Why cutting pay is not the answer

Feb 3 2010 By Andrew Hebden, The Journal

CUTTING the wages of tens of thousands of workers in the North sounds like a peculiar remedy for tackling the long-standing problem of regional inequality in the UK.

Yet that is precisely the proposal put forward by the Liberal-leaning think tank the CentreForum when it called for an end to national pay bargaining in the public sector.

It says that teachers and nurses in the South who are currently paid the same as their counterparts in the North are losing out because the cost of living is so much higher there. This is true for around 5m public sector workers who are subject to national pay bargaining (apart from in parts of London where an additional allowance is paid).

The report’s author, Professor Alison Wolf, argues that this is not only bad news for those who work in the affected professions in the South, but, equally, for private enterprise in the North. Here, she argues, firms are being forced to pay higher wages to staff in order to compete with the artificially high rates paid in the public sector. Businesses in the North are thus deprived of the competitive advantage of a low cost base which they would otherwise benefit from.

Inevitably, the unions have vigorously contested any plans to scrap national pay bargaining.

Yet many people who run businesses will feel Prof Wolf does have a compelling case, especially if they have seen valued members of staff move into the public sector due to the financial incentive on offer. It is hard to argue that a drain of talent from the private to public sectors is good for the region, especially in the North East where public sector employment is already too large.

Prof Wolf’s solution is, however, far too simplistic. Indeed, it would only serve to immediately increase regional inequality by making tens of thousands of public sector workers in the North worse off, meaning they have less to spend on goods and services in the local economy. It could spark a vicious circle of decline that the economy can ill-afford.

Instead, we must continue to focus on efforts to diversify the economy of the North East. Public sector pay, meanwhile, must be strictly regulated – not just in the North but everywhere – to ensure it is not stifling growth in the real economy.

Andrew Hebden is head of business at The Journal