Public sector pay rise is good for all: demand side is the problem
Compared with the commentary from business leaders, right wing politicians and neo-liberal followers, the statistics on Scotland’s economy do not suggest there are major supply constraints on economic growth and development. Their demands are for Scotland’s budget to be focused on investment in roads, skills, and cutting red tape and taxes. But the real needs of the economy are somewhat different. In Scottish Left Review (issue 99), we argued the performance of the Scottish economy – in terms of employment, GDP per capita, attraction of inward investment – was leading Britain outwith the London city-region and the supply sides of the labour and capital markets were reasonably effective and efficient. The factors that are holding back productivity improvements, enhanced competitiveness and greater levels of innovation are to be found within companies and organisations and on the demand side of the economy. However, as we argue below, with a recovery in pay levels within the private sector and a pay cap within the public sector there are imbalances occurring within the economy that are creating labour shortages in some occupations within the public sector, hence, the title of this article.
With about the most unequal distribution of income and wealth in the developed world, Britain has been pursuing a strategy of cutting the living standards of the many and promoting the interests of the rich few. Austerity measures of real term cuts in social security payments and a sanction-enforced welfare regime, an increasingly flexible labour market with poverty wages and insecurity, rising levels of self-employment with few rights and low incomes have all taken money and so demand out of the economy. Exacerbating these drivers towards a stagnating economy, the massive redistribution of power, wealth and resources to the ultra-rich means further deterioration in tax revenues, economic activity and continuing public and private deficits so that debts continue to rise. This strategy is counter to most of our competitors and has been widely criticised outside Britain. 
Total employment in Scotland has increased by almost 20% since 1999, with the private sector growing by more than a quarter (26%) while the public sector has fallen by about 1%. In 1999, there were 456,000 full-time equivalent (FTE) jobs in the public sector in Scotland; after some fluctuations over the last 18 years, the total in 2017 is almost the same at 465,300. Within these totals, FTE employment in reserved sectors (civil service, public bodies, armed forces, public corporations, public sector financial institutions) has declined from 71,300 to 53,600, with most reduction in full-time posts. By contrast, the devolved sectors (civil service, other public bodies, nhs, further education colleges, local government and public corporations) has risen from 384,700 to 411,700. Since 2011, proportionately in local government males have seen a bigger fall with 13% fewer FTE jobs compared with a 6% fall for women.
Over this same 18 years, median (average) gross weekly earnings for full-time employees in the public sector have risen by about 67% and by 56% in the private sector. In the late 1990s, full-time public sector workers earned 17% more than their private sector equivalents, this had increased to 21% by last year. However, the last 2-3 years have seen a large rise in private sector earnings (increasing by £17, 3.4%) in 2015-16 alone compared with public sector earnings (increasing by £4, 0.7%). This has resulted in median private sector earnings rising to 87% of public comparators, showing that earnings between the sectors have been closing since 2015.
Most of the relative private sector improvement has been at the bottom end of the distribution, likely due to the introduction of the National Living Wage, with a larger proportion of private sector workers in the occupations affected. Contracting out of low paid, disproportionately, women’s jobs has depressed their incomes as they are no longer covered by collective bargaining. At the top decile, earnings in the private sector have remained about 10% higher than in the public sector, a trend that has continued since the economic downturn in 2009.
These data only refer to employees and so exclude those on zero hour contracts and the self-employed. There has been much discussion on these growing elements of the precarious economy, including our own article in Scottish Left Review (issue 93) on the high levels of poverty amongst the self-employed, who account for almost 1 in 5 of the workforce. Including these vulnerable members of the labour force in the statistics would highlight how mal-distributed workers’ incomes are overall.
The overall gender pay gap for employed workers has declined from 16.7% to 6.2% since the millennium. Considering figures for Britain, Scotland has fairly similar results. Weekly earnings for men and women and for all sectors have increased almost at the same rates across the economy, apart from finance and business services which have accelerated away.
As we all are aware, price and cost rises have eroded wage and salary increases for working Scots since the turn of the century. Indeed, working class wage incomes are barely 1% above what they were in 2005. With devaluation of Sterling since the Brexit vote, a worsening trading and economic position, and real cuts in the value of welfare benefits, there is every reason to forecast further falls in incomes for all groups across the country. This will fuel a further recessionary spiral downwards.
