Prospect’s warning comes in the light of a parliamentary debate during which MPs warned that regional pay would polarise wealth across Britain, depress demand further and reinforce the North/South divide in the country.

Prospect pay researcher Jonathan Green said: “The government wilfully chooses to misrepresent the nature of the public sector workforce, which includes a higher percentage of professional and specialist workers than the private sector.

“The evidence of a public sector pay premium is not as clear cut as the minister implied in the debate.”

ONS data published in July 2011 shows that those in the public sector who have a degree or an equivalent qualification earned on average 5.7 per cent less than those in the private sector in 2010.

“Rather than imposing further pay restraint, the government needs to urgently address this shortfall in earnings between qualified professionals and specialists in the public sector and their private sector equivalents.

“Specialist civil servants work in national labour markets, not local ones. We know from experience that the government does not have a genuine commitment to market-facing pay, only to finding excuses to reduce it, otherwise they would have to increase pay for their specialists,” said Green.

He added that national pay bargaining does not prevent organisations from taking account of regional differences in pay. The public sector, like most national organisations in the private sector, have different pay rates for those working in London and in some cases regional hot spots such as the South east.

In the parliamentary debate, Jonathan Edwards, (Plaid Cymru) said regional pay would “reduce pay in the poorest parts of the state across the public sector and introduce market conditions into public sector workers’ pay and remuneration.”

Hywel Williams (Plaid Cymru) said regional pay would “institutionalise lower pay in countries and regions of the UK such as Wales compared with London and south-east England, and magnify the unfairness of the current economic situation.”

Helen Goodman, (Labour) said the proposal had the potential to take between £500 million and £1 billion out of the North-east economy every year.

Phil Wilson (Labour) pointed to a Treasury guidance note from 2003 that said:

“At the extreme, local pay in theory could mean devolved pay…to local bodies. In practice, extremely devolved arrangements are not desirable. There are risks of workers being treated differently for no good reason. There could be dangers of leapfrogging and parts of the public sector competing against each other for the best staff.”

He said that was the basic, fundamental reason why devolution of levels of pay in the public sector had not been introduced.

Owen Smith (Labour) called for evidence-based policy. He said the government should properly review the experience of workers in the Courts Service. “They should consider retention, rates of pay and the way in which the system has facilitated movement or otherwise across the country, and bring that to the table as part of the evidence for the current proposal.”

Chloe Smith, economic secretary to the Treasury said the government was not setting out detailed and prescriptive proposals.

She said the Chancellor had written to the independent pay review bodies to ask them to consider how to make public sector pay more responsive to local labour markets. They will report back with interim findings by July.

Workers covered are:

• NHS, excluding doctors and dentists
• teachers
• prison officers and
• the senior civil service.

Smith said the Minister for the Cabinet Office would co-ordinate and assist secretaries of state in “exploring how local, market-facing pay could be introduced in civil service departments.”

For the devolved administrations, Smith said public sector pay in devolved areas was a matter for them, except for those areas where workers are covered by a national pay review body.

However she was “keen to see local market-facing pay introduced across the UK, and we urge all devolved administrations to consider issuing separate remits for the relevant pay review bodies within devolved areas.”