Osborne’s economic and political reasons for local pay rates

George Osborne has just fired the first shot in the fight over the 2012 Budget. His decision to introduce local pay for the 160,000 civil servants coming off the public sector pay freeze is, as is often the case with Chancellor Osborne, both an economic and a political move.

The economic case for local pay is straightforward. National pay rates mean that public sector workers are relatively underpaid in prosperous areas of the country and relatively overpaid in deprived areas. Pay that reflected local conditions would make for a more balanced economy, helping the private sector in those parts of the country where the public sector is currently dominant.

But there’s also a lot of politics involved. Much of the power of the public sector unions stems from the fact that we have national pay bargaining. If pay was set locally, one would expect big national unions to be replaced by smaller local ones, which is why the unions will resist this change so vigorously.