SUBMISSION TO THE OFFICE FOR MANPOWER ECONOMICS ON MARKET FACING PAY

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1 Market Facing Pay Scttish Gvernment May 2012 SUBMISSION TO THE OFFICE FOR MANPOWER ECONOMICS ON MARKET FACING PAY Intrductin In the Autumn Statement 2011, the UK Gvernment asked fur f the Independent Pay Review Bdies t cnsider hw public sectr pay can be made mre respnsive t lcal labur market cnditins. In parallel t the 2012 UK Budget, HM Treasury (HMT) published evidence which it cnsiders supprts its plicy apprach. The Scttish Gvernment des nt supprt the UK Gvernment s prpsals n ecnmic, public sectr efficiency r equity grunds. We are als uncnvinced with regard t the evidence base which has been used t supprt this prpsal. There are a number f challenges in making relevant cmparisns f pay between the private and public sectr bth in terms f adequately reflecting differences in emplyee characteristics and jb characteristics. Estimates based n the time perid since the nset f the recessin are als temprarily inflated due t differences in the timing f wage adjustments in the public and private sectrs. In ur view, a mve tward market facing pay has the ptential t be damaging t lcal ecnmies and culd seriusly hamper the prvisin f public services. Furthermre, we remain t be cnvinced that reginal pay awards will in practice lead t savings t the taxpayer r prmte grwth. Indeed, we wuld cnsider that the establishment f reginal pay bargaining machinery wuld be relatively expensive and inefficient cmpared t ther methds. The Scttish Gvernment is als cncerned that such a plicy may be used as a vehicle t cut spending in certain parts f the UK with a negative impact n many areas in Sctland. There are already significant variatins in pay; data frm the Annual Survey f Hurs and Earnings finds that the average hurly pay fr public sectr wrkers in Lndn is apprximately 28% higher than in Sctland. Extending this further wuld nt be ecnmically efficient r assist effrts t prmte shared grwth acrss the cuntry. This submissin utlines sme f the key pints that infrm the Scttish Gvernment s psitin. It cvers Scttish Gvernment s apprach t pay; Evidence base fr public-private pay differentials; and, Implicatins fr ecnmic grwth and public services; Scttish Gvernment Pay Plicy Since 2007, the Scttish Gvernment has taken frward a respnsible apprach t setting public sectr pay. In the face f unprecedented cuts t ur Budget, the Scttish Gvernment has balanced difficult decisins n tight pay cnstraint with the need t sustain emplyment pprtunities acrss the public sectr. Nw, mre than ever, we need t spend the resurces available in the best pssible way, t have the maximum impact n delivering high quality public services fr the peple f Sctland. Fr example, by implementing a freeze f the basic pay fr all staff cvered by the Scttish Gvernment s pay plicy and suspending nn-cnslidated bnuses we have been able t 1

2 prvide measures t supprt the lwer paid by maintaining ur cmmitment t the Scttish Living Wage and ensuring that any emplyee earning less than 21,000 receives a pay award f at least 250. As a result we have been able t extend ur n Cmpulsry Redundancy agreement fr the 30,000 emplyees cvered by ur pay awards and the NHS in Sctland fr a further year subject t agreement with the unins abut wrkfrce flexibilities. Evidence base fr public-private pay differentials The pssible intrductin f market-facing pay raises a number f cmplex issues. The Scttish Gvernment remains t be cnvinced by the evidence n public-private wage differentials. Measuring Public-Private Wage Differentials Fr example, we are aware f recent estimates frm studies by the Institute f Fiscal Studies (IFS) 1 and the Office f Natinal Statistics (ONS) 2 that suggest a current public/private sectr pay differential f arund 8% in the UK. Hwever, it is imprtant t nte that such studies cme with a significant number f caveats. In particular, it is widely recgnised that there are majr methdlgical challenges in estimating differences in pay between jbs in the public sectr and jbs in the private sectr. This makes it difficult t ascertain whether there is a like fr like premium. While attempts are made t accunt fr variatins in qualificatin, skills r ccupatin, prxies used t accunt fr these differences may nt fully reflect variatins in rles r respnsibilities. Further, pay patterns acrss the private sectr are nt unifrm. Overall the distributin f earnings is wider UK median grss annual pay - private sectr dminated industries ( ) cmpared t the ACCOMMODATION AND FOOD SERVICE ACTIVITIES 15,956 public sectr and AGRICULTURE, FORESTRY AND FISHING 19,968 there are als WHOLESALE AND RETAIL TRADE 20,058 differences between ARTS, ENTERTAINMENT AND RECREATION 21,146 ADMINISTRATIVE AND SUPPORT SERVICE ACTIVITIES 21,320 sectrs (ranging OTHER SERVICE ACTIVITIES 22,633 frm htels and REAL ESTATE ACTIVITIES 24,924 retailing t financial MANUFACTURING 26,050 TRANSPORTATION AND STORAGE 26,052 services) and WATER SUPPLY; SEWERAGE, & WASTE MANAGEMENT 27,148 between different CONSTRUCTION 27,540 sized firms. PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES 32,172 FINANCIAL AND INSURANCE ACTIVITIES There are als INFORMATION AND COMMUNICATION 35,028 ELECTRICITY & GAS 35,864 limitatins in the MINING AND QUARRYING 41,128 ability t draw 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 cnclusins frm available pay data. Fr example, data frm the Annual Survey f Hurs and Earnings (ASHE) des nt include self-emplyed wrkers, and the measures f pay d nt fully take int accunt all frms f remuneratin and benefit such as bnuses. Bnuses can be a significant element f ttal remuneratin in the private sectr hwever ASHE nly captures sme cmpnent f this. 35,000 1 The IFS Green Budget: February 2012 : - The Institute fr Fiscal Studies (2012) 2 Estimating Differences in Public and Private Sectr Pay The Office fr Natinal Statistics (2012) 2

