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Rubbishing regional pay

Source: Public Sector Executive July/Aug 2012

Fenton Coulthurst talks to Helen Kersley, head of the New Economics Foundation (nef) team behind a report that seems to demolish the economic case for regional pay in the public sector.

Would a regional pay structure for the public sector cut government spending and help revitalise the private sector across the country? Not according to a new report by Helen Kersley and colleagues at the New Economic Foundation (nef).

The report, ‘The economic impact of local and regional pay in the public sector’, released in July for the TUC, studied the theoretical and practical basis of the Government’s proposed plans and deemed that of the three central arguments put forward by the Treasury, “none of them stand up to close scrutiny”.

It found little to recommend public sector pay cuts across the country. Talking to PSE, Kersley highlighted problems regarding the social impacts of the proposal and with the standards of the Treasury’s research, plus the fact that in even the most optimistic scenario, UK GDP would suffer nearly £3bn in net losses, the research suggests. This would be due to lower spending by workers affected, lower tax takes, and harm to local economies.

Misconceived assumptions

The Government’s case is centred on three key arguments: that the public sector has a ‘pay premium’ grossly above equivalent jobs in the private sector in some regions; that the private sector is more responsive to local conditions for determining wages; and that the supposedly higher pay in the public sector ‘crowds out’ jobs and investment for private companies.

Kersley and her team said the assumptions behind these arguments were not supported by the facts, and that the language used by proponents is often “mischievous”, particularly concerning pay premiums.

In doing the research, the team tried to clarify the definitions of the terms used by the Treasury and found that ‘premium’ was one term that had been warped significantly.

She blamed not just Government ministers and policy-makers, who should know better, but also lamented the fact that the idea of a pay premium had taken hold in the public imagination and entered common parlance in terms of economic debate.

She said: “You might talk about a gap, or you might talk about a differential, but to talk about a ‘premium’, as if people are doing the same thing but are just getting extra pay for it, is very misconceived and actually mischievous. One of the findings we had discussed in some depth was that in fact there are many factors which mean we are not comparing like-for-like.”

In her opinion, the way the Treasury uses the term glances over crucial differences between roles and contexts in the two sectors, such as the size of organisations and type of work. The report says: “The relatively simple comparisons used by the Treasury are synonymous to comparing ‘apples with oranges’: and strangely or not, this is a habitual fallacy of ‘pop’ economics and statistics.”

Managing the bill

Lurking behind the controversial regional pay proposals is, of course, the Government’s overriding desire to cut the deficit; but it seems the Treasury has done little to prove the plans would even save money.

Kersley found that the Government’s research didn’t account for many factors used to accurately calculate Government savings. Far from saving money, the move appeared to only drive up costs.

She told PSE: “Yes, you are making a saving on the public sector wage bill. But when you then take account of the fact that you are getting less tax revenue because people are earning less, and if you’re not making that up by an equivalent number of private sector jobs being created at a decent wage that will yield that tax benefit, then in terms of public finances, what we see in the wash is that any savings you make are going to be quite small relative to the economic impacts that you are having.”

Kersley pointed out that her preliminary research was not able to account for HR and administrative costs incurred by the Government’s plans. Based on these limitations, her report tried to downplay expenditure and keep estimates conservative, especially while there is still more sophisticated research to be done on the policy’s full impact.

Despite not factoring in these costs, the outlook depicted by the nef report was bleak if such cuts were to take place. But even using a model adhering to the Government’s ‘crowding out’ theory, where public sector pay cuts are met by positive private sector response in pay and hiring more people, the net loss to GDP was still a massive £2.7bn.

The estimates of the counter-model increased the economic cost significantly. Presuming that the ‘crowding out’ theory – which the nef report questions the relevance of in the first place – would not practically apply, Kersley’s research estimated that costs to GDP would hit £9.7bn.

“We didn’t have the resources to do that, but it would be something to add in, which is why we conclude that these costs are likely to be sufficiently high to wipe out any savings to the public purse.”

‘Really troubling’

Concern was raised about the balance of studies used by the Treasury and their relevance as a basis for policy-making.

The report says ‘crowding out’, which states that excess public sector pay takes investment away from the private sector and drives up costs to the detriment of market competition, is applied in Treasury analyses without due account of the economic climate, and that even its creator Milton Friedman had “doubted that it had any validity in an economic downturn”.

Kersley told us: “They discussed in some depth the problem of ‘crowding out’, which they tried to describe. They very overtly didn’t talk at all about the ‘crowding in’ issue. So there was nothing of that in that evidence. It was very much the case that it wasn’t balanced. It was putting forward a particular line of argument, not looking at it in the round, which you might expect to see.”

In addition to this, Kersley found that of the studies used by the Treasury – “only a handful” were used anyway – a lot of emphasis was placed on a study with significantly out-ofdate research, ‘The Pattern and Evolution of Geographic Wage Differentials in the Public and Private Sector in Great Britain’, which only has data up to 2001. She found it worrying that the Government was basing policy-making on out-dated material.

She said: “I think it is really troubling when it’s going to have such an impact on a number of people, not just the public sector workers, but on the wider economy and people who work in it.”

Kersley was keen to point out to PSE that the pay cuts would disproportionately affect lowerpaid public sector jobs, largely occupied by women, and increase the number of people relying on benefits to supplement their pay packages to make ends meet. She warned that the Government should avoid “storing up trouble down the line” by not taking into account the “knock-on” effects of pay cuts and emphasised that this was a major reason why the plans were so inefficient.

Kersley and her team at nef were led to conclude that more work needed to be done to outline the full impact of the proposal, though the economic viability of regional pay seems doubtful in the light of her preliminary findings.

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