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Posts Tagged ‘wages’

Immigration debate continues

One of the key battle grounds at the next General Election is undoubtedly going to be immigration. A topic that is very closely related to EU membership and what can be done to limit the number of people coming to the UK. One side of the argument is that immigrants coming into the UK boost growth and add to the strength of the economy. The other side is that once in the UK, immigrants don’t move into work and end up taking more from the welfare state than they give to it through taxation.

A new report produced by University College London’s Centre for Research and Analysis of Migration has found that the effect on the UK economy of immigrants from the 10 countries that joined the EU from 2004 has been positive. In the years until 2011, it has been found that these immigrants contributed £4.96 billion more in taxes than they took out in benefits and use of public services. Christian Dustmann, one of the authors of this report said:

“Our new analysis draws a positive picture of the overall fiscal contribution made by recent immigrant cohorts, particularly of immigrants arriving from the EU … European immigrants, particularly, both from the new accession countries and the rest of the European Union, make the most substantial contributions … This is mainly down to their higher average labour market participation compared with natives and their lower receipt of welfare benefits.”

The report also found that in the 11 years to 2011, migrants from these 10 EU countries were 43 per cent less likely than native Britons to receive benefits or tax credits, and 7 per cent less likely to live in social housing. This type of data suggests a positive overall contribution from EU immigration. However, critics have said that it doesn’t paint an accurate picture. Sir Andrew Green, Chairman of Migration Watch commented on the choice of dates, saying:

“If you take all EU migration including those who arrived before 2001 what you find is this: you find by the end of the period they are making a negative contribution and increasingly so … And the reason is that if you take a group of people while they’re young fit and healthy they’re not going to be very expensive but if you take them over a longer period they will be.”

However, the report is not all positive about the effects of immigration. When considering the impact on the economy of migrants from outside of the EEA, the picture is quite different. Over the past 17 years, immigration has cost the UK economy approximately £120bn, through migrant’s greater consumption of public benefits, such as the NHS, compared to their contributions through taxation. The debate is likely to continue and this report will certainly be used by both sides of the argument as evidence that (a) no change in immigration policy is needed and (b) a major change is needed to immigration policy. The following articles consider this report.

Report
The Fiscal effects of immigration to the UK The Economic Journal, University College London’s Centre for Research and Analysis of Migration, Christian Dustmann and Tommaso Frattini (November 2014)

Articles
Immigration from outside Europe ‘cost £120 billion’ The Telegraph, David Barrett (5/11/14)
New EU members add £5bn to UK says Research BBC News (5/11/14)
UK gains £20bn from European migrants, UCL economists reveal The Guardian, Alan Travis (5/11/14)
EU immigrant tax gain revealed Mail Online (5/11/14)
Immigration question still open BBC News, Robert Peston (5/11/14)
EU migrants pay £20bn more in taxes than they receive Financial Times, Helen Warrell (5/11/14)

Questions

  1. Why is immigration such a political topic?
  2. How are UK labour markets be affected by immigration? Use a demand and supply diagram to illustrate the effect.
  3. Based on your answer to question 2, explain why some people are concerned about the impact of immigration on UK jobs.
  4. What is the economic argument in favour of allowing immigration to continue?
  5. What policy changes could be recommended to restrict the levels of immigration from outside the EEA, but to continue to allow immigration from EU countries?
  6. If EU migrants are well educated, does that have a positive or negative impact on UK workers, finances and the economy?
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The world’s highest minimum wage

We have had a minimum wage in the UK for well over a decade and one its key purposes was to boost the pay of the lowest paid workers and in doing so reduce the inequality gap. Rising inequality has been a concern for many countries across the world and not even the nations with the most comprehensive welfare states have been immune.

Switzerland, known for its banking sector, has been very democratic in its approach to pay, holding three referenda in recent years to give the Swiss public the chance to decide on pay. Imposing restrictions on the bonuses available to the bosses of the largest companies was backed in the first referendum, but in this latest vote, the world’s highest minimum wage has been rejected. The proposed wage is the equivalent of £15 per hour and it is the hourly wage which proponents argue is the wage needed to ensure workers can afford to ‘live a decent life’. However, prices in Switzerland are considerably higher than those in the UK and this wage translates to around £8.33 per hour in purchasing power parity terms, according to the OECD. In the UK, much debate has surrounded the question of a living wage and the impact that a significant increase in the NMW would have on firms. The concern in Switzerland has been of a similar nature.