3 In additin the survey takes place in April f each year which is utside the main bnus seasn. The Mnthly Wages and Salaries Survey shw that bnus payments in the private sectr peak between January and March. Fr example, bnuses accunted fr 15.2% f average UK private sectr weekly earnings in February 2010 and 17.9% in March Bnuses as a percentage f average UK weekly earnings 20% 18% 16% 14% 12% 10% 8% % 4% 2% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nv Dec Estimates f the pay gap may als be misleading if there are factrs that drive differences in labur market participatin and/r chice f sectr amngst the wrkfrce. One study 3, which attempts t address this, has findings which actually suggest a psitive wage differential fr males in the private sectr in Sctland. These pints demnstrate that care shuld be exercised when basing any plicy cnclusins n such studies. Impact f the recessin It is als imprtant t cnsider the time perid ver which any assessment f public and private sectr pay is taken. The ONS estimate that the apparent pay premium increased frm 3.0% in 2002 t 5.9% at the start f the recessin in 2008 befre rising further during the recessin (due t falling earnings in the private sectr). Hwever, the Institute fr Fiscal Studies frecast that, as a result f the plicies f pay restraint in the public sectr, the average public-private pay premium will fall by 4.4 percentage pints between and and by 7.8 percentage pints by Estimates f the scale f any pay gap are therefre expected t decrease significantly even befre any ptential impact f the intrductin f market facing pay is cnsidered. The Scttish Gvernment will cntinue t take frward a realistic apprach t public sectr pay in this difficult climate whilst ensuring that the lwest paid are best prtected. This will be balanced alngside ur cmmitment t deliver high quality public services fr the peple f Sctland. 3 A.Heitmuller, Public-Private Sectr Pay Differentials in a Devlved Sctland, Jurnal f Applied Ecnmics, Vl. 9, N.2, pp , Nvember

