That public sector pay freeze

Steve Bundred’s call for public sector pay freeze has provoked howls of outrage from public sector unions. Perhaps more serious, though, is the charge that such a measure would be  counterproductive. Will Hutton argues that the government needs to wait until the economy improves before cuts are made. Richard Murphy goes further, accusing Bundred of economic illiteracy:

whilst unemployment is rising (and it is) the only correct course of action by the government is to spend. The prevailing consensus that cuts are the only agenda in town is simply wrong.

Well, yes, sort of. It’s true that, while the government is printing money and trying to stimulate the economy it would not make sense to sack a load of  public servants. It is better to pay them to carry on doing what they are doing than to have them idle and depleting the rapidly diminishing benefits pot.

The inevitable headcount cuts will, therefore, probably come when the economy starts to improve. Word on the public sector street is that budgets and staffing levels will be drastically reduced from April 2011.

The same argument doesn’t quite work against freezing pay though. A pay freeze would not throw more people onto the dole. While it would be a cut in real terms, it would not have the same economic impact as laying people off. It would simply be a gradual reduction in the amount of government cash going into the public sector; a measure that is probably overdue anyway.

But there are also practical reasons why a pay freeze should be implemented now rather than in a couple of years time. As a general rule it is easier to make people redundant when the economy is strong and easier to impose pay cuts during a slump. During an upturn, people are far more willing to volunteer for redundancy as they can usually expect to find another job. When times are tough, fewer people stick their hands up. Even a generous package is not much of an incentive if people expect to be out of work for several months.

By contrast, pay cuts are almost impossible to impose during a boom. People see what other workers are getting and become resentful. They are far more likely to strike or to up and leave when there are plenty of other jobs around. During a downturn, though, people are far less willing to strike, even in strongly unionised environments. The argument that the rest of the country is taking pay cuts, combined with the fear that strikers might be the first to go when the axe falls, is usually enough to dampen most people’s enthusiasm for industrial action.

Furthermore, pay rises have a multiplier effect. Each year you pay a percentage increase on the rise you gave the year before. Redundancies too are calculated as a percentage of pay. The higher the pay rise you give to people now, the higher the bill for future pay rises and the more it will cost to make people redundant in a couple of years time.

So, although it might seem unfair to some public sector workers, if the UK needs to cut its public spending, a pay freeze now, as Steve Bundred suggested, would be a good place to start.

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