Regional pay in the public sector: an idea whose time has gone?

Blog posts

2 Aug 2022

Stephen Bevan 
Head of HR Research Development 

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The hastily retracted proposal to introduce regional pay in the public sector had been considered by both Liz Truss and the Taxpayers’ Alliance as a way of saving £8.8bn a year. It’s not a new idea, and both Gordon Brown and George Osborne took the proposal very seriously during their respective periods as chancellor, but neither went ahead with implementation. So let’s take a look at what regional pay might offer, and why it has never delivered, despite its allure.

We know that the rate of inflation varies by region and this means that, outside London and the South East, it could be argued that many public sector workers whose pay is determined nationally are being ‘overpaid’ relative to local pay rates and relative to regional inflation. Proponents of regional pay argue that greater freedom to set pay rates locally (especially where local rather than national labour markets are dominant among lower-graded staff) might be a simple way of reducing the total public sector paybill. There have been several previous attempts to introduce regional pay, most notably the local pay initiative in the NHS during the early 1990s and delegated pay across the Civil Service in the early to mid 2000’s. None of these attempts have succeeded and the principal concerns have been:

• That local pay determination, especially if it results in significant differences in base pay, will make it more difficult to encourage senior staff or specialists to move out of London and the South East. This risks national pay rigidities being replaced by local pay rigidities, and that these would act as a barrier to the flexible deployment of staff to meet changing business needs.
• That local pay determination might stimulate artificial and costly competition for talent – with ‘bidding-up’ breaking out between public sector employers within the same organisation (eg DWP, HMRC or the NHS).
• That public sector unions have better and quicker local information networks than local employers and that co-ordination between unions will easily outflank that between employers, especially if they are in competition for some staff groups.
• That local ‘reward management’ capability among managers who have always worked under a centralised system was generally considered to be weak. For example, managers in both the NHS and local government have had some delegated powers for a number of years, but the take-up has been very low because it stimulated no enthusiasm, exposed a lack of pay expertise locally and threatened to increase workloads considerably.
• That there will be high displacement costs attached to replicating bargaining and pay-setting processes locally, consequent dispute resolution, and the time and costs involved in setting up and running a local or regional labour market and pay information infrastructure. These would be likely to cancel out many of the savings made.

• That regional pay misses the point about what pay is for – that the main determinants of pay setting should be skill level, qualifications and job size rather than geography. Should the ‘rate for the job’ be different in Durham compared with Guildford – especially if it’s the same job? How might equal pay be affected by this?

If public and private sector wage differentials at regional level were seen as a major factor by private sector employers, this might boost the case for looking at regional pay-setting in the public sector. But the fact is that the big banks and retailers, with large national networks, have always shied away from embracing the complexity of regional basic pay, choosing instead to have a simpler set of allowances reflecting (in most cases) the higher cost of living in London and the South East.

Some regions of the UK, of course, are heavily dependent on public sector employment (the North East, Wales and Northern Ireland, for example). We need to be careful when contemplating reducing household incomes in these regions still further, especially now. Many people who work in the private sector also have public sector employees (or ex-employees) in their households. Reducing incomes as part of some grand experiment to introduce market-facing pay, based on ideology rather than economics, may have perverse and unintended consequences, such as further reducing consumer spending power in already deprived regions and increasing inequality between regions (and probably widening the North-South divide).

A further problem with the policy is that the mooted savings appear to be based on analysis carried out a decade ago when public sector pay was £30 a week higher than in the private sector. In fact as the graph below shows, public sector pay is now on average £20 a week lower than in the private sector. There are of course still regional differences beneath these averages, but with pay growth in the public sector stuck below 2 per cent a year (while it’s rising by 6 per cent a year in the private sector), the bigger problem that we’re facing now is public sector pay falling behind the private sector rather than racing ahead.

I've been carrying out research in this field for almost 30 years now and it is easy to get cynical about initiatives like this because there really isn’t anything especially innovative about them and they have been tried several times before. The reasons that regional pay hasn’t taken hold previously is mostly that it doesn’t deliver what HM Treasury or what some economic theory predicts. This isn’t an especially ideological point, either. It’s just that the practicalities of making it work are too difficult and implementation on the ground is very hard. Of course, we can argue about whether increasing wage flexibility should be seen as part of a wider push to de-regulate the labour market or whether reducing incomes in poorer regions undermines the marginal propensity to consume, but the reality is that Ms Truss and the Taxpayers’ Alliance have set an old hare running which is being peppered with bullets by both its traditional opponents and by some of its friends. I hope they take the hint.

It’s long been my view that governments of all persuasions rarely have a very coherent public sector pay strategy. They tinker at the margins and favour eye-catching initiatives rather than those which work. Pay and rewards, when used alongside imaginative and inclusive management practices, can deliver motivation, high performance and a sense of distributive justice (excuse the jargon). As long as some politicians believe that the biggest contribution to success that public sector workers can make is to cost less, we’re going to struggle to get high-octane performance from any organisation.