4 Variatins by type f emplyee Analysis undertaken by the IFS suggests that females are fund t have a higher estimated public/private sectr pay differential than males, hwever ne limitatin f this study is that it des nt cntrl fr differences in ccupatin. Fr mst f the perid the IFS fund n statistically significant differential fr men. The estimated differential is als fund t be higher fr thse at the lwest end f the incme distributin. Any general mve twards lcally determined pay culd therefre have a disprprtinate impact upn female wrkers and thse n the lwest incmes. It shuld als be nted that public sectr pay already differs acrss the UK. Fr example, the Annual Survey n Hurs and Earnings (ASHE) finds that median hurly public sectr pay in Lndn is 28% higher than in Sctland. Many public sectr rles (e.g. central department civil servants) are nt lcatin dependent. Decentralisatin ut f Lndn (where a prprtinately higher number are based) culd, as an alternative t reginalisatin f pay, realise cst savings thrugh a reductin in the use f Lndn weighting. Impact n the Ecnmy In his letter t the Pay Review Bdies, the Chancellr argued that variatin in public-private pay differentials acrss regins may harm private sectr businesses which have t cmpete with higher wages. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Nminal GVA grwth ( ) It was als argued that variatin in 0.0% 0.0% Nrthern West East f Wales Nrth West Yrkshire Nrth East Suth West East relative pay culd lead t unequal Ireland Midlands England and The Midlands Humber quality f services acrss regins, and result in the public sectr paying mre than is necessary t recruit, retain and mtivate staff. 1.2% 1.4% 1.7% 2.3% 2.4% 3.2% 3.4% 3.5% 4.3% 5.3% 6.9% Suth East Sctland Lndn Hwever, there are a number f weaknesses with this argument. Firstly, there is little supprting evidence that such crwding ut f private activity is actually ccurring in Sctland. There is n bvius link between utput (GVA) grwth between 2007 and 2010 and the estimates f the public sectr wage premium. Sctland GVA grwth has been secnd highest in the UK, while Scttish emplyment rates are better than fr the UK as a whle. Since devlutin and up t the start f the recessin the public sectr accunted fr 19% f ttal emplyment grwth in Sctland ver the perid 1999 t 2008 slightly less than its pr-rata share. Public sectr emplyment increased by just under 49,000 ver the perid, whilst private sectr emplyment rse by ver 210, , , , ,000 50, ,000 Change in emplyment, Sctland, 1999 Q4 t 2007 Q4 189,400 46,900 Secndly there is little evidence t suggest 0 Ttal Private Public that crwding-ut f the private sectr is the key cncern in mst areas. In reality, grwth is driven by a cmplex set f factrs. It is unlikely that that public-private sectr pay differentials are the sle barrier t unlcking ecnmic perfrmance. 4

5 As pinted ut abve, if crwding-ut is the principal cncern then mving public sectr psts ut f relatively tight labur markets such as Lndn culd be mre ecnmically efficient as it wuld save mney and encurage grwth in ther parts f the cuntry. Thirdly, the biggest barrier t ecnmic grwth at the mment is a lack f aggregate demand. Reducing public spending in certain areas will nly suppress these lcal ecnmies even mre. The Scttish Gvernment des nt cnsider that a levelling dwn f wages is cnducive t either the prductiveness f staff r t increasing the current level f ecnmic activity. There is a risk that this culd further embed structural weaknesses and decline and lead t ppulatin shifts as peple pursue mre lucrative pprtunities. In additin t the negative impact n the ecnmy, this may lead t prblems recruiting and retaining staff. Recent wrk carried ut by Incmes Data Services 4 n lcal pay determinatin highlights that mst large, multi site private sectr cmpanies have natinal pay structures. Cmplex lcal appraches can be cstly. Finally, ecnmic thery suggests that wrkers shuld be paid their marginal prduct in effect a wage that reflects their prductivity. Alngside this, there is a strng underlying principle f equal pay fr equal wrk that has been bradly maintained in the public sectr. If this was t change, it may lead t prblems as lcal areas cmpete with ne anther fr staff (perhaps even leading t increased csts) and make it mre difficult t maintain mrale and retain gd staff. This may in turn lead t deteriratin in the quality f the service prvided and spatial inequalities in service prvisin. Cnclusin The Scttish Gvernment des nt supprt prpsals fr market facing pay and has n intentin f implementing such a plicy in Sctland. Hwever, the prpsal has the ptential t impact upn sme 30,000 UK Gvernment staff wrking in Sctland. As utlined in this submissin, there are serius methdlgical challenges in estimating differentials between public and private sectr pay. Mrever, the public sectr pay freeze is already set t reduce measures f the apparent pay gap while public sectr wrkers are als facing significant cst pressures such as increased pensin cntributins. The Scttish Gvernment des nt accept the ecnmic r public service efficiency arguments put frward by the UK Gvernment. In reality, we d nt cnsider there t be evidence that crwding-ut f the private sectr is the key cncern in mst areas; rather it is ften a lack f verall aggregate demand in the lcal ecnmy. Reducing public spending in certain areas will nly suppress lcal ecnmies even mre and perhaps further embed structural weaknesses. Reducing relative wages in certain areas will make it mre difficult t attract and retain high quality staff. With the UK nw in a duble dip recessin, fcus instead needs t be n genuine and prductive measures t bst investment and grwth in the ecnmy. Scttish Gvernment May Grwing number f myths abut lcal pay determinatin, IDS, 17 January