Is regional pay a good idea?

Is regional pay a good idea?  Probably not if what is proposed is adopted and here’s why.  The premise is that having the same pay rates across the country within the public sector leads to a distortion of the market in that local businesses find it difficult to recruit staff in areas of relatively high public sector wages, such as in say the North East as opposed to the areas of relatively low public sector wages, such as in say the South East.  By removing this inequality small businesses will be able to start up, entrepreneurship will flourish and the local economies and therefore the national economy will improve.  There will also be the additional benefit that overall the cost of the public sector will fall. 

This all seems to make sense except that there already is regional pay through the London weighting where jobs in the capital are paid more to compensate for the higher cost of living in that area.  London does not seem to have the issues with job creation and entrepreneurship that exist in the regions and so it begs the question ‘does higher public sector pay stifle the ability to create new jobs?’  This undermines the original premise of the argument but there are a further two areas of concern in pursuing such a policy.

The first is that any business cannot be divorced from its environment.  If public sector pay is reduced in an area, especially if it is highly dependent upon income from that sector then the money available within the local market will reduce.  This will make it more difficult for local business to start up and flourish as the majority of money earned in a locality is spent in that locality.

The second is that if public sector pay is reduced in the regions and is retained at higher levels in the London area then people will move within a flexible labour market to those areas of higher pay.  This may lead to an over-supply of public sector workers and could drive down wage cost overall but it is more likely to increase pressure on the already tight resources in the capital.  For example, demand for housing could rise, which will push up rental costs which will ultimately be reflected in higher wages to compensate.  This will lead to a higher wage cost in the capital and the logical conclusion would be that public sector wage costs in the regions would have to drop further still to compensate for the growing cost gap.  Taken to its ridiculous conclusion there would be no jobs in the regions as everyone will have moved to London and wage parity will be restored.

Using regional pay differentials to drive down the cost of public sector is likely to have the very opposite effect to the one desired by the premise and so perhaps a more radical approach is required.

As an alternative, regional pay should be introduced but the other way round in that public sector wages should be higher in the regions than in the capital.  This would mean that there would be more money going into areas of low relative wealth which would boost market confidence and which would increase the likelihood of new businesses being started and being able to flourish.  This would boost local economies and therefore lift the overall economy of the country.  In addition it would reduce the pressure on London to soak up more and more people and would lead to a reduction in rental costs and an improvement in the quality of life for many within the capital.

It is worth a consideration but don’t hold your breath.

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