An interstate bidding war for workers has left state governments battling to meet soaring wage costs, with pay demands from public servants adding nearly $4 billion to employee-related costs this year.

Some negotiations have already sparked industrial action as Western Australia, Victoria, South Australia, Tasmania, the ACT and the Northern Territory prepare for pay increase demands in upcoming public sector pay talks, The Australian Financial Review reports.

State governments are also under pressure to compete for staff with other states and the private sector because of chronic skills shortages, the report said.

NSW treasurer Michael Costa says the problem is not confined to a national level.

The skills shortage is one of the factors driving up wage costs, he told the newspaper.

There's not only competition from other states, but globally.

We have got people from Britain recruiting our nurses out there.

Higher wage demands from frontline health, police and education staff, along with plans to employ extra people ahead of state elections, will increase employee-related costs to $62.7 billion this financial year, the paper said.