international academic journals. In his policy oriented papers he has studied theoretical aspects of competition among state owned and private firms, the regulation of utilities, and the design of health policies and of education policies.
Many policies, like income tax, VAT, wind farms, have costs and benefits, and ministers must strike the right balance between their costs and their benefits.
But there are also policies which create costs with no offsetting benefits. National pay scales in the public sector is such a policy. It requires that the pay of two equally qualified and experienced teachers, or nurses, or policewomen be the same irrespective of where they live and work. I believe that imposing this uniformity, rather than allowing pay to reflect the local labour market conditions, is unfair, reduces employment in the public sector and worsens the quality of the public services available to the taxpayer and the public.
To see why I can make such a sweeping statement, let's work through a simple example: national pay scales require that the pay package of equally qualified workers must be the same in a high-salary town, let's call it Guildborough and in a low-salary one, say Middlesford. In general, life in Guildborough is more expensive than in Middlesford: food, clothes, transport, hairdressers, plumbers, and especially houses, whether for sale or for rent, are all dearer in Guildborough. This is so because the demand from highly paid private sector workers pushes prices up (and differences are not small: according to the BBC, the average house costs £423,891 in Guildford and £121,527 in Middlesbrough). But surely everybody can see how unfair it is that equally qualified public sector workers should be forced to enjoy such spectacularly different living standards, just because of where they happen to live.
As well as unfair, equal pay is also inefficient: it leads to a smaller public sector everywhere, possibly exactly the opposite of what the supporters of national pay scales want.
Why? Consider: inevitably, because public sector pay in Guildborough is artificially low, hospital and schools in Guildborough will find it difficult to appoint good doctors, nurses, and teachers, and public sector employers will find it difficult to recruit competent managers, IT engineers and secretaries: while many workers are committed to the public sector, many others have mortgages to pay, and families to feed, and would for this reason rather work in similar jobs in the private sector for a bigger pay packet. So rich Guildborough ends up with too few capable public sector employees.
And paradoxically, poor Middlesford also ends up with too few public sector employees: if the hospitals, schools and councils there could pay their employees less than what distant national negotiators agree upon, then they could recruit more doctors and teachers and police for the same budget: this would reduce queues in Middlesford’s hospitals, reduce its class sizes, and put more bobbies on the beat. Given time, local pay negotiations would allow public sector employers to hire more and more capable staff, and so improve public sector services. This would make life in Middlesford more attractive, so that more people would want to move there, which would in time rebalance the wage disparity in the private sector, reducing regional differences in wealth.
To avoid transferring more taxpayer’s money to the better-off areas where salaries are higher, which would obviously exacerbate inequalities, allowing local pay negotiations must of course be accompanied by a commitment to increase the total wage bill by the same amount in each area. This would give managers and union negotiators an important choice: how to use any extra funding that is made available to their local service. With local negotiations, they would be able to respond accountably to the wishes of local residents, and choose whether to improve services by increasing the number of employees, or by increasing their pay, and so making it easier to recruit and retain capable staff. This, surely, is the road to improvements in public services.
Brendan Barber has been General Secretary of the TUC since 2003, having first joined the union organisation in 1975. He held a number of posts in the TUC Organisation, and Press and Information Departments, before serving as Deputy General Secretary from 1993 until his election as General Secretary. Brendan has played a lead role in TUC initiatives to promote union organising, oversaw the launch of the TUC's highly successful learning and skills operation, Unionlearn, and played a crucial role in assisting unions and employers to resolve a number of difficult long running disputes. He led the organisation of the huge half a million strong, March for the Alternative in March 2011, and co-ordinated the negotiations and industrial action over public service pensions on 30 November 2011, which saw two million people in 30 unions support their unions’ campaigns for pensions fairness. Brendan has served on a number of public bodies including the Council of ACAS (1995-2004), the UK Commission on Employment and Skills and has been a member of the Court of the Bank of England since 2003. He is retiring as General Secretary at the end of the year.
Trade unions have long supported national pay bargaining in the public sector as the best route to fairness, transparency and equality. That is why unions have been at the forefront of the campaign against the government’s misguided attempt to introduce ‘local market facing’ pay. Our case is based on a hard-headed assessment of the facts as well as a commitment to fairness. Local or regional pay would be disastrous for the economy, would damage our public services, and is simply not backed up by theory or practice.
Concerned at the government’s failure to assess the effect of a move to local or regional pay on our struggling economy, the TUC asked the New Economics Foundation to model the impact. They found that such a move would cost the UK economy up to £10bn per year and could lead to the loss of 110,000 jobs. Common sense alone tells us that further holding back the pay of our nurses and teachers will hit local shops and businesses too, with a dragging effect on the whole economy.
Proponents of local or regional pay often base their case on the existence of a supposed pay ‘premium’ for the public sector. But this is based on fundamentally flawed assumptions. The public sector has more highly-qualified people, a smaller gender pay gap and a smaller gap between top and bottom pay. The two sectors are also characterised by completely different occupational structures. New research by pay experts Incomes Data Services shows that average earnings in finance, construction and manufacturing all outstrip public sector earnings, but that the private sector average is dragged down by endemic low pay in retail and catering.
