The government's desire to see more locally-facing pay in the public sector has run into difficulties. Trade unions, MPs and the wider public have raised doubts about the idea -notably, that it would suck public money and demand out of struggling regions. So might it be better for government to abandon the whole idea and stick with paying public sector employees the same rates through national pay scales (except for London)? No - and for a number of reasons.
· It is unfair to pay public sector workers regardless of the cost of living. A typical family's cost of living is 12.6% higher in the South West than the North East, or 13.5% higher than in Wales and this is not reflected in national pay scales.
· The existing system damages public services. Where pay is too low, it takes longer to fill vacancies and staff leave more quickly. This has been found to cause of higher fatality rates in hospitals and lower academic outcomes for students in deprived areas.
· There is evidence that excess pay in the public sector (around 7 percent more than an equivalent private sector worker) 'crowds out' private sector employment by making it more difficult for firms to recruit good staff.
· By linking pay increases to length of service rather than performance, public sector pay scales mean staff are not rewarded for their efforts - perhaps one cause of much lower levels of productivity than the private sector. So it's clear there's a strong case for reforming public sector pay.
An oft-cited model has been 'zonal pay' in the Courts Service, introduced by Labour in 2007. Unlike most existing systems of public sector paysetting, this would mean workers would earn a little more in 'hotspot' areas - staff in Liverpool might earn more than in rural Cornwall, say. Though certainly an improvement on the existing system, on its own, there are likely to problems with this. It would fail to deal with micro problems within these areas - preventing pay being higher for teachers in a challenging school than an easier one within the same zone, for example. It would also mean sticking with national salary scales which give little or no power to local managers to reward the best performers. If no adjustments to budgets are made, it would in effect reduce non-pay bill budgets in the new 'hotspot' regions, having a potentially damaging effect on public services there. If adjustment are made, it would in effect 'suck' money out of the non-hotspot regions. So is there a better way - one that would not only not hurt struggling regions, but actually help them - as well as addressing some of these other problems?
Our report, Local Pay, Local Growth, tries to provide one. To ensure that poorer regions do not lose out where public sector pay is too high and reduced relative to the private sector, we propose reinvesting the money through job creation and infrastructure projects - this would create at least 288,000 jobs in some of the most deprived regions of the UK. To ensure cost control, we examine the Swedish model, which transitioned over several years to a system which is much more responsive at a local (and even individual) level. To ensure staff are fairly paid for their contribution, we propose replacing automatic pay scale progression with performance related pay frameworks used in the private sector.
No one would suggest that implementing these reforms will be easy. But if we are serious about improving public services, we will have to address public sector paysetting: tight budgets mean we can no longer paper over the cracks. Truly fair pay in the public sector is an opportunity too good to miss.
Ed Holmes is a senior research fellow at Policy Exchange