Blog Entry 19 March 2012
Why local pay isn't a great or straightforward idea
Weekend media was full of Budget leaks suggesting that the government will abandon national public sector pay deals for a series of local or regional settlements. Such a decision may save considerable money for HM Treasury over the longer term as public sector pay would eventually fall towards lower levels in poorer regions such as the North East, North West and South West. Likewise there may be significant implications in Wales, Scotland and Northern Ireland where similar differentials between public sector pay and average earnings exist.
The government argument goes like this. First that high public sector wages means that private sector employers miss out on good skills and talent because they can't compete and offer similarly high wages. Secondly that a large, well paid public sector 'crowds out' private sector growth in other ways too. Third is the perennial issue of ‘fairness’ - that it is unfair for hard working private sector employees in the same areas to subsidise higher pay, pensions and better conditions for their public sector neighbours. The arguments mirror national thinking that underpinned the coalition’s economic policy back in 2010 - namely that reducing the size and reach of the state would allow the private sector to drive growth and break public sector dependency in poorer regions and ultimately rebalance the economy.
There are a number of leaps of faith in that analysis. Given that this same belief has failed to deliver at a national level, there are doubts that it will do so at a local or regional level either. But there are other flaws in the government's thinking. Firstly, it's not clear that reducing the levels of cash circulating around any local economy will do it any good. Specifically the higher wages in public sector jobs are likely to be spent on largely private sector products and services - property, transport, restaurants, shops and so on. Reducing demand for private sector products and services is likely to reduce the profits of such businesses and then affect the wages and jobs of those employed by them, potentially creating a downward spiral in economic activity.
Furthermore, poorer regions and communities tend to have weaker local economies made up of less productive as well as lower wage sectors and occupations. For example, the West Midlands, the North East and North West have greater proportions of retail and hospitality and lower proportions of knowledge intensive jobs such as business services. Likewise the south west is home to more SMEs than other regions. Higher paying jobs and sectors such as financial services, pharmaceuticals, technology and aerospace are more heavily concentrated in the South, South East and Eastern regions. So in turn it is not obvious that firms in poorer regions with different sectors are losing out to public sector employers in a competition for the same skilled and/or more productive workers.
And what might be the impact in higher education? Pay is currently negotiated nationally but universities are not public sector employers within the Chancellor's control. This is probably good news for all of the regions and localities where higher education institutions and campuses are located. Jobs, relatively high wage levels and student spending all help to increase spending in comparatively weaker local economies. Universities of all types are pretty evenly distributed throughout the UK – for example the majority of the recently expanded Russell Group members are located in poorer performing economies. All universities will remain an engine for investment and growth in all places.
Nevertheless a change in other national arrangements is more likely to hasten the breakdown of agreements in higher education. For a government keen on institutional competition and through it, increased innovation and better value, more efficient cost structures, this might be seen as a welcome step. The marketisation of the sector is clearly creating new types of competition and competitive behaviour. It is likely that all universities will still try to compete for the best academics and administrators in order to boost demand and their performance in the NSS and the REF. But in the longer term, many institutions may find themselves constrained by current HE policy and potentially by their geographical location too.
All institutions could take advantage of a deregulated labour market and seek to pay some more and others less – maximising their competitive capacity. They might also seek to bring in other pay and reward differentials such as performance related pay or different pension arrangements. But there are always winners and losers from such changes – at both the institutional and individual levels. For everyone that does well and for every institution that wants to recruit the best there is likely to be a pressure to reduce costs and make savings elsewhere. In turn this may stretch out pay within HE – widening differentials between different earners and occupations.
Several other aspects of HE policy may prevent some institutions from competing much at all - with more driven to lower fees through reforms such as ‘core and margin’ and ‘AAB’. In turn this might lead to even greater inconsistency within and between institutions and potentially greater gaps between different levels and roles. Those with less tuition fee and research income will find it harder and harder to compete across the board. Across the sector it may reinforce an institutional hierarchy but still drive all institutions to exploit savings from any downward trends in localised public sector pay. But a significant regional hierarchy may also emerge – where universities in more expensive areas find themselves with higher pay levels across the board and less flexibility to respond to growing levels of competition. Worst of all for the Treasury may be a widespread push to increase fees so that all have more resources to compete in the longer term – even those in better performing regional economies.
As ever some will do well through a more marketised and localised system. But it won't easily create either an unconstrained local or national competition for staff in HE. Those institutions in poorer areas with greater fee and research income are likely to benefit the most with more flexibility and resource to reward some and savings from jobs where staff are less mobile and without much choice. But even those with the most income in more expensive areas might find any advantage undermined by higher costs caused by their geographical location. In any case it is difficult to see a straightforward unconstrained market emerging in either local or national terms.
But overall the consequences of a more widespread move to regionalised or localised pay systems will be clearer for individual employees. Better qualified workers are usually more mobile within and between regions (and countries) whereas lower skilled employees are significantly less able or likely to move. The former will typically do better in winner take all, more competitive labour markets – although their pay and reward may be less secure – but those who are less well qualified and less mobile will do worse. The gap between the two will grow faster and stretch out. This will be true in higher education as much as in other public or private sector organisations and it will have a range of challenging consequences for us all.
Andy Westwood - CEO