Pay heed to private life

September 1, 2000

University lecturers in London should get much bigger salaries than their colleagues in the Northeast, argues Andrew Oswald.

Britain and other industrial nations should make public-sector pay more flexible so that wages differ according to region.

London cannot recruit enough police officers to protect its citizens. Surrey and other parts of the Southeast are unable to hold on to their teachers and nurses. Universities in the capital find it harder to recruit lecturers than do universities in the north of the country. The government has responded to this problem by doing nothing, or by introducing indirect remedies - cheap loans, strange allowances, overtime anomalies.

Such steps fail to acknowledge the simple truth: public-sector pay must be allowed to vary by region because private-sector pay does. Ultimately there is competition for workers between the two. It is no secret that recruitment problems in southern England's hospitals and high schools occur because private-sector wage rates are much higher in that part of the country.

Partly the legacy of a trade union-inspired view of the world - which deemed that a Swansea fireman should receive the same wage as a Guildford fireman, even though a pound buys far more in Wales than it does in Guildford - the system for setting lecturers' and nurses' pay allows only a tiny London weighting and nothing elsewhere.

As a result of this illogical reasoning, areas where the cost of living is high have to resort to subterfuge and rule-bending to make the public sector function. Someone who would be a junior worker in Humberside has to be promoted to a senior grade in an expensive area. This is the tyranny of rigid remuneration scales and it has unpleasant side effects. It puts people of average ability into grades where they are called on to make decisions that may be beyond their competence.

Equivalent problems are visible in data on the quality of British schools. School statistics from the late 1990s produced by schools inspectorate Ofsted show a clear quality gradient by geographical location. The lowest measured quality of school lessons was in inner London, followed by outer London, followed by the regions where the cost of living is progressively lower. Turnover and wastage rates for the police show the same pattern.

Three steps are required. First, if western democracies wish to have a public sector of any appreciable size, they must accept that pay determines the quality of the workforce. The universities are a particularly good example. Politicians have short horizons and will always be under pressure to keep wages low.

Second, once the desirable level of quality has been decided, the pattern of public-sector wages across regions should be set to be the same as in the private sector. If banks in region X pay secretaries 30 per cent more, so must the hospitals and universities in region X.

Third, there are ways to calculate how much private rates of remuneration vary from Cornwall to Canterbury. My colleague David Blanchflower and I have found that, for a standardised worker, private-sector wages are 48 per cent higher in central London than in Tyne and Wear. In inner London the figure is 35 per cent, and in outer London 26 per cent. The rest of the Southeast pays a regional premium of 14 per cent. The metropolitan part of the West Midlands pays 6 per cent more than the cheapest area in England. And so on.

Most firms would not consider paying identically in different parts of the country. But the public sector is forced to maintain the facade that it is feasible.

Much of the variation in private pay is, of course, caused by differences in the costs of accommodation. The average price of a house in County Durham is Pounds 48,000, in Hertfordshire Pounds 140,000. But there is more to it than housing. Some areas have clean air and pretty green lanes. Others have roads that are more like a gently undulating car park than an uncongested idyll. Market forces take this into account and, where demand and supply curves intersect, feed out the wage rates needed to attract workers of the right quality into the private sector. We should apply the same principle in the part of the economy organised by the state.

Public-sector pay scales should vary by region. This would be as logical for universities as it is for fire stations and hospitals.

Andrew Oswald is professor of economics, University of Warwick.

* Should university lecturers be paid by region, with University of London academics receiving 50 per cent more than their University of Newcastle counterparts?

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