With a higher wage, costs of production will inevitably rise and this is likely to lead to firms taking on fewer workers and perhaps moving towards a different mix of factors of production. With less workers being employed, unemployment would be likely to increase and it may be that the higher costs of production are passed onto consumers in the form of a higher price. One problem is that as prices rise, the real wage falls. Therefore, while advocates of this high minimum wage suggest that it would help to reduce the gap between rich and poor, the critics suggest that it may lead to higher unemployment and would actually harm the lowest paid workers. It appears that the Swiss population agreed with the critics, when 76% voted against the proposal. Cristina Gaggini, who is the Director of the Geneva Office of the Swiss Business Association said:

I think [it would have been] an own goal, for workers as well as for small companies in Switzerland … Studies show that a minimum wage can lead to much more unemployment and poverty than it helps people … And for very small companies it would be very problematic to afford such a high salary.

The proposal was made by Swiss Unions, given the high cost of living in Switzerland’s suggest cities. It was rejected by the Swiss Business Federation and government and this was then echoed by the overwhelming majority in the referendum. Switzerland has been found to be the most expensive place to live in the world and the wages paid are insufficient to provide a decent life, with many claiming benefits to support their earnings. The debate over the minimum wage and the living wage will continue in countries across the world, but for now the Swiss people have had their say. The following articles consider this issue.

Switzerland rejects world’s highest minimum wage BBC News (18/5/14)
Swiss voters reject plan to establish world’s highest minimum wage The Guardian, Julia Kollewe (18/5/14)
Swiss voters reject setting world’s highest minimum wage Wall Street Journal, Neil Maclucas (18/5/14)
Swiss voters reject world’s highest minimum wage, block fighter jets Reuters, Caroline Copley (18/5/14)
Switzerland votes on world’s highest minimum wage at £15 per hour Independent, Loulla-Mae Eleftheriou-Smith (18/5/14)
Swiss reject highest minimum wage in world Financial Times, James Shotter (18/5/14)
Swiss reject world’s highest minimum wage, jet purchase Bloomberg, Catherine Bosley (18/5/14)

Questions

  1. Using a demand and supply diagram, illustrate the impact of a national minimum wage being imposed.
  2. Using the diagram above, explain the impact on unemployment and evaluate the factors that determine the amount of unemployment created.
  3. Given what you know about the proposed Swiss minimum wage, how much of an impact on unemployment do you think there would be?
  4. Draw a diagram to show the effect on a firm’s costs of production of the national minimum wage. Explain how such costs may affect the prices consumers pay for goods and services.
  5. How is it possible that a higher minimum wage could actually lead to more inequality within a country?
  6. Is there a chance that a minimum wage could lead to inflation? What type would it be?
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Private versus public

Many people are attracted to work in the private sector, with expectations of greater opportunities for promotion, more variation in work and higher salaries. However, according to the Office for National Statistics, it may be that the oft-talked-of pay differential is actually in the opposite direction. Data from the ONS suggests that public sector workers are paid 14.5% more on average than those working in the private sector.

As is the case with the price of a good, the price of labour (that is, the wage rate) is determined by the forces of demand and supply. Many factors influence the wages that individuals are paid and traditional theory leads us to expect higher wages in sectors where there are many firms competing for labour. With the government acting as a monopsony employer, it has the power to force down wages below what we would expect to see in a perfectly competitive labour market. However, the ONS data suggests the opposite. What factors can explain this wage differential?

Jobs in the public sector, on average, require a higher degree of skills. There tend to be entry qualifications, such as possessing a university degree. While this is the case for many private-sector jobs as well, on average it is a greater requirement in the public sector. The skills required therefore help to push up the wages that public-sector workers can demand. Another explanation could be the size of public-sector employers, which allows them to offer higher wages. When the skills, location, job specifications etc. were taken into account, the 14.5% average hourly earnings differential declined to between just 2.2% and 3.1%, still in favour of public-sector workers. It then reversed to give private-sector workers the pay edge, once the size of the employer was taken out.

Further analysis of the data also showed that, while it may pay to be in the public sector when you’re starting out on your career, it pays to be in the private sector as you move up the career ladder. Workers in the bottom 5% of earners will do better in the public sector, while those in the top 5% of earners benefit from private-sector employment. The ONS said:

Looking at the top 5%, in the public sector earnings are greater than £31.49 per hour, while in the private sector, the top 5% earn more than £33.63 per hour… The top 1% of earners in the private sector, at more than £60.21 per hour, earns considerably more than the top 1% of earners in the public sector, at more than £49.65 per hour.

The data from the ONS thus suggest a reversal in the trend of average public-sector pay being higher than private sector pay, once all the relevant factors are taken into account.

