Kwasi Kwarteng is the MP for Spelthorne
This morning, The Times (£) published a letter from 25 economists. These academics argued that we should stop the current practice of setting uniform national pay rates in the public sector. Instead, we should allow wages to be negotiated individually. Any savings made would be kept by the local area, and used to further enhance public services.
At first glance, this may seem like an obscure issue. However, it has important implications for the structure of the British economy. Too many areas of the country are becoming dominated by the public sector. In the short term, this is bad for unemployment. In the long term, it is dangerous both for our economy and the quality of our public service.
As anyone who has moved to London will tell you, the cost of living varies across the country. This means that paying the same wages nationally allows some to have a much higher standard of living than others. Private sector companies, offering lower local market rates, cannot hope to compete.
We already recognise this problem through a London weighting that recognises the higher cost of the capital. Significant divergences still remain, however. According to the Institute for Fiscal studies, workers in the public sector in Wales earn up to 18% more than those in the private sector. The think-tank Policy Exchange estimates that across the country, including pensions, those in the public sector earn 14% more than in the private.
The result is that private companies, especially small businesses, cannot afford to take on skilled staff. One survey for the Institute of Directors found 28% of manufacturers complaining that the high level of public sector pay was making it difficult for them to find staff.
In other areas where private sector wages are high, the national pay scales conversely make it difficult for the public sector to attract the right staff. This has a real impact on the services they provide. Research by Professor Carol Propper suggests that a 10% rise in the local private sector’s salaries causes exam performance drops by one GSCE grade per pupil. Even more dramatically, Professor John Van Reenen from LSE found that the relatively low wages in the health sector were causing the 6100 extra deaths in London and the South East each year.
The current Eurozone crisis has shown the danger of not allowing prices to adapt to very different economies. We do not want London to become Germany, and the north East or Wales Greece. As long as some of our regions are dominated by the public sector, they will continue to fall further behind.
If we want to rebalance our economy in the long run, we have to make it make it easier for the private sector to hire the best workers. That cannot happen while we stick to national pay bargaining.