What Is the Effect of Public-Sector Pay Regionalisation on Local Economies? Christopher Belfield, Ksenija Osmjana, Joyce Ong Pei Wen, Christian Wolf MERG Project: Public Sector Pay Regionalisation1

2 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Introduction Conclusion Public Sector Pay Regionalisation Why? Differences in premia exist, they  hurt private sector businesses  lead to variations in public sector service quality  lower the number of jobs that can be supported by the PS How? Letters to pay review bodies have been sent, official proposals are due on 17 July 2012

MERG Project: Public Sector Pay Regionalisation3 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Introduction Conclusion PS Pay Structure  Pay scales negotiated and set on a national scale apart from a London allowance  1/3 of incomes set by independent Pay Review Bodies o E.g. NHS staff, prison officers, school teachers  Others negotiate by occupational group  Public-private wage differentials vary widely across regions o In London and the Southeast, differentials for a given level of qualification are not significantly different from zero o Other parts of England: 8% for men and 13% for women o Wales, Scotland, and Ireland: 10% and 16% for men and women respectively Current Public Sector Pay Structure

MERG Project: Public Sector Pay Regionalisation4 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification PS Pay Structure Conclusion PrS Regionalisation  Two main motivations: o Cost of Living o Labour market issues  Three types of national pay structure: o London and South East additions o Zonal pay o Complex local systems  IDS reports lack of pay variation outside of London: o 7 of 11 regions are within a £19 (weekly pay) range  However the IFS argue that the public sector premium for men varies substantially o From 4.5% in the North-West to 18% in Wales Private Sector Pay Regionalisation

MERG Project: Public Sector Pay Regionalisation5 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification PrS Regionalisation Conclusion Effects 1.Budget Savings – potentially large Public sector wages more that ¼ of public spending But! Counter effects due to o Smaller tax revenue, especially in rural areas o Declining public sector employment o Implementation costs o Higher public sector premia due to experience and qualifications

MERG Project: Public Sector Pay Regionalisation6 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion Effects 2. Reduction in Labour Shortages But! Effects may be offset by o Higher variation within regions than across o Higher variation between industries in one region than across regions o Wage inflation

3. Quality of Public Sector Services Examples: o GP practices – higher vacancy rates in deprived areas o Nurses: agency nurses earn 30-40% more, less productive, correlation between relative wage and fatality rates o Teachers o Long-term effects on the affected sectors But! No effect if deprived and non-deprived areas in the same zone MERG Project: Public Sector Pay Regionalisation7 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion Effects Deprivation Low-skilled labour in public sector Poor quality provision

MERG Project: Public Sector Pay Regionalisation8 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion Effects 4. Effects on the Private Sector High wages in public sector  higher reservation wages in the private sector  higher costs to businesses  lower competitiveness (e.g. Sweden in 1990s)

MERG Project: Public Sector Pay Regionalisation9 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Effects Conclusion Quantification “There is substantial evidence that the differential between private and public sector wages varies considerably between local labour markets.“ “potential to hurt private sector businesses” “unfair variations in public sector quality” “reduce the number of jobs that the public sector can support” ASSUMPTION: Regionalisation Implies Cuts

MERG Project: Public Sector Pay Regionalisation10 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion Quantification How do we identify overpaid regions? real median pay ratios public sector pay premia (IFS) ASSUMPTION: Regionalisation in London Sets Benchmark estimate of likely cuts

MERG Project: Public Sector Pay Regionalisation11 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion AD Analysis Multipliers in Recessions Theory Empirics Theory low multipliers across the entire business cycle due to negative real wealth effects higher multipliers in recessions, with point estimates of around 2.5 zero lower bound, financially constrained consumers  positive wealth effects

MERG Project: Public Sector Pay Regionalisation12 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion AD Analysis Disaggregated Effects of Spending  Sacerdote (2011) disaggregates spending into three groups: o Block grants to fund local government employment o Support to low income families o Paying for new infrastructure projects  He finds that funding local government employment has almost no effect on employment o Local government employment funding came with ‘far fewer structural restrictions’ o Disparity between short term stimulus and long term employment contract

MERG Project: Public Sector Pay Regionalisation13 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion AD Analysis High valuation of public services and amenities (Serrato and Wingender, 2011)  Decreased labour supply in deprived areas facing cuts in public wages  Migration of (private sector) workers to areas of higher public service provision  Decreased social welfare Migration Effects

MERG Project: Public Sector Pay Regionalisation14 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification AD Analysis Conclusion  London and the South East are the only regions where public sector workers are not overpaid  The largest downward adjustments are expected in the North East, South West, Wales and Scotland.  Using an estimated multiplier of 1.5, we found that GDP would fall by 0.33% per year, and budget savings will be £3.3bn or 0.22% of GDP.  However, pay regionalisation is also likely to have adverse effects on regional economies. o Wales would face a fall in aggregate demand of over £400m (1.19% of GDP) o North West and Scotland of over £600m (0.91% and 0.80% of GDP respectively) Quantitative Effects

MERG Project: Public Sector Pay Regionalisation15 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion We assumed:  no pay increases in underpaid regions  decrease in government expenditure has same absolute effect as an increase  fall in public sector wages is roughly (after adjustment) equivalent to a fall in government spending  best-guess estimates of the multiplier and changes in regional wages  London is benchmark for adjustment  thus, our results are only rough estimates Qualifications

MERG Project: Public Sector Pay Regionalisation16 Introduction PS Pay Structure PrS Regionalisation Effects AD Analysis Quantification Conclusion  simple zonal pay structure inefficient  however, the call for greater wage variation across regions is not unfounded  to reap the benefits of regionalisation without putting deprived areas under further strain, we propose offsetting fiscal transfers via infrastructure investments  Such investments could be financed by savings generated by pay regionalisation  This has the potential to not only boost aggregate demand and long-term growth, but also decrease the level of deprivation faced by poorer regions and thus reduce the undesirability of working in these areas. Bottom Line

Thank you very much for your time and attention. Any Questions? MERG Project: Public Sector Pay Regionalisation17