Regional pay proposals spark controversy

An announcement by the UK's Chancellor of the Exchequer in his April 2003 budget statement that the government intends to introduce measures to increase regional wage flexibility in the public sector has drawn an angry response from trade unions. This feature examines the rationale behind the government’s proposal and the evidence on regional wage disparities within the UK economy.

The Chancellor of the Exchequer’s budget statement on 9 April 2003 contained a commitment to introduce measures to ensure that pay systems in the public services become more responsive to differences in labour market conditions between the UK’s regions. In particular, the pay review bodies which determine levels of pay for 40% of the public service workforce would have a new remit to take into account regional and local factors. To augment the economic data available to negotiators and pay review bodies, the government also announced plans to publish regional inflation figures. Supporting its proposals, the government cited evidence from its 2002 review of the public sector labour market which showed that wages in the public sector vary far less than those in the private sector. The review found that 'public-sector workers outside of London are probably better paid than their private-sector counterparts. But those in London are worse off than equivalent workers in the private sector' (quoted in the Financial Times, 11 April 2003). The review concluded that the problem lay with national pay bargaining and review body arrangements.

The government’s rationale - further flexibility in the labour market

The government’s intentions were re-stated, and the underlying rationale became clearer, with the publication of the assessments of the 'five economic tests' for joining the euro on 9 June 2003 (UK membership of the single currency: an assessment of the five economic tests, HM Treasury, Cm 5776). In announcing the negative result of the government’s assessment, the Chancellor outlined policy measures aimed at further improving the flexibility of the UK’s labour market. He reaffirmed the government’s commitment to action to increase regional pay flexibility in the public services: 'As part of radical reforms at a national, regional and local level, I propose that by next year almost all pay remits for public sector [review] bodies will include a regional or local pay dimension.'

The detailed assessment underpinning the test on flexibility (one of the five) reveals government thinking on the issue. There appear to be two central premises.

• First, it cites evidence that the regions in the UK in which wages have grown fastest are those with low unemployment, from which it is concluded that relative wage flexibility between regions has already contributed to a narrowing of regional unemployment rates.

• Second, the UK’s 'decentralised and uncoordinated wage bargaining system' is commended because of its 'ability to adjust to industry, sector and regional conditions'.

By implication, national pay bargaining and review body-based pay systems are an impediment to further regional wage flexibility. Hence the assessment proposes policy measures to increase wage flexibility in the public sector, including those referred to by the Chancellor in his statement.

Regional wage differentials small outside south-east

Data on regional wage relativities produced from the official Labour Force Survey by economists David Blanchflower and Andrew Oswald (London’s public sector workers need to be paid 50% more than those in the north, March 2002), show that the principal regional pay divide is between the south-east of England and the rest of Great Britain. Earnings for private sector workers are 54% higher in central London than in the Tyne and Wear region of north-east England, which is taken as the benchmark. Outer London workers earn 24% more and the rest of the south-east region 13% more. However, in no other region do private sector earnings differ by more than 5% from Tyne and Wear.

Public and private sector developments

To some degree, the regional wage differentials evident in London and the south-east have already led to new forms of 'locational compensation' within national pay systems in the public services. London weighting allowances are of long-standing, but have recently been enhanced in parts of the public sector. Teachers, police and National Health Service (NHS) staff have a growing and complex array of cost-of-living, regional weighting and recruitment and retention supplements to their pay packets which focus on London, other areas in the south-east and increasingly extend to other parts of the south. The Agenda for Change agreement recently concluded in the NHS (UK0303104F) provides scope for the introduction of premia to help address recruitment and retention difficulties in particular geographical areas. The teachers’ pay review body was directed by the government in autumn 2002 to consider the implications of more differentiation by location. Recognising potential problems of poaching of labour that may arise in a fully devolved pay determination system in public services, ministers responsible for education and health have also specified that any proposals to increase regional and local variation in pay have to demonstrate that they will avoid such negative outcomes.

At the same time, evidence from the private sector suggests that the government’s implicit model of a system of pay determination which is overwhelmingly local, and therefore acutely sensitive to inter- and intra-regional variations in labour market conditions, is rather wide of the mark. Findings from the comprehensive 1998 Workplace Employee Relations Survey show that those private sector employees whose pay is set by collective bargaining at local level are outnumbered by those is pay is set centrally within large multi-site organisations by a ratio of 3:2. And the trend since 1990, for both negotiated and unilaterally-determined pay, has been towards greater centralisation within organisations (UK0001251F).

