Friday 10 February 2012

Regional Pay and GVA

In this post on Monday, the Bevan Foundation drew attention to one of the key reasons for Wales’ comparatively low GVA – low wages.  It’s not a surprise; it’s a point that has been made a number of times in the past, but it’s a point of which we sometimes lose sight.
There are a number of reasons for Wales’ average pay being lower than the UK average.  Not the least of them is the fact that for organisations not headquartered here, the Head Office salaries – usually the highest – are elsewhere.  In a sense, that means that economic activity in Wales doesn’t contribute to GVA as much as it would if the higher salaried jobs were distributed in the same way as the lower paid jobs.  Such distribution is not exactly a practicable solution, but the effect of an uneven distribution is worth bearing in mind.
Given the way that GVA is calculated, low wages will inevitably depress GVA in any area, just as high wages would increase GVA.  So, the proposals by the UK Government to introduce ‘regional pay’ would have a direct impact on GVA.  For any area where regional pay was set at a lower value than average, GVA would apparently drop; for any area where it was set at a higher level, GVA would apparently increase.
This happens with no change whatsoever in the work people do, in the output they produce, or in their productivity; it’s solely an effect of redistributing the same amount of pay in a different way geographically.  I think we can be reasonably confident that the introduction of regional pay would see public sector pay levels reduce in Wales compared to the average, whilst they would increase in London and South East England relative to the average.
In principle, I’m in favour of redistributive policies, but in this case, the UK Government would be deliberately and consciously increasing the GVA gap between Wales and the UK average, by taking from the poorest areas and giving to the richest.
No doubt, some will cease on the resultant increase in disparity as clear proof that Wales can’t afford to control her own affairs.  But in fact, all it proves is that the measurement of GVA is a complex business, and doesn’t simply reflect poor economic performance in Wales.
I wish it were as easy as suggesting some sort of reverse regional pay, where the highest salaries were paid in the poorest areas, as a deliberate tool of policy to redistribute GVA more evenly.  But it does underline the way in which a policy of deliberately moving high paid public sector jobs from the centre to the periphery can have an impact on relative economic wealth. 


Owen said...

I thought GVA was a measure of production and wages has minimal effect on it? The average salary in Wales is higher than GVA per capita isn't it?

So, in my opinion at least, low GVA is more about Welsh produce being low-value/cheap - a symptom of the branch factory economy in a large swathe of Wales. I don't think we'll ever see GVA rise until Wales creates and retains high-value, high-skilled, niche jobs - ideally IP protected.

But I'd agree that GVA is a "complex business" and there's more to an economy that numbers on a balance sheet. For example a low value added company in rural Wales employing 200 is surely "worth more" than a high-end financial institution in Cardiff employing 20?

Unknown said...

I believe in devolving public pay to Wales, but I also believe that the Barnett consequential has to be calculated on the average public page for the whole of England - Including London and the SE and their attendant weightings. We could then properly reward excellence where it is deserved without penalising the norm. If we are to remain a part of the UK for now, we might as well enjoy some of the benefits.

John Dixon said...


It's a complex calculation, but the level of wages does affect it - see the post to which I linked from the Bevan Foundation. Don't forget that GVA per capita includes all the non-working population as well, whereas average wages only includes the working population - it's not a direct comparison.

Think of it another way - public sector expenditure contributes to GVA, and includes wages. If regional pay changes the levels of public expenditure between two 'regions', then it will also 'move' GVA between those regions.

Anonymous said...

The current EU structural funding has increased emphasis on financial instruments as a complement to direct aid for enterprise. It's directly linked with financial instruments offered by the EIB. However, the scale of investment required to justify the establishment of holding funds and the subiquential coverage of management overheads has rendered these instruments a better fit to large scale investments. Essentially it results in smaller scale Welsh enterprises being excluded from support and large scale London headquartered enterprises taking advantage of structural investment by having a footprint in West Wales and the Valleys. Essentially it's creaming off the financial support it into their headquartered overhead costs. This actually results in the opposite of what EU structural funds seeks to achieve and is reflected in the eggageration of GVA disparity. A little known instrument is a reference to the Gothenburg 'sustainability' clause in the Lisbon treaty, which allows for member states or regions to sponsor 'micro-businesses' by means of providing localised investment instruments, on such aspects as raising native technical skills, enviroengineering projects and cooperativebusinessclubs. This is used to great effect in Scotland but appears to be absent in Wales due to lack of devolved fiscal and legislative powers. These are JASPERS, JEREMIE, JESSICA and JASMINE. This is off the radar in Wales, and virtually unheard of due to lack of vorbegendemassnahmen (forseen-step-actionable?) from the Welsh Government or legal constraint from Westminster. It's really quite simple, the cheifengineer gets paid more than the fitter, and the finance director gets paid more than the book-keeper. Where does the high paid employee reside and who do they work for? How do we change it?

John Dixon said...


Thanks for that - there are some interesting points there which I'll be following up.