Chancellor George Osborne is to ask independent pay review bodies to consider how public sector pay can be made more responsive to local markets.
The consultation will report by July 2012.
It will apply to all pay review body workforces, with the exception of doctors, dentists, the armed forces, and the judiciary.
According to the Treasury, 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.
For example, the Institute for Fiscal Studies (IFS) 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.
Some public sector organisations, such as HM Courts and Tribunals Service, have already successfully taken action to ensure pay is in line with local labour markets, but there is the potential for others to take a similar approach.
Christopher Johnson, head of Mercer’s human capital business, said: “We are also very pleased to see the government’s decision to invite public pay review bodies to review local pay for the public sector, although it is unlikely to be implemented any time soon.
“The impact of the current practice of using national pay scale means that in some local markets outside London and the South East, the public sector drives the local jobs market making it difficult for private sector employers to compete for talent.
“However, the problem needs to be carefully addressed as the localising of public sector pay has an impact on the local economy.”
Read more news from the Autumn Statement 2011