Mind the (Imaginary) Gap

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Gordon Brown revives a Tory idea about regional pay

One of New Labour's more baffling preoccupations over the past few months has been its apparent fixation with the idea of regional pay. Exactly where the impetus for this is coming from seems a bit of a mystery, since none of the major unions have been campaigning in this direction and there hasn't really been any significant business lobby for regional pay variations either.

So, if it's not big business or the unions, who exactly is in favour of this idea? The uncomfortable answer for Gordon Brown fans is that - like the drive for privatisation and PFI schemes - this particular obsession is almost entirely Treasury driven.

Like so much of what passes for New Labour thinking, the original idea of regional pay was cooked up when Kenneth Clarke was Chancellor of the Exchequer, at the fag-end of the last Tory government.

With the Tories, the idea of regional pay was regarded as yet another blunt instrument with which to clobber the unions. In his Budget speech of 1987, Clarke not only called for regional pay determination - he wanted the see abolition of the annual pay round, the doing away with concepts like the 'going rate' and the ending of national pay bargaining - all seen as gruesome reminders of collective bargaining.

Clarke's exact words were: 'We must move towards a system more clearly based on market forces, on demand and supply, on competition and on ability to pay... If we can move to a system where pay increases are primarily based on performance, merit, company profitability and demand and supply in the local labour market, we will dethrone once and for all the annual pay round and the belief that pay increases do not have to be earned.'

In the event, the launch of this policy was badly timed. It had been thought up at the high point of Tory triumphalism and not long after the defeat of the miners. But by the time it emerged into daylight things had changed. In the late 1980s there was a relatively short-lived upturn in the economy, especially in the service sector and in London and the south east. For a period, this led to a dramatic tightening of the labour market, whereby market forces ensured that demand for labour outstripped supply and not the other way round.

This did not provide the ideal backdrop for giving the unions a good cuffing. Far from driving down rates of pay and doing away with the 'going rate', many companies were forced to bump their rates upwards and pay at or above the 'going rate' in order to attract qualified staff and keep them from going over to rival firms. So Clarke's plan was shelved and failed to re-emerge for a good decade until the Cabinet Office came up with its new strategy document, 'Modernising Government', in 1999. Among other things, this called for the reform of 'outdated' systems and challenged the idea that everybody should get the same pay increase each year or that pay and conditions should be set nationally.

The Treasury was again saying that, 'Pay must also be allowed to vary at local level, according to local pressures.' But the focus now was a bit different. This time, the main justification being given for regional pay was that, 'In the private sector, pay differentials of up to 50 percent exist between different parts of the country' and that 'unless public sector organisations take these differentials into account, service quality will be at risk and both employees and service users in large parts of the country will suffer'.

All of this is asserted as though it was gospel. In fact, it is a very partial interpretation of the facts, dressed up to justify further attacks on public sector workers. One strand follows directly from a longstanding fixation Gordon Brown has had with upping the 'productivity level' of the British economy to US levels. Brown is also convinced that the key factor inhibiting the bridging of this (quite imaginary) gap is the relative inefficiency of the public sector in Britain, compared to the private sector.

In fact there is no convincing evidence to back up any of these assertions, especially the one being used to justify regional pay. There is a very large differential in earnings between London and the south east and other parts of Britain (though it rarely stretches to as much as 50 percent). But outside of London and its immediate surroundings, the differences in rates of pay (between the north east and the Midlands, for example) are remarkably small.

The main reason for this is that most major companies in the private sector - like all of the major banks, for example, or all of the main retail chains - pay more or less the same rates of pay in Manchester as they do in Glasgow or Birmingham. On top of these national rates they pay extra for workers living and working in London, in the form of London weighting payments. According to a recent official report on local government pay, the average extra amount paid for working in London - across both the public and private sectors - is currently £3,290 a year. This is barely enough to keep up with the colossal additional costs of living in the capital such as transport and housing, and certainly nowhere near 50 percent higher than the rest of the country.

Why is any of this important? Because, according to some free market fundamentalists, one of the things which makes the private sector special is that it allows companies to react 'flexibly' to circumstances, varying rates of pay more or less at will. One of these - a particularly irritating Professor of Economics from Warwick University called Andrew Oswald - argues that this is what already happens in most of the British private sector. And it is this model of a kind of free-market Shangri-La which, in his view, the public sector should be following. This evangelical supporter of top-up fees once used the university staff magazine to suggest corporate-style pay rises through 50 percent redundancies.

Confusingly, Oswald is so far gone with the free market fairies that - a bit like the kind of libertarian Tories who favour the abolition of any legislation which limits pornography or drug use - he also argues that London weighting payments need to go through the roof in order to keep up with housing costs (especially for academics like himself). Understandably, the Treasury wants to completely ignore the part of Oswald's argument which favours a massive hike in London weighting. But enough of them are happy to use the rest of his thesis to provide intellectual ballast for an otherwise extremely ropey case on regional pay and for a more general attack on national pay rates.