Sunday, December 16, 2007

Public Sector Pay Reviews

The government has been busy insisting lately that all public sector pay reviews should be kept to as near the 2% target inflation level as possible. The cold hard logic is that because there are so many public sector workers the more money they are given, the greater the inflationary pressure.

The first problem with this is that it doesn't reward workers in the public sector. In fact really given that other inflation figures are higher including the RPI index at 4.0% it probably gives anyone working in the public sector a pay cut. So not only are public sector workers under appreciated with less job security they must now take a pay cut year on year.

The second problem is that it is a very short term knee jerk reaction which does not make economic sense in the long term.

Lets start with a premise which we can all agree on and then apply the New labour policy to see what happens.


We want a public sector which rewards and values employees. In doing this we recognise we will not be able to compete on salary but workers will not be penalised simply because they work for the greater good.

We will treat employees as individuals encouraging innovation, recognising that a strong capable workforce will mean a strong Great Britain

New Pay Scheme:
No salary settlement to be higher than lowest rate of inflation.
  • Differential between Public and Private sector increases in the same way that the differential between house prices and earnings have increased
  • Employee motivation decreases, if salary does not change employee become priced out of the economy (eg housing) and so have to seek promotion on a new grade or move to the private sector. Staying in the same post is not a viable option.
  • Low paid jobs attract poor employees who cant compete for average jobs. There is a tendency for public sector employers to hire or retain poor employees rather than have no one in post.
  • Low paid jobs cannot be filled, greater reliance on temps which cost up to X1.5 more.
  • Employees who remain in the same post for their career i.e. police officers, paramedics decide to leave the industry.
  • Organisations cheat: they award pay rises outside of the annual payment to keep employees effectively negating any economic effect the annual policy has.
  • When employee leaves, the job cannot be filled, the salary is then regraded to a salary which the old employee would have liked but was not allowed. So the public sector is willing to pay more for a new person with less experience. The policy does not retain employees.
  • Public sector will never be world class. You get what you pay for, you pay third rate wages you get third rate service.
  • The average employees suffer, these pay settlements don't effect the fat cats only the front line staff.
In reality you may save money by restricting salary growth but you end up paying more in hidden costs and your public sector improvement / reform policies suffer.

Public sector pay as an economic tool is a blunt instrument. There is an argument for making sure that things don't get out of hand by applying a cap or by phasing large pay rises. However, the bottom line is that the policy does not treat people as individuals.

There are much better ways of managing the economy without penalising a section of society who choose to give up private sector wages for the greater good.

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