Leading article: Time to pay heed to the North-South divide

Not surprisingly, it was the 1 per cent cap on public sector pay rises and the 700,000-plus job losses that grabbed the most attention after the Chancellor's Autumn Statement.

But George Osborne's interest in making public sector wages more responsive to local labour market conditions will have more far-reaching consequences. If he can make it happen, that is, and if he can do it right.

The Chancellor was careful not to overplay his hand, requesting only that the independent Pay Review Bodies report back by July next year with recommendations. But the Government clearly errs in favour of a more flexible system. And rightly so.

Living costs in the North-east some 9 per cent lower than the national average, and in London 15 per cent above it, are an unequivocal indictment of Britain's North-South divide. But such differences are no less real for being undesirable. Clinging to national wage levels simply means that public sector workers in some areas enjoy a lifestyle far beyond that available to their colleagues elsewhere. True, there have been efforts to smooth over the worst inequalities. But £5,000-per-year of "London weighting" makes little real dent in the capital's wildly inflated housing costs, and those outside London, but still in the expensive South-east, have no help at all.

The situation is not just a problem for the public sector recruiters who report difficulties finding staff in high-cost areas and services suffering as a result. Nor, despite the compelling case, is it only a question of fairness. National pay deals also skew local labour markets, pushing up private sector pay and turning a disproportionate number of high-end workers away from jobs in local companies.

The concept of regional pay differentials to address the problem is far from new. Most recently, it was part of the spending review instituted by Gordon Brown in 2002. That it was quietly dropped ahead of the following general election only serves to illustrate how difficult a policy it is to push through. How, for example, could employees – particularly senior staff – ever be persuaded to move away from high-pay areas? Trickier still is managing the boundaries between different wage zones.

Then come the political hurdles. Trade unions are already marshalling their forces, keen to preserve the National Pay Bargaining negotiations in which they play a central role. And, although regional differences might theoretically be brought into line by increasing wages in expensive areas, realistically it will mean cuts for those in, for example, the North-east. Even local businesses, which might benefit from less pressure on wages, are not uniformly in favour, pointing out that a sudden drop in pay for swathes of the local workforce will only add to the economic gloom.

All are risks worth taking, and there are several examples from the private sector that could help. But attempts to manage the effect of regional imbalances must not be allowed to distract from efforts to address the causes. The failure of successive governments to fill the economic void left by the loss of heavy industry was unforgivably short-sighted. Now, in the aftermath of the banking crisis, the arguments for tempering Britain's reliance on financial services and for ensuring growth is not restricted to London alone are stronger than ever. The Coalition is making the right noises, but it will take more than rhetoric, a sprinkling of Enterprise Zones and a £1.4bn Regional Growth Fund to make a real difference. While local public sector pay scales are a sensible course, any changes must be part of a broader plan for Britain's regions. Otherwise, they will only make the North-South divide even wider.