Treasury plans to introduce “local pay” in the West Midlands could cost the region £1.2 billion a year, trade unions have warned.
And the proposals, which are expected to mean cutting or freezing pay for some public sectors if they go ahead, could actually lead to the loss of more than 11,000 jobs across the West Midlands.
The figures were published in research commissioned by the TUC into the Government’s plans to impose local pay deals on public sector workers.
Ministers argue that reforms may be needed because pay in the public sector is currently higher than pay in the private sector for people with similar qualifications and responsibilities.
It means that private sector employers struggle to recruit staff, according to George Osborne, the Chancellor.
And ministers highlight studies by think tank the Institute for Fiscal Studies, which found that men working in the public sector in the West Midlands are paid on average seven per cent more than men in similar roles in the private sector – while women receive a 15 per cent pay boost.
The difficulty, according to the Treasury, is that public sector wages are usually set nationally and are based on conditions in the labour market in the wealthier south east region rather than the North or Midlands, where salaries in the private sector are lower.
Although Mr Osborne has not specified exactly how he plans to narrow the gap, in practice the only way would be to cut public sector pay or to freeze it – which would mean a cut in real terms – until the private sector caught up.
The Treasury has asked a series of independent pay review bodies to consider whether change is needed and will make a decision based on their findings.
But a study by left-wing think tank the New Economics Foundation, commissioned by the TUC, disputed the claim that public sector workers were paid more.
In many cases it was impossible to make a realistic comparison, because public sector workers such as midwives or police officers simply had no private sector equivalent, it said.
The study also highlighted the effect of taking money out of local economies by cutting the pay of public sector workers.
In a “best case” scenario, in which cutting public sector pay did help private firms recruit staff, the imposition of local pay could lead to the net creation of an extra 3,710 jobs in the region, the study found.
But it would still need to the regional economy in the West Midlands shrinking by £296 million.
If there was no benefit to the private sector – which the report said was a more likely outcome – the regional economy would lose £1.2 billion as the spending power of public sector workers fell, 11,000 jobs would be lost.
TUC Regional Secretary Rob Johnston said: “Quite apart from the huge hit that public sector workers would have to take in their pockets if pay in parts of the UK is held down to ‘allow’ the private sector to catch up, this report shows that the move would also prove hugely damaging to local economies.
“Despite the concerns being voiced by MPs in the parts of the UK most likely to be affected by the introduction of local pay rates, the government has so far refused to rule out this move that would hit public sector workers and their families – who are already feeling the financial pinch as they suffer the effects of a lengthy pay freeze – very hard.
“We hope that our report – combined with the findings of the three pay review bodies due to report back to the government this week – will prove to be the final nail in the coffin for these discredited proposals.”
However, employers have taken a very different view. In its submission to the Chancellor’s inquiry, the CBI warned that “local pay setting is vital to both long-term regional economic development and effective public service reform.”
The CBI, in a lengthy written submission, added: “The introduction of market-facing pay will assist the private sector in the challenge of rebalancing the economy and offsetting the decline in public sector jobs and investment.
“Genuinely competitive and local labour markets best allocate resources, achieve fairness between the public and private sectors and encourage growth, job creation and prosperity.”