It is time to take pub­lic sec­tor pay rises out of the hands of politi­cians

The Daily Telegraph - Business - - Business Comment - RYAN BOURNE Ryan Bourne holds the R Evan Scharf Chair for the Pub­lic Un­der­stand­ing of Eco­nomics at the Cato In­sti­tute

How much of a pay rise should a man­ager in a small sales com­pany in Bolton re­ceive this year? Un­less you own such a com­pany, have re­viewed the em­ployee’s per­for­mance, know the busi­ness’s com­peti­tors, and have as­sessed lo­cal mar­ket trends, I sus­pect few of us would feel com­fort­able mak­ing that judg­ment.

Yet when it comes to govern­men­trun ser­vices, ev­ery­one seems to know the pay rise nurses, teach­ers and civil ser­vants across the coun­try “de­serve”. Bolton to Lon­don, Derby to Ch­ester – we are all ex­perts in their labour mar­kets.

The Labour Party de­mands pay be raised across the whole pub­lic sec­tor. Some Con­ser­va­tives, led by Michael Gove and Boris John­son, sim­i­larly ad­vo­cate loos­en­ing the cur­rent pub­lic sec­tor pay cap, which has re­stricted pub­lic sec­tor pay to 1pc an­nual in­creases since 2013. Other Con­ser­va­tive MPs have equal cer­tainty about keep­ing the cap, claim­ing any loos­en­ing is un­af­ford­able.

Of course, the dif­fer­ence be­tween the sales man­ager and pub­lic sec­tor work­ers is that tax­pay­ers fund the lat­ter. Gov­ern­ment must con­sider what tax­pay­ers are will­ing to fi­nance. We know, from cal­cu­la­tions un­der­taken by the In­sti­tute for Fis­cal Stud­ies, that even an ad­di­tional 1pc in­crease in across-the-board pub­lic pay lev­els would cost tax­pay­ers ap­prox­i­mately £1.5bn. With the UK still run­ning a bud­get deficit, sav­ings have to be made some­where, so why not con­tinue to re­strain growth in the £150bn pub­lic pay bud­get?

Con­ser­va­tives are right to point out that any new spend­ing must be fi­nanced by tax­a­tion or bor­row­ing. But it’s im­por­tant to put choices in con­text. Since 2010 the Tories have ring-fenced and in­creased a whole host of spend­ing on pen­sion­ers, health­care, aid, child­care and, later, de­fence and as­pects of the schools bud­get. It is th­ese de­ci­sions that have re­sulted in ar­bi­trar­ily bear­ing down on pub­lic sec­tor pay to hit spend­ing tar­gets.

The re­sult of sus­tain­ing this cap has been pre­dictably more dam­ag­ing as time has elapsed. A host of em­ploy­ment ar­eas, not least nurs­ing and prison of­fi­cers, are re­port­ing staff short­ages. There is no mech­a­nism to cope with ever-changing de­mands. That’s why this week we have heard gov­ern­ment com­mit­ments to make the pay cap more flex­i­ble – a game of whack-a-mole to solve the prob­lems the cap it­self cre­ated.

Yet, just as short­ages show too much pay re­straint in some sec­tors, Con­ser­va­tive spend­ing hawks are surely right that in some re­gions tax­pay­ers have been over­pay­ing pub­lic sec­tor work­ers rel­a­tive to a mar­ket wage. Much like the de­bate about gen­der pay gaps, we only have crude av­er­ages to review here. But in 2015-16, pub­lic pay was, on av­er­age, 14pc above the pri­vate sec­tor, or 4pc once you con­trol for qual­i­fi­ca­tion lev­els and a range of other fac­tors. This gap would be higher still if we con­sid­ered dif­fer­ences in pen­sion pro­vi­sion, and greater pub­lic sec­tor job se­cu­rity. Given pay scales are de­ter­mined na­tion­ally, the gap would be even larger still if as­sessed re­gion­ally.

