Can the Tories get away with regional pay?

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This government just won't let up. Its latest wheeze is a plan to introduce "regional pay".

The plans look like a thinly disguised attempt to reduce public sector pay in some parts of the country and cut government spending even further. But of course, they haven't been presented like this. Instead the Treasury has set out a detailed justification for its case that public sector pay must be made more "market-facing".

One of the government's principal justifications is its argument that on average public sector workers earn more than private sector workers. But the government can only reach this conclusion by ignoring the real differences between very different employment spheres. The public sector makes up only a fifth of the UK's workforce. Public sector workers tend to be older on average and have more qualifications. This has an impact on earnings.

By contrast, the private sector is much more diverse with extremely high earners in areas like finance and a small army of lower-paid and lower-skilled staff in cleaning, catering, hotels and restaurants. As the employment research body Incomes Data Services (IDS) put it in a recent report for the civil service unions, such comparisons are unfair.

These objections haven't stopped the government from pressing ahead with its plans. When the government first began to look at this, it was with a view to breaking up national bargaining and replacing it with local bargaining. This might still be on the cards, but it's a risky strategy. As a recent Guardian article warned, local bargaining could lead to increased union membership and activism. Instead therefore, the government is casting around for some sort of framework that might retain a measure of control while also allowing it to reduce spending on pay.

One option being closely considered is an approach that is said to be common in retail banking and large supermarkets, which is to categorise branches into zones and pay different rates in each zone. In some cases the zones are broad geographical areas while in others - for example retailing - companies place different branches into tailor-made zones. Under these systems the highest pay rates are in inner London, and pay in "outer London" is the next highest.

While pay outside London is generally lower, zonal pay structures allow extra payments in "hot spots" across the country where there is greater competition for labour.

Most unions are opposed to regional pay - but one or two union leaders have signalled that they might be prepared to discuss this sort of approach. However, there are real dangers involved here. If the government is serious about wanting to use such a system to ultimately reduce pay levels, then wage levels in any new lowest-paid zone would have to be below the current lowest rates, if not for existing staff then for new starters.

How would this be achieved? Might there be lower pay rises for zones outside London and the "hot spots"? And are union officials really contemplating getting into these sorts of discussions?

A lot will depend on the government's determination to push this through in areas like the civil service, where a model already exists - in the Ministry of Justice. According to IDS, this model started life with five zones, with zone 1 covering Greater London. It has since been refined down to four zones. IDS says that the two zones that cover most of the country - "national plus" (zone 4) and "national" (zone 5) - are now paid at the same rate, though for face-saving reasons the different names of these two zones have been retained. Maybe, but they could also provide a framework for reducing pay in the future, perhaps for new staff.

But it won't necessarily be easy for the government. Even some public sector employers are worried. In the NHS the employers' organisation have said they're not happy about the plans. They express concern that "a crude zonal or regional system will not work effectively across the range of occupations and professions which exist in the NHS". They're also worried about the prospect of differential pay increases, which they say could raise equal pay risks.

There is also opposition regional figures who understandably fear for their local economies if the plans go through. On a recent visit to Cardiff, clearly worried about his party's electoral prospects, Vince Cable was forced into reassurances that the coalition had no plans to cut public sector pay rates in Wales.

This policy is a way of heightening regional differences in order to divide opposition to the government in key areas. But if the Tories push ahead, it will ratchet up tensions with their partners and may yet be another nail in this coalition's coffin.