How to save money without saving money

There are a few rather odd points in the economists’ letter to George Osborne which was published in The Times on Tuesday.

Firstly, the term ‘crowding out’ seems to be thrown around a lot at the moment. In its classic sense, it is used to describe a situation where loose government fiscal policy increases the goods market equilibrium and therefore the demand for money, bidding interest rates up and thus reducing the expansionary effect of the government expansion. There is little evidence to suggest that this is the case in the UK economy at present.

In the labour economics sense, government ‘crowding out’ seems to be used to describe a situation whereby public sector wages are significantly above the local market rate for a job, so that private sector firms are unable to recruit the staff they need. (The corollary is that public sector wages are ‘too low’ in high-wages areas such as London, but this is something trade unions happily acknowledge and can be addressed with an increase in London weighting).

Leaving aside the fact that crowding out in regional labour markets seems not to be happening (as the recent UNISON/IDS report detailed, and as one would expect in a time of slack labour markets), there are some other puzzling aspects in the detail of the letter.

On the one hand, the signatories make it clear that the “total public sector pay bill” in each area should be unchanged, while simultaneously claiming that “any savings [would be] used to enhance local services”. As a humble economics student my maths isn’t up to much, but I’m pretty sure if A, B, C and D all remain unchanged, A+B+C+D also remains unchanged, so there can be no savings. Are they arguing that installing ten sets of regional pay negotiations will reduce overhead costs compared with one national pay negotiations?

Picture: telegraph.co.uk

Secondly, and most significantly, I fail to understand how public sector wages can be brought into line with private sector wages in, say, the South West if the total wage bill for the South West has been pre-determined. Hospital negotiators may decide that a clinic secretary's salary can and should be cut by (x) to bring it into line with private sector secretaries, but that leaves them with (n.x) in wages which has to be spent on other staff in the South West, whatever the ‘needs’ of other local labour markets. This runs completely contrary to the stated aims of the Chancellor (and the signatories) to allow wages to be more closely dictated by individual micro-labour markets.

The only possible explanation I can think of is that they wish for the pot of money in the South West to be redistributed from ‘overpaid’ lower-wage secretaries and cleaners towards higher-waged public sector staff (doctors, experienced teachers) where skills are less in competition between private and public sectors, even where there is no market mechanism demanding higher wages for them. This would naturally have the effect of being regressive in terms of income distribution, and also reducing economic activity as money is redistributed from those who spend to those who save. If this kind of local effect is what the signatories are intending, they would do well to state it openly.

Being charitable, I assume that many of the signatories have simply not read through the detail of the letter. Some may be in favour of local pay bargaining per se. Whatever the case, the political effect of their letter has been to bolster the position of a Chancellor whose aim is to abolish national pay bargaining without ringfencing existing spending levels, reducing the public sector pay bill and driving down wages across the country.