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The price is not right

Deborah Littman on the Government’s misguided public service pay policy

ordon Brown kicked off 2008 with a depressing New Year’s message for millions of public sector workers. The government announced its intention to keep public sector pay rises close to its two per cent inflation target.  Pay review body awards last year for police and nurses in England were staged to keep them below two per cent. The armed forces, however, in the first pay round of 2008 got 2.6 percent. Non-pay review body groups have been told that they will be held to two  per cent increases for the next three years.

Brown and Chancellor Alistair Darling claim that tight limits on pay are necessary to avoid fuelling inflation. But a number of reputable economists have thrown cold water on the idea that public service pay is responsible for rising inflation. The Institute for Fiscal Studies says pay gains will have little impact on pricing pressures.

Antoine Bozio of IFS points out that the Bank of England considers pay increases of around 4.5 per cent a year across the whole economy to be consistent with its inflation target, putting public sector pay rises well within this category (1). Moreover, pay increases are usually negotiated retrospectively. According to Incomes Data Services, an independent research organisation which has been analysing pay settlements since 1966, wage negotiators normally take account of what has already happened on the inflation front and react accordingly. “In other words, the causal relationship is usually not from wage increases to inflation, but rather the other way around.” (2)

If wages don’t drive up inflation, what does? Stephen Nickell of Nuffield College states that inflation is a measure of what people buy, not what they earn. “It is the things that are produced by the private sector that go to the calculation of inflation – haircuts, potatoes.” And those costs have been soaring. The Retail Prices Index (RPI) has been running at over four per cent for most of the past year (much higher than the government’s preferred inflation measure, the CPI, which excludes mortgage interest and other housing costs) but even this higher figure doesn’t seem to adequately reflect the price shocks people are experiencing in their local shops, railway stations and garage forecourts.

Where does this dissonance come from? Not to get too technical, but inflation measures such as the RPI are based on the average price of a basket of goods, some of which rise in price while others fall. Inflation is being kept down at the moment because the cost of big ticket items such as flat-screen televisions, cars and computers is dropping. But these are items that low paid workers are much less likely to buy than basics, like food, fuel and transport fares, where prices are rocketing.

 MySupermarket.co.uk analysts, for example, found that prices of staple items at the three biggest supermarkets - Tesco, Asda and Sainsbury's - leapt by 12 per cent last year, adding up to £750 to average food bills.

The major energy companies recently announced increases in electricity and gas prices of 12.7 per cent and 23.8 per cent, while sharp rises in housing costs, childcare, petrol and fares are also putting enormous pressure on the budgets of ordinary families. Economists estimate that the real rate of inflation for much of the country is closer to six per cent -- meaning that the two per cent pay limit for public service workers will amount to a massive pay cut.

Beyond the pain that pay restrictions will bring to public service workers themselves, they could have a disastrous impact on Labour’s broader policy agenda. The government has set itself ambitious targets for eradicating child poverty by 2020, for combating ill health and social exclusion and for getting people into work. All of these goals will be undermined if public service workers are not paid incomes that allow them to adequately support themselves and their families.

Already one in six British households is living in fuel poverty -- the highest rate for almost a decade. Below inflation pay rises will make fuel unaffordable for a greater number of families, threatening the government’s commitment to eradicate fuel poverty entirely across the UK by 2016-18.

The consequences of inadequate income will cost the Treasury far more than they would have to invest in a decent public service pay increase, through higher NHS costs, poorer school results, and higher levels of child poverty, crime and social disorder. Research commissioned by UNISON has uncovered the serious damage being done by the growing gap between what our members earn and what they need.

Vincent Pattison interviewed 49 low paid workers, on private contract at a  Manchester hospital. He found that their hourly wage of less than £5.88 an hour was insufficient to cover their basic living costs. Attempting to afford even the basic necessities was described as ‘a constant battle’, ‘soul destroying’ and ‘an uphill struggle’. As a consequence workers were often unable to afford adequate food, had no money for social activity and suffered constant anxiety about falling into debt. This showed up in poor health, high levels of stress and social isolation.(3)

Such problems are not restricted to the lowest paid. Peter Ambrose’s study ‘Living and Working in the Southeast’ looked at UNISON members with an average household income of £34,000 a year – well above the poverty threshold. Nonetheless he found serious problems caused by workers’ inability to meet high regional living costs, particularly the soaring cost of housing.

The study identified health and safety risks as people cut back on house repairs and maintenance, imposing large but unmeasured costs on the NHS. Ambrose found that high living costs were reducing workers’ capacity to make proper pension provision, while the need for parents to subsidise their children’s housing costs was impoverishing those in their 50s-70s.

 Historically, low pay levels resulted in serious recruitment and retention problems in many areas of the public sector.  Some of the early improvements in pay and conditions post-1997 had helped to make working in the public sector more attractive.  Cutting pay over the coming three years will undo all that good work. Turnover is expensive, as is the use of agency staff to fill vacancies. The government won't reveal what it spends on public sector consultancy, but former consultant David Craig estimates it at £10bn in Labour's first seven years, and rising.(4) The money would be much better spent paying staff at a level that recruited and retained highly skilled, highly motivated staff.

Pay limits may also discourage graduating students from entering the public sector, as they are trapped in the ‘Alice in Wonderland’ contradiction of demands that they repay their student loans at the RPI inflation rate of 4.8 per cent, while their pay is held down to the CPI inflation rate of 2 per cent.

Holding down public service pay while leaving private sector pay untouched, will also have a disproportionate and unfair impact on women, undermining the government’s efforts to close the gender pay gap.  Almost twice as many women as men work in the public sector. Some 65.2 per cent of public-sector workers are women, while 41.1 per cent of private-sector employees are women. The public sector provides many of the professional and career level jobs for women in areas such as healthcare, education and social services, as well as offering greater opportunities for flexible working and pay parity.

The inescapable conclusion is that the Government is cutting off its nose to spite its face.  There is no evidence to back up their claim that public sector wage freezes will counter inflation, but plenty to show that it will undermine a whole raft of progressive policies.   If the Prime Minister is serious about his commitment to helping the lowest paid, promoting excellent public services and delivering a fair deal for women in the workplace, he should think again about imposing this damaging unnecessary two per cent limit on public service pay.


(1) UK govt limits on public sector pay have little impact on inflation- IFS, 30 January, 2007 http://uk.biz.yahoo.com/30012008/323/uk-govt-limits-public-sector-pay-little-impact-inflation-ifs.html

(2) Public sector pay policy, IDS, August 2007

(3) Pattison, V. (2006) 'The working poor and the living wage in Manchester', Unpublished PhD thesis.

(4) Jenni Russell, ‘We rage at Hain and Conway but miss the real profligacy’, Guardian, 30 January, 2008