What’s the problem with regional pay?

Prior to the Budget there was some tension between Conservatives and Lib Dems on regional pay, with Conservatives talking about regional pay, and Lib Dems, most notably Vince Cable, talking about regional pay bargaining (the distinction matters: while nationally set regional pay rates mean lower salaries in weaker labour markets, regional pay bargaining could mean paying more to attract a quality workforce to a deprived area…).
Post Budget, things look a lot clearer – the government is talking about introducing regional pay (or pay zones with the potential to recognise pay hotspots) starting with approximately 140,000 staff in DWP, Home Office and Department for Transport. The government’s rationale is straightforward enough and set out at length in the Treasury’s evidence review to the independent pay review bodies whose work this announcement undercut.

On the one hand, they say that in stronger labour markets, public sector workers are underpaid, leading to problems for recruitment and quality of service (citing evidence from teaching and health). On the other hand, in weaker labour markets, the government believes that public sector pay premia may suppress private sector wealth creation as businesses struggle to recruit. There doesn’t seem to be any evidence cited for this proposition, but it is surely getting repeated often enough that it will shortly acquire the patina of truth. More convincingly, the argument is that savings from the ‘overpaying’ of staff could be recycled into more public sector jobs, or more service related spend.

Reaction to the proposal has been overshadowed by the #grannytax firestorm, but devolved governments, the Labour party, unions and a host of commentators (including Vince Cable) have all criticised the proposals heavily. In most cases the concern is that regional pay will exacerbate and entrench economic and social inequalities, sucking money and skilled workers out of already struggling local economies. Other commentators point out that the system is likely to be administratively complex and costly, including Ed Cox, who cites a study showing the private sector is moving away from regional pay for precisely this reason.
As Welsh Finance Minister Jane Hutt said the proposal is ‘socially divisive’ and ‘doesn’t make economic sense’.

I have so many questions about regional pay, but for now I’ll confine myself to just one. What’s actually the problem?

The government’s paper relies heavily on the excellent work done on public sector pensions and pay as part of IFS’s Green Budget. Here’s something the government hasn’t quoted (emphasis mine):

‘In the ten years leading to the start of the recession in 2008, there was no significant public sector premium for men, and indeed a private sector premium in 2001 / 2002. Since 2008, a public sector premium for men started to emerge and was at almost 5% by the start of 2011. This increase was unintended, resulting from the effects of the recession on private sector pay….’ (p113)

Ok. For the ten years prior to the recession, no pay premium for men. Since then, statistically significant pay premia have emerged for men in some regions of the UK, as a consequence of wage fluctuation in the private sector. Move along. No reason for government to intervene here.

It’s about women then. Here’s my favourite graph from the IFS report:

According to the Government Equalities Office the ‘pay gap between full-time men’s and women’s median earnings stands at 9.1 per cent, whereas the overall gap when comparing the pay of all men and women in work is 19.5 per cent’. It is unable to explain more than a third of this gap, which it says indicates ‘discrimination may still be an important factor’. Personally I’d also add in the 16% of the gap directly attributable to taking time out or going part time to look after children.

It’s in this context that the government is arguing that when the public sector pays women more than the private sector it’s not only a problem, but a problem requiring intervention.

What if the public sector is just paying its women employees a fair wage?

I’d love to hear from people who have a more detailed understanding of the data (especially anyone that can explain what’s happening in Northern Ireland), but in the meantime, I’m calling public sector pay premiums a good thing.