Together these statistics reveal a pressing need – with or without Brexit, a hard, soft or transition-softened leaving from the EU – for an alternative economic strategy that ensures that decline is reversed and all can look to an improvement in standards of living. Using a different but as rigorous approach shows workers in Britain have suffered the biggest fall in real wages among leading OECD countries: between 2007 and 2015, real wages fell by 10.4% – a drop equalled only by Greece.
Continuation of current strategies, that have seen stagnation for over a decade in the economy, cannot deliver a turnaround at the very time when investment in hope and confidence are critical. Economic theory supports such a move away from the neo-liberal austerity strategy of this ‘lost decade’.
There is a left neo-Keynesian case for intervening in the labour market to ameliorate at least some of the problems which have evolved over recent times through austerity and the public sector wage cap. Experience confirms that workers with transferable skills will leave or not apply to work in the public sector if the wage freeze continues to offer better prospects for some elsewhere in this or other economies. This will create problems for the delivery of public services at a time when skilled European staff are leaving because of Brexit. It is important to maintain balance within teaching, social work, planning, housing, and many other public sector services in terms of experience and new recruits so that a prolonged period of artificially constraining pay in one part of the labour market cannot be allowed to create long term deterioration in another sector like education, caring, etc. For the effective and efficient delivery of high quality services there is a need to scrap the 1% public sector pay cap.
HR specialists and most employers traditionally would also have recognised that workers are more productive when they are appreciated – an argument neo-liberals seem to apply only in the case of executives and industry leaders – so that motivation and change in challenging times is facilitated when rewards can be justifiably offered rather than being constrained by government policy.
For those on low pay there are strong arguments for higher increases to ensure pay justice. These are not the causes of the financial and economic crises, who are to be found amongst the top decile of private sector finance and business service workers – the very groups who have seen real income increases throughout the last twenty years.
Most importantly are the macroeconomic and fiscal arguments for higher pay in the Scottish public sector. Productivity across the UK has been stagnating since 2008 due not to excessive rates of pay but the opposite: we are in a deleterious cycle of encouraging low pay-low profits-low investment enterprises coupled with increasing imported inflation following the Brexit-inspired devaluation of Sterling. The economy has major and long-established structural problems that are pushing it down the rankings of competitiveness, resilience and wealth production. As in the Nordic countries, Germany and the Netherlands, reversing this requires significant adjustment that the market cannot deliver. Following their paths of fundamental restructuring will require national tri-partite conversations and negotiations around pay, investment, the social wage and social contract, and that means a strong workers’ voice. A first step will be a return to meaningful collective bargaining rather than an imposed pay cap which excludes such critical discourse.
Complementing a relaxing of the pay cap, therefore, there needs to be: attention to greater in-work training and development; encouragement of innovation in the workplace led by the workforce; contracting back in many of the services and jobs put out to self-employment, private providers and Arms’ Length External Organisations (ALEOs); and, especially, renewed focus on the lessons of what a better public procurement strategy could be – again much discussed in previous editions of Scottish Left Review. The affordability of higher public sector pay is central to this path of generating progressive change throughout the economy as pre-distribution is key to the sustainable success of the Nordic economic models.
Any extra income that a low-paid worker gains is typically spent on increased consumption of goods and services, what Keynes called the marginal propensity to consume, because low paid workers have unmet needs. This additional spending creates a multiplier effect creating extra demand within the economy leading to more production and employment. These have high multiplier effects locally and nationally particularly when compared with the consumption habits of the rich. More employed on reasonable wages means, automatically, that tax revenues are higher; more proactively supported orders for local companies – as demonstrated by the Commonwealth Games contracting strategies – means more income and jobs locally, again generating increased tax revenues than where a laissez faire approach is taken.
An inclusive and sustainable economic growth strategy is possible, but must have a restoration of just rewards in the public sector, and can raise the Scottish growth rate above Britain’s – necessary to increase revenues under the recent devolution of more tax powers, creating virtuous fiscal and economic cycles.
Mike Danson is Professor of Enterprise Policy at Heriot-Watt University and Geoff Whittam is a Reader in Entrepreneurship at Glasgow Caledonian University.