This will naturally add to debates about living standards, which are likely to take on a stronger political slant as the next election approaches. It is obviously partly down to the public-sector pay freeze that we saw in 2010 and also to a reversal, at least in part, of the previous trend from 2008, where public-sector pay had been growing faster than private-sector pay. However, depending on the paper you read or the person you listen to, they will offer very different views as to who gets paid more. All you need to do in this case is look at the titles of the newspaper articles written by the Independent and The Telegraph! Whatever the explanation, these new data provide a wealth of information about relative prospects for pay for everyone.

Data
Public and Private Sector Earnings Office for National Statistics (March 2014)
Annual Survey of Hours and Earnings, 2013 Provisional Results Office for National Statistics (December 2013)

Articles
Austerity bites as private sector pay rises above the public sector for the first time since 2010 Independent, Ben Chu (10/3/14)
Public sector workers still better paid despite the cuts The Telegraph, John Bingham (10/3/14)
Public sector hourly pay outstrips private sector pay BBC News (10/3/14)
Public sector workers are biggest losers in UK’s post-recession earnings squeeze The Guardian, Larry Elliott (11/3/14)
New figures go against right-wing claims that public sector workers are grossly overpaid Independent, Ben Chu (10/3/14)
Public sector pay sees biggest shrink on 2010, figures suggest LocalGov, Thomas Bridge (11/3/14)
Public sector staff £2.12 an hour better off The Scotsman, David Maddox (11/3/14)

Questions

  1. Illustrate the way in which wages are determined in a perfectly competitive labour market.
  2. Why does monopsony power tend to push wages down?
  3. Why does working for a large company suggest that you will earn a higher wage on average?
  4. Using the concept of marginal revenue product of labour, explain the way in which higher skills help to push up wages.
  5. How significant are public-sector pay freezes in explaining the differential between public- and private-sector pay?
  6. Why is there a difference between the bottom and top 5% of earners? How does this impact on whether it is more profitable to work in the public or private sector?
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Back to the target (almost)

The Consumer Prices index (CPI) measures the rate of inflation and in October, this rate fell to 2.2%, bringing inflation to its lowest level since September 2012. For many, this drop in inflation came as a surprise, but it brings the rate much closer to the Bank of England’s target and thus reduces the pressure on changing interest rates.

The CPI is calculated by calculating the weighted average price of a basket of goods and comparing how this price level changes from one month to the next. Between September and October prices across a range of markets fell, thus bringing inflation to its lowest level in many months. Transport prices fell by their largest amount since mid-2009, in part driven by fuel price cuts at the big supermarkets and this was also accompanied by falls in education costs and food. The Mail Online article linked below gives a breakdown of the sectors where the largest price falls have taken place. One thing that has not yet been included in the data is the impact of the price rises by the energy companies. The impact of his will obviously be to raise energy costs and hence we can expect to see an impact on the CPI in the coming months, once the price rises take effect.

With inflation coming back on target, pressures on the Bank of England to raise interest rates have been reduced. When inflation was above the target rate, there were concerns that the Bank of England would need to raise interest rates to cut aggregate demand and thus bring inflation down.

However, the adverse effect of this would be a potential decline in growth. With inflation falling to 2.2%, this pressure has been removed and hence interest rates can continue to remain at the record low, with the objective of stimulating the economy. Chris Williamson from Markit said:

The easing in the rate of inflation and underlying price pressures will provide greater scope for monetary policy to be kept looser for longer and thereby helping ensure a sustainable upturn in the economy … Lower inflation reduces the risk of the Bank of England having to hike rates earlier than it may otherwise prefer to, allowing policy to focus on stimulating growth rather than warding off rising inflationary pressures.

The lower rate of inflation also has good news for consumers and businesses. Wages remain flat and thus the reduction in the CPI is crucial for consumers, as it improves their purchasing power. As for businesses, a low inflation environment creates more certainty, as inflation tends to be more stable. Businesses are more able to invest with confidence, again benefiting the economy. Any further falls in the CPI would bring inflation back to its target level of 2% and then undoubtedly concerns will turn back to the spectre of deflation, though with the recent announcements in energy price rises, perhaps we’re getting a little ahead of ourselves! Though we only need to look to countries such as Spain and Sweden where prices are falling to realise that it is certainly a possibility. The following articles consider the data and the impact.

