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Why local and regional pay doesn't add up

Issue date

TUC briefing
May 2012

Public sector pay supports local and regional economies, ensures fairness and transparency and supports equal pay. The government wants to change the way pay is set, raising the prospect of local or regional pay instead of the current national system. This briefing sets out why we should all be worried about moves to localise public sector pay.

In the Budget this March, the Chancellor announced that the Government wanted to move towards 'more local, market-facing pay' in the public sector. This followed a request in the Autumn Statement for the public sector pay review bodies to look at how public sector pay can be made 'more responsive to local labour markets'.

Four of the independent pay review bodies are currently conducting these reviews, gathering detailed evidence from unions and other stakeholders, and are due to report in July. Although the reviews do not cover the whole public sector workforce, their findings will gather evidence and views to inform decisions about future policy.

Local pay and fairness

The Government should promote fair employment. This cannot be done by paying nurses, teachers and Jobcentre staff less in the poorer parts of the UK. The jobs require the same level of skills and qualifications as they do in wealthier areas, and can indeed be more challenging in low income areas where issues such as health inequalities bring additional challenges for public services. Most people would say that it is fairest to pay people for what they do, not where they live.

Public sector pay supports local economies

Public sector wages play a vital role in local and regional economies, especially in the less well-off parts of the UK. Localising public sector pay would damage the economy by reducing public sector workers' spending power, and would widen the inequalities between different parts of the UK.

For example, the North East has both the lowest wages and the highest unemployment in England. It is not credible to argue that the public sector is 'crowding out' private sector jobs in areas where there are high numbers of unemployed people for every private sector vacancy.

Instead, reducing public sector wages could lead to fewer jobs, as falling consumer spending would drive more private sector enterprises out of business. The failure of these businesses would then cause further ripple effects. Economists estimate that this could double the impact of any public sector wage cut.

It is likely that public sector pay would fall furthest in the poorest parts of the UK. The table below estimates the regional effect of cutting public sector pay by just one per cent.

The effect of reducing public sector pay by 1 per cent

Public sector employees

( thousands)

Direct effect of a 1 per cent reduction in income on public sector earnings per year

(£millions)

Government Office Region 2 and 3 combined

North East

300

78

North West (inc Merseyside)

780

189

Yorkshire and Humberside

574

130

East Midlands

492

119

West Midlands

561

131

Eastern

647

158

London

815

242

South East

908

231

South West

574

140

Wales

399

97

Scotland

680

162

Northern Ireland

220

54

Total

6,950

1,730

Source: ONS Labour Force Survey (Summer 2011) Note: this table shows the direct first round effect of pay reduction. These figures would need to be increased to take account of the negative multiplier effect of cutting public sector wages on private sector businesses.

  • A one per cent reduction in public sector wages would be likely to reduce overall UK income by about £1.7 billion per year. The actual effect would be much higher, given the multiplier effect of dampened consumer spending power on private sector businesses.
  • A five per cent reduction in public sector wages would be likely to reduce overall UK income by about £8.5 billion per year, plus the multiplier effects.

Pay practice in the private sector

Advocates of local public sector pay argue that private sector pay is set in line with local labour markets. Large multi-site private companies provide the most appropriate comparison with the public sector. Evidence shows that, rather than fragmented local bargaining, the most common system used by these companies is a national pay structure with some allowance for higher rates in London and the south east of England. Marks and Spencer, BT, Waterstone's and British Gas all use this approach.

This is very similar to the current public sector system, where employers have some flexibility to take account of the higher cost of living in London and the south east.

Local pay and equalities

National pay schemes have been developed to minimise the risk of equal pay challenges. The Agenda for Change system in the NHS arose out of substantial legal challenges to previous pay practices, was designed with leading equal pay experts, and took several years of negotiation and implementation to put into place. Localising pay would risk reigniting expensive and lengthy legal battles.

In addition, it is important to note that one of the reasons for the difference between public and private sector pay is that there is a much bigger gender pay gap in the private sector, and a much bigger gap between top and bottom pay. Is this what the government really wants to emulate in the public sector?

Is local bargaining efficient?

There are also concerns that the Government might move to localise the bargaining arrangements that determine public sector pay. This would be an inefficient, costly and disruptive move.

National bargaining brings economies of scale and ensures transparency. Local bargaining would mean significant extra resources and duplication of effort. For example, the NHS has 161 acute hospital trusts. Each of these would have to gather labour market intelligence, draw up a negotiating position, hold negotiating meetings, set up new pay-roll systems and so on.

Localising bargaining would also increase the number of potential pay disputes, further absorbing time and resources and damaging local industrial relations.

In the early 1990s the government introduced local bargaining to the NHS. Hospitals were concerned that they might pay too much or too little, so the annual pay negotiations took well over a year, after which all the trusts settled within 0.1 per cent of each other. The experiment was then halted because the Chancellor wanted to take back tighter control of the overall paybill.



The Public Sector Pay Review Bodies cover just over 1.5 million public sector employees.

See Office of Manpower Economics site for details: www.ome.uk.com

Location-based pay differentiation: a research report for UNISON, Incomes Data Services, Sept 2011

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