National pay rates for teachers, civil servants and prison officers could be scrapped under plans announced by the government.
Chancellor George Osborne has written to independent pay review bodies asking them to recommend how public sector salaries can be brought in line with the private sector.
According to HM Treasury, public and private sector organisations compete for employees in different markets across the UK, but while private sector pay is set in accordance with local labour markets, public sector pay is usually set on a national basis. As a result, in many areas, public sector pay does not reflect local labour market conditions.
The Institute for Fiscal Studies has found that public sector workers are paid similar wages to private sector workers in some parts of the country, but over 10% more in other locations.
The government said that such differences between public and private sector pay can adversely affect private sector businesses that have to compete with higher public sector wages. It also leads to unfair variations in public sector service quality and limits the number of jobs that the public sector can support.
During the Autumn Statement, Osborne announced that the government would ask independent pay review bodies to draw up plans for local pay bargaining to make public sector pay more responsive to local labour markets by July 2012.
Osborne said that, although it was announced in the Autumn Statement that the public sector pay freeze will end after 2012/13, the government wants public sector pay awards to average 1% over the next two years.
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