Not that we know what that gap should ide­ally be. In mar­kets, pay is de­ter­mined by the in­ter­ac­tion of sup­ply and de­mand, and peo­ple’s wages in­flu­enced by their skill lev­els, ex­pe­ri­ence and pro­duc­tiv­ity. So-called “com­pen­sat­ing dif­fer­en­tials” also play a role, with a pre­mium of­ten seen for dan­ger­ous work or hav­ing to travel to un­de­sir­able work­place lo­ca­tions, for ex­am­ple. We do not have the knowl­edge of all pub­lic sec­tor work bro­ken down by lo­cal labour mar­ket, sec­tor and per­for­mance – so ag­gre­gat­ing to judge whether av­er­age pub­lic pay rel­a­tive to pri­vate is “fair” is im­pos­si­ble. What think­ing about the in­for­ma­tion lost in th­ese statis­tics does high­light, though, is the prob­lem of crudely cap­ping na­tion­ally-de­ter­mined pay lev­els. Such a pol­icy ig­nores both sec­toral needs (such as de­mands on the health ser­vice) but also lo­cal con­di­tions. It means con­tin­ued over-pay­ment by tax­pay­ers for cer­tain roles in cer­tain re­gions, and un­der­pay­ment lead­ing to short­ages in oth­ers.

Iron­i­cally, both can end up cost­ing tax­pay­ers money and low­er­ing the qual­ity of pub­lic ser­vices. Over­pay­ing is overtly waste­ful and en­cour­ages de­cent work­ers in poor ar­eas to give up more pro­duc­tive pri­vate sec­tor jobs for pub­lic ones. But a ceil­ing that pre­vents gov­ern­ment em­ploy­ers from pay­ing more to fill short­ages leads to more stress­ful work, en­cour­ages exit from the pub­lic work­force and ne­ces­si­tates the use of ex­pen­sive, lower-qual­ity agency work­ers to de­liver ser­vices. Decades-old re­search found this phe­nom­e­non was re­spon­si­ble for in­creased death rates from heart at­tacks in the South of Eng­land, where the prob­lem was most acute.

Scrap­ping the cap and us­ing Pay Review Bod­ies, as some sug­gest, can en­sure pay is set high enough to avoid short­ages. But it’s the na­tional na­ture of pay-set­ting that leads to the other prob­lems of over­pay­ment and lo­calised dam­age to the econ­omy. If the Prime Min­is­ter truly wanted to make pub­lic sec­tor pay-set­ting more eco­nom­i­cally ef­fi­cient, she would re­move the pay cap but with the quid

pro quo of abol­ish­ing na­tional bar­gain­ing too.

Swe­den shows the way. In­di­vid­ual work­ers have con­tracts with their lo­cal gov­ern­ment em­ployer. If repli­cated here, an in­di­vid­ual school or lo­cal hos­pi­tal trust would be free to vary pay to at­tract or re­tain a de­cent maths teacher or to cope with new de­mands at A&E, as they saw fit from their own bud­gets. Coun­cils like­wise could set pay in line with the gen­eral eco­nomic con­di­tions of the lo­cal econ­omy. In this way, de­volv­ing pay de­ci­sions would, over time, im­prove the ef­fi­ciency and qual­ity of pub­lic ser­vices. Abol­ish­ing the cap would be a short-term down-pay­ment for im­proved eco­nomic per­for­mance and bet­ter pub­lic ser­vices.

For just as I do not know what a sales com­pany man­ager in Bolton should be paid, I wouldn’t trust Theresa May to know bet­ter than the busi­ness owner ei­ther. So why not trust the Bolton NHS Trust, rather than a politi­cian or pay body in White­hall, to as­sess what to pay a Bolton nurse?

‘De­volv­ing pay de­ci­sions would im­prove the ef­fi­ciency and qual­ity of pub­lic ser­vices’

MPs have been de­bat­ing whether to bring to an end the 1pc an­nual pay cap for pub­lic sec­tor work­ers. The re­stric­tion, which in­cludes nurses and civil ser­vants, has been in place since 2013

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