Fair pay saves livesby Stephen Nickell / May 25, 2010 / Leave a comment
Published in June 2010 issue of Prospect Magazine
In 2004, the Office of National Statistics produced its most recent regional retail price indices. These revealed that £100 in the north of England buys 15 per cent more than in London and over 10 per cent more than in the southeast. Despite this, pay in public sector jobs is much the same across the country, with the exception of a modest London allowance.
Presumably, this situation has come about because pay bargains in the public sector are made nationally—and because of the view that fairness implies equal pay for equal work. But in fact, fairness implies equal real pay for equal work. Equal nominal pay, which is what we have, means that public servants in the north are 10 per cent better off than their colleagues in the south for doing the same job.
As you would expect, this near uniformity of pay does not apply in the private sector. Secretaries, for instance, earn about 20 per cent more in the southeast and over 60 per cent more in London than they do in the north. By contrast, nurses earn much the same in the southeast as the north, and only around 10 per cent more in London.
But these discrepancies have serious consequences. It is very hard for public sector employers located in London and the southeast to recruit and retain good staff because of the high level of wages in the local labour market. And, because they are locked into the pay system, there is little they can do about it. Therefore, hospitals in these areas suffer a chronic shortage of experienced permanent staff—a gap filled by temporary agency nurses.
The results of this skills shortage are unsurprising. One standard measure of hospital quality is the death rate within 30 days of admission for AMI (acute myocardial infarction, or a heart attack). A 2008 LSE paper showed there is a very strong correlation between a hospital’s AMI death rate and pay in the local labour market outside. In other words, the higher local wages are, and thus the harder it is to get good…