A report from centre-right think tank Policy Exchange has called for an end to national pay rates after its study found public sector workers in the North East, Merseyside and South West earn as much as £3,200 a year more than their equivalents in the private sector.
The report called for the Government to end national pay bargaining, under which public sector workers receive the same levels of pay regardless of where they live.
Trade union groups have dismissed the idea of a public sector premium as a "myth" and said the reports were misleading.
According to Policy Exchange on average, public sector workers benefit from a 6.1% premium, meaning they earn as much as £1,400 more a year than someone in the private sector. The report said they also enjoy better pensions and perks than private sector workers.
It also urged the government to push ahead with its plans to remove automatic pay rises across the public sector.
'Not fit for purpose'
The think tank said that rebalancing the pay and pensions of public sector workers so that they are in line with the private sector would save £6.3 billion a year in public spending.
It claims this money could be better spent tackling local unemployment and could create at least 288,000 private sector jobs, or the equivalent salaries of 332,000 more nurses or 252,000 more teachers, in the poorest parts of the country.
Matthew Oakley, head of economics and social policy at Policy Exchange, said: "Nationalised pay negotiation is not fit for purpose for the modern public sector. It is bad for the economy and bad for public services.
"We should move to a system where local public sector employers can decide how to negotiate salaries with employees in order to reflect the realities of their local labour market.
"At the same time as freeing up money for infrastructure and local growth projects, this will enable top performing public sector workers to be paid more."
General secretary of public sector union group Unison said when you start with "false assumptions" your results are equally "flawed".
"The idea that there is a public sector pay premium is a myth and dressing it up with dodgy statistics still won't make it true."
Chancellor George Osborne recently warned that public sector pay levels are so out of kilter in some regions that they are squeezing out the private sector, and suggested that they should be made "more responsive" to local labour markets.
However, the Liberal Democrats boasted at their annual conference last month that they had blocked Conservative attempts to bring in regional variations.
