Although market factors, affordability and the characteristics of individual public services properly pay a play major part in determining public sector pay, there is still, in reality, an inevitable and large role for government in this respect; even if, for political reasons, there may be an attempt to obfuscate this role.
The influence that government has over public sector pay can and should be used for beneficial macro-economic purposes. This can be achieved by linking pay to GDP growth (which makes sense if one sees GDP changes as being a ‘performance indicator’ of the public sector and therefor a link to GDP as representing performance related pay in a broad sense) and moderating this link depending on whether the economy needs boosting or restraining. In this way, public sector pay can have a counter-cyclical effect i.e. it can reduce the booms and busts of the economic cycle.
For example, in normal times public sector pay could increase by inflation plus the growth in GDP (i.e. it would increase in line with the money value of the economy). However, if GDP growth was over, say, 2%, pay increases could be restricted to inflation plus 2%. This would be below the increase in the money value and so would have a deflationary effect; thus lessening the ‘boom’.
By the same token, if there was a recession and GDP was falling, public sector pay could still increase by the full amount of inflation. This increase would be above the change in the money value of the economy, and so would be inflationary, and would therefore work against the decline in economic activity occurring during the recession.
A clear line on public sector pay of this kind might also forestall industrial disputes – although considerable local and service flexibility will still be needed to meet particular needs and varying market conditions. A formula for public sector pay would also be applicable to MPs’ pay, reinforcing the notion that ‘we are all in it together’.
Another element of public sector pay that the government could use to pursue wider economic policies is in relation to very high salaries. By placing a ceiling on the pay of any individual entering employment in the public sector (e.g. that their pay should not exceed that of the Prime Minister) the pressure generally within the economy to offer very large salaries to attract the top talent would be abated to some extent.
The fear, of course, would be that this would make it difficult to attract such talent to the public sector, thereby worsening the performance of the sector. Whether, though, it is realistic for the public sector to compete with big multinationals might be doubted; and if there is not a significant impact on the quality of recruits this brings into question whether the benefits of premium salaries match the financial costs, strain on industrial relations, and undermining of society’s perception of public service arising from such salaries.