Ministers have insisted they are pressing ahead with considering proposals for a local pay scheme which could mean workers in Birmingham received higher salaries than those in Dudley or Walsall for doing the same jobs.
Cabinet Office Minister Francis Maude told MPs the current system of national public sector pay scales was hurting the private sector and damaging the economy.
It followed speculation that the Government was backtracking over proposals set out by the Chancellor, George Osborne, to introduce local pay for public sector workers.
Mr Maude did say that no decisions had been taken, and that Ministers would wait for the findings of pay review bodies which had been asked to investigate the case for local pay by Mr Osborne. However, this has always been the Government’s policy as set out by the Chancellor.
Ministers claim that public sector workers are paid more than private sector counterparts doing similar jobs in many parts of the country, and that this makes it hard for private firms to recruit staff.
They are considering extending a local pay system which already exists in the courts service, where staff in central Birmingham can be paid more than those in other parts of the West Midlands.
Labour argues that the measure would make the wealth gap between richer and poorer parts of the country even worse, by taking money out of less wealthy areas.
Mr Maude told the House of Commons: “The public sector could be crowding out the private sector and private sector investment, and holding back the private sector-led recovery that the economy needs.”
He was speaking in a debate led by Labour, which opposes the local pay plan.