20/09/2012 08:19 BST | Updated 19/11/2012 05:12 GMT

National Pay Rates for the Public Sector Make No Sense in a Modern Economy

National pay rates for the public sector make no sense in a modern economy.

In the private sector there are large variations in the level of pay according to the region in which one works, these reflect differing living costs, different supply and demand conditions in the local economy and differing levels of profitability for local firms.

If there is a shortage of teachers in inner London then the rational response is to pay more to attract the talented teachers that are needed, not offer the same wage as is paid in lower living cost Liverpool. Under the current system the public sector teacher in Liverpool has a relatively high standard of living compared to the equivalent teacher in inner London who struggles on a similar wage. This is not fair and discriminates against the London teacher or Nurse.

The national pay system also unnecessarily ratchets up the overall government expenditure, this is because the need to pay a living wage in London for public sector greatly benefits public sector workers in lower cost regions who get the same wage when they could be paid a lower regional wage reflecting their lower living costs. This means wages are higher in the public sector than they need to be implying higher taxes for all.

According to the 2011 Annual Survey of Hours and Earnings, the median full time Public Sector worker earns £556 while the median Private sector worker earns £476, that is, a 16.8% differential. When it comes to overall pay, the median pay in London is £650 some 30% higher than the national median wage of £501 and the £451 in the lowest paid region Northern Ireland. The cost of living and housing in London is significantly higher than in the North East meaning many public sector workers in London are unable to get onto the property ladder as their wages are constrained to the level of those in lower cost regions. The pressures on public finances are now so pressing, that we can no longer afford to continue with a system of pay in the public sector that fails to recognise the differing living costs of different regions.

It is a fairly straightforward to compare living costs in different regions and greater flexibility in regional wage rates would lead to a superior allocation of public expenditure, a better quality of the provision of public services in higher cost regions, combined with a lower burden of taxation for all. The increasing burden on public services such as education and health make it essential that we think differently about the way we reward an incentivize employees in the public sector.

An end to the current nonsensical system of equal rewards for all regardless of living costs would be a useful start to solving some of our current public service provision problems.