Private sector employers also value the efficiency and control that national pay arrangements offer. Big companies with sites across the country tend to use national scales with adjustments for London and the South East, very similar to the public sector approach. Marks and Spencer, BT, Greggs, Santander and British Gas all use this kind of system. Of course, small local employers based at one or two sites will set pay locally, but how can they compare to the vast complexity of the NHS or our education system?
Big private employers recognise, as the public sector does, that local bargaining is desperately inefficient. Think of the time and resources involved in 25,000 schools, 500 NHS trusts, 350 local councils all doing the research, gathering local data, benchmarking, negotiating, assessing the equal pay implications, and dealing with the almost inevitable increase in industrial tensions and disputes. It might be a paradise for consultants and lawyers, but it certainly isn’t an efficient way to set the pay of six million public sector workers.
Local pay isn’t good for services either. The NHS employers’ organisation, in its evidence to the pay review body, stressed the risks of local pay, saying, “getting rewards wrong could have a significant impact on the quality of patient care and safety” and warning of the risks of “skills seepage” as people move in search of higher wages, leaving low-pay areas struggling to recruit and retain staff.
All these reasons and more are why local pay is unpopular with the public, politicians and businesses. In a recent poll 65 per cent of people said the policy should be scrapped. MPs of all parties have spoken out, there was an overwhelming vote against the policy at the Liberal Democrat conference, and councils from Northumberland to Cornwall have adopted formal motions against local pay. They see that the policy is misguided, dangerous and unfair, and it is time the Chancellor dropped it once and for all.
One should not confuse, as I fear Brendan does, the overall level of public sector pay with its distribution in different jobs and different regions. The reasons why I am in favour of local negotiations are fairness and efficiency, not to keep public sector pay down (in fact, unlike the Chancellor, I would like to see it increase): I can easily imagine plausible scenarios where the average public sector pay is higher with local negotiations.
How should the total public sector pay be shared out? Society accepts that different workers in the public sector - an army corporal, a primary school teacher, a hospital consultant - are paid differently. Society accepts this not because some jobs are more valuable or more dangerous than others, which they might or mightn't be, but because different workers have different alternative employment opportunities elsewhere, in the private sector, or even abroad. So if it is fair that workers in different jobs and in the same city are paid differently because they have different alternative employment opportunities, what's unfair about workers in similar jobs and in different cities with different alternative employment opportunities being also paid differently?
I absolutely agree with Brendan that "getting rewards wrong could have a significant impact on the quality" of public services. But what guarantees that national negotiators know better how to get rewards right? I'd say they are more likely to get them wrong, being necessarily less aware of what is happening on the "front lines". And then again, seeing different regions with different pay structures is an excellent way of learning their effects. If LEA A pays its deputy head-teachers less and its classroom assistants more than LEA B, and it turns out to have better schools and happier students, then perhaps LEA B can learn from LEA A's better practice and thus improve the education of its pupils. Certainly if a local negotiation can damage services at local level, a national negotiation can damage them at national level, which would have worse and more long lasting consequences.
Finally, I see no reason why local negotiators should be prevented from choosing to accept the proposal of a national agreement between groups of employers, just as the Trade unions and the private employers that Brendan mentions agree to have uniform pay rates across the country. But it would be their considered choice, not an imposition from above. I believe that, with the exceptions necessary to protect the vulnerable, such as health and safety, or discrimination, or minimum wage legislation, rules and straightjackets on the free functioning of the labour market damage the economy and serve no useful purpose.
Professor Gianni De Fraja repeats the flawed assumptions used by opponents of national pay bargaining.
He argues that national pay scales ‘create costs with no offsetting benefits’. In fact the benefits of transparent, equality-proofed national pay scales are clear, allowing mobility, fairness and control of overall costs. Teachers, for instance, work in a national labour market but they can decide where to live and work according to their professional interests, family life and personal connections – they don’t just follow the money.
The flipside of denying the benefits of national pay is a refusal to acknowledge the huge costs and inefficiencies of local bargaining. It takes time and expertise to research, benchmark, equality proof and negotiate pay. Local negotiations take managers and staff representatives away from their day jobs delivering services. Local pay bargaining is also likely to increase industrial tensions, raising the prospect of disruptive and costly disputes.
Another flawed assumption is that there is no flexibility within the current national framework. This is simply untrue. Take the NHS, where high cost area supplements are worth up to an extra 20 per cent of pay, and local recruitment and retention premiums can be used to tackle problems attracting staff to particular roles. It’s a transparent, evidence-based approach to flexibility rather than a fragmented, opaque local system.
Professor De Fraja also cites differences in living costs but again the assumptions are flawed – official data shows that outside London the cost of food, petrol, utilities and entertainment varies very little.
Finally he says that a move to local pay should ‘of course be accompanied by a commitment to increase the total wage bill by the same amount in each area‘. At a time when George Osborne has frozen pay for two years and threatens a near-freeze for another two, our nurses, teachers and firefighters would dearly like to see an increase. But it is naïve to think that this is what underpins the government’s drive for local pay. What it would really mean is a pay ‘permafreeze’ for much of the country, damaging both our economy and our services.