A recent review of regional pay variations within the private sector ('Regional pay', IDS Report no. 872, January 2003) identifies three main ways in which employers have adapted these national pay structures to local and regional pressures:

1. defined allowances or pay premia for specific geographical areas, usually tiered between inner London, outer London and the rest of the south-east, within a national structure;

2. a system of three to six geographic pay zones (of which inner and outer London and the rest of the south-east are usually three), in which locations are grouped according to cost and recruitment and retention pressures; and

3. scope for variation within national pay grades according to recruitment and retention considerations for specific occupations or localities.

Crucially, decisions on the level of pay variation and on which locations are placed in which areas or zones, or are eligible for variations, remain in the hands of central management. In a subsequent review of the public sector ('Pay differentials in the public sector', IDS Report no. 880, May 2003), Incomes Data Services concludes that developments on recruitment and retention allowances in the public services bear a remarkable resemblance to private sector practice.

Sharp reaction from trade unions

The government’s proposals drew an immediate and critical reaction from trade unions concerned that they represented a threat to national bargaining arrangements. Commenting the day after the budget announcement, Brendan Barber, general secretary of the Trades Union Congress, said: 'Clearly there are distinctive pressures on pay, particularly in London and the south-east. But that does not mean that national pay bargaining should be set aside. Unions will strongly stick up for national agreements which provide a vitally important framework for fairness in many areas' (quoted in Financial Times, 11 April 2003). Likewise, Dave Prentice, leader of the country’s largest (public sector) union Unison, commented that: 'Extra pay in one part of the country cannot be at the expense of others. National pay bargaining is a transparent and fair system, which is efficient and aids movement around the country' (cited in Labour Research, May 2003). The context is important: greater local pay flexibility has been a central demand from employers in negotiations revising pay arrangements in health (UK0303104F) and local government. The announcement also came in the middle of key leadership elections in the GMB general union and the Transport and General Workers’ Union (UK0306105N) both of which have extensive public service membership. The Confederation of British Industry has yet to comment formally on the government’s proposals.

In the face of union criticism, the government subsequently sought to clarify its proposals. In an interview with the Financial Times on 22 April, the then employment relations minister Alan Johnson said that the government was not looking to abolish national pay bargaining. Its concern was to see scope for greater regional and local flexibility introduced into these national arrangements.

Commentary

The case for greater public service regional pay flexibility is being driven by recruitment and retention issues in London and the south-east. In this respect, little has changed since proposals for greater regional pay differentiation last surfaced under the then Conservative administration at the end of the 1980s. In an analysis published at the time, Janet Walsh and William Brown showed that increasing inter-regional wage dispersion during the 1980s was entirely due to a widening of the gap between the south-east and all other regions ('Regional earnings and pay flexibility', DAE working paper no. 9008, University of Cambridge, 1990). Moreover, as the current differences in the cost of living and private sector pay levels between central London, outer London and other parts of the south-east indicate, the issue is as much intra-regional as inter-regional. The same applies in some other regions where there are recruitment and retention problems in particular localities. Reflecting this, the framework for ongoing negotiations in the health service, for example, refers to localities rather than regions.

Crucially, the substantial number of private sector employers which retain national pay bargaining or fixing arrangements have sound reasons for doing so. These relate to the fact that they are undertaking similar activities in many different locations, as in retail, banking and hospitality, and/or to the national nature of the labour market for particular occupations. Whilst pay setting in important parts of the private sector is decentralised, the underlying logic is one of the disaggregation of large businesses into smaller profit-accountable business streams and units, and not primarily one of geography. A striking indication of the problems that employers can face should they break up national pay bargaining arrangements when such business and market considerations point to the contrary comes from the railways. Here the train operating companies continue to face a series of comparability claims, resulting in a classic pattern of 'leapfrogging' settlements. One of the main rail unions has called for a return to national bargaining to bring order back into pay setting arrangements (UK0304103F).

The key issue is how far a degree of public service regional pay flexibility can be secured without undermining the continuing benefits that derive from national arrangements. As Incomes Data Services comments (‘Pay differentiation in the public sector’, IDS Report no. 880, May 2003), it seems most likely to be secured if 'it operates within a coherent national pay and conditions framework, which provides clear and consistent guidance for when and how pay differentiation should occur'. (Paul Marginson, IRRU)