Time for the Lib Dems to blow the final whistle on national wage settlements

by Stephen Tall on March 18, 2012

It’s over 50 years since the campaign by Jimmy Hill, then chairman of the Professional Footballers’ Association, successfully scrapped the maximum wage which operated throughout the football league until 1961. Some probably lament the commercialisation of the game which it set in motion. But the idea that individuals should have a ceiling placed on their wage-earning potential by the authorities seems quaintly absurd today.

Except in the public sector. If you’re paid by the government — if, for example, you work in schools, colleges and universities, or the civil service and local government — then your wages are defined by national pay rates determined by Whitehall and trade union negotiations. It doesn’t matter which part of the country you work, you operate within that centrally-set national pay framework. It is as quaint and as absurd as the wage rules of football were half a century ago.

The latest leaks ahead of the Budget suggest that the Coalition will put a stop to this cabale. I hope the rumours turn out to be accurate. Back in 2006, Gordon Brown argued in favour of “more local and regional pay flexibility” in his Mansion House speech as Chancellor; but like so many politicians before and since he quailed at the thought of actually introducing a policy which will create ‘winners’ — including and especially those working in, and depending on, public services in the most deprived parts of the country — but which will also result in ‘losers’ who may shout more loudly.

There is a seductive line of opposition to scrapping centralised pay rates, articulated here by Jonathan Calder — that a national wage settlement is the most effective way of deterring “the brightest and best [ending] up in London, earning more than their counterparts elsewhere.” It’s not an argument I buy. Here’s why…

Skewing the wage market: the impact on deprived communities

This is not a simple question of London/south-east Vs the Rest of the UK. There are huge variations within regions, too, which skew the labour market — we only have to think of Nick Clegg’s famous example of the “absolute disgrace that a child born today in one the poorest neighbourhood in Sheffield, where I am an MP, can expect to live 14 years less than one born in the wealthiest neighbourhood.” Guess which Sheffield neighbourhood is going to find it easiest to attract the best teachers or social workers — the leafy suburb or the gritty inner-city — if both pay the same salary?

Unsurprisingly, recruitment and retention rates in the most deprived parts of the country are well below those of the more affluent. Under normal market conditions, this would be reflected in the pay and conditions: tougher work would be better rewarded. In this country, we hope that our public sector ethos will somehow make up the difference, that there will be enough local heroes willing to undertake more demanding jobs for no extra remuneration. The evidence shows that such hope is as forlorn in reality as it sounds in theory.

Alison Wolf, Professor of Public Sector Management at King’s College London, produced an excellent and thorough analysis of the malign impact of national pay rates on the country, and in particular on our most disadvantaged communities, in November 2011 for Centre Forum. Here’s a table from her report which illustrates the point I make above, that inter-regional differences exert a profound influence on public services:

As Professor Wolf notes:

… even in regions where public sector pay is relatively very high, deprived localities find it very hard to attract good professionals. Money is not the only thing that matters to public sector employees (or indeed almost anyone); and there are genuine differences in people’s motivations which translate into career choices. But money certainly does matter; and if we want to improve the quality of services for deprived communities, then one obvious and powerful thing to do is to pay people more to work in them.

Attracting private investment to deprived areas

But the negative impact of national pay rates on public services are not the only important aspect of this debate — there is also their constriction of the capacity for deprived communities to attract private sector investment. Low-wage regions, such as Sheffield, should have one obvious competitive advantage over London: lower living costs, in particular housing, should make it easier to attract and retain skilled employees.

National pay rates in the public sector, though, skew the market, siphoning off the supply of qualified staff. Professor Wolf again:

Nationally set public sector salaries, just as much as the national (and also uniform) minimum wage, put a floor under the wages a private employer can offer – and correspondingly reduce the degree to which setting up business in a deprived area rather than a prosperous one is financially attractive. Of course this does not mean that there is no successful private enterprise in relatively less successful areas; there are still plenty of companies who can and do pay good wages to highly productive workers and turn a handsome profit. But at the margin, it makes it harder and less attractive to create new private sector businesses and jobs – and the margin is where the recently redundant, the long term unemployed, the less skilled, and the school leavers are to be found.

Conclusion

It seems clear to me where we should be heading: for each individual employee to be able to negotiate their own individual contract, as they do for example in Sweden. In reality, many constraints and parameters will remain, not least the total budget available that can be afforded for public services. There will also, of course, continue to be a valuable role for trade unions in collective bargaining, but much more of it will happen at regional rather than national level.

Ending national pay rates is not a silver bullet. National and regional income inequalities are deeply ingrained, as are the vested interests of government and the unions in sorting out wage settlements with as little bother as possible, rather in the way C.19th conferences of Europe once re-drew the maps of countries. No single measure is going to put that to rights overnight. But it would, I believe, be a step in the right direction not only in improving individual employee rights, but also in helping the most deprived areas in our communities to start to compete with their better-off neighbours.

* Stephen Tall is Co-Editor of Liberal Democrat Voice, and also writes at his own site, The Collected Stephen Tall.