UK inflation falls in October: what the economists say The Guardian, Katie Allen (12/11/13)
British inflation hits 13-month low, easing pressure on central bank Reuters, David Milliken and William Schomberg (12/11/13)
UK inflation falls to 2.2% in October BBC News (1211/13)
UK inflation falls to 13-month low: reaction The Telegraph (12/11/13)
Fall in inflation to 2.2% welcome by government The Guardian, Katie Allen (12/11/13)
Inflation falls to lowest level for a year as supermarket petrol price war helps ease the squeeze on family finances Mail Online, Matt Chorley (12/11/13)
Inflation falls to its lowest level for more than a year as consumers benefit from petrol pump price war Independent, John-Paul Ford Rojas (12/11/13)
UK inflation slows to 2.2%, lowest level in a year Bloomberg, Scott Hamilton and Jennifer Ryan (12/11/13)
Are we facing deflation? Let’s not get carried away The Telegraph, Jeremy Warner (12/11/13)

Questions

  1. How is the CPI calculated?
  2. Use an AD/AS diagram to illustrate how prices have been brought back down. Is the reduction in inflation due to demand-side or supply-side factors?
  3. What are the benefits of low inflation?
  4. The Telegraph article mentions the possibility of deflation. What is deflation and why does it cause such concern?
  5. Explain why a fall in the rate of inflation eases pressure on the Bank of England.
  6. How does the rate of inflation affect the cost of living?
  7. Is a target rate of inflation a good idea?
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Is underemployment the new unemployment?

Unemployment is a term that economists and non-economists are familiar with, even if the non-economists perhaps have a less stringent definition of what we term unemployment. Typically, we say you are unemployed if you are of working age and available for work at the current wage rate, but are not in work. Another important and related concept is that of underemployment, which according to the ONS, is a growing problem in the economy.

Latest figures released by the ONS show that just over 10% of all workers in the UK would like to work more hours each week. This is essentially what underemployment is and it typically affects part-time workers who want to move closer to a full-time job, but are unable to find the necessary hours from their employer. As the economic situation in the UK worsened after the financial crisis, unemployment increased rapidly. Some people went from working full-time to part-time and others simply lost their job. As the economy started to stabilize, people began returning to work, but many found that part-time employment was the only option, despite wanting to work many more hours at the going wage rate. As the ONS said:

During this period [the economic downturn] many workers moved from full-time to part-time roles and many of those returning to work after a period of unemployment could only find part-time jobs … Of the extra one million underemployed workers in 2012 compared with 2008, three-quarters were in part-time posts.

The increase in underemployment has levelled off and though the recession has been a key contributing factor to the higher levels of underemployment, it’s important to note that it can be caused by a few things, as outlined by the ONS.

• employers only being able to offer a few hours of work each week
• workers, such as bar staff, being in jobs where they are only required for a few hours a day
• personal circumstances changing so that someone now wants to work more hours than before
• people settling for a part-time job as second-best when they would much rather have a full-time one

Although many people are happy with their part-time jobs and hence would not see themselves as underemployed, for those who are underemployed, the fact that they cannot find sufficient hours seems to indicate an inefficiency within the economy, especially if long-term unemployment or underemployment emerges. This problem is particularly relevant amongst the young and those in low-skilled jobs. However, it is also an increasing problem amongst the self-employed.

The implications of underemployment are far-reaching. Naturally it adversely affects an individual’s financial situation, which at the current time with rising household bills can have devastating consequences. There are also wider effects such as the economic implications in terms of economic growth and inefficiency, as well as a potential increased strain on the tax and benefits system. Given these far-reaching consequences, it is an issue that everyone should be concerned about. The following articles consider the growth of underemployment in the UK economy.

Underemployed workers jump by 1m since financial crisis Telegraph, Rebecca Clancy (28/11/12)
Underemployment affects 10.5% of UK workforce (including video) BBC News (28/11/12)
Economic crash leaves an extra 1million workers under-employed and wanting more hours Mail Online (28/11/12)
UK is underemployed: should we be surprised? BBC News, Stephanomics, Stephanie Flanders (28/11/12)
Unemployment affects 1 in 10 workers, ONS says Guardian, Mark King (28/11/12)
One in 10 workers no underemployed Financial Times, Brian Groom (28/11/12)
Underemployment rises to affect one in ten workers Channel 4 News (28/11/12)

Questions

  1. What is the difference between unemployment and underemployment? Is one worse than the other?
  2. Why did underemployment initially begin to rise after the financial crisis and what factors helped to slow the increase?
  3. How can underemployment be measured? Is it likely to be accurate?
  4. Part-time work has risen in recent decades, as part of a more flexible labour market. Do you think this is a good thing or does it add to the problem of underemployment?
  5. What are the economic implications of underemployment? You should think about the effects on an individual, their family, society and the wider economy.
  6. How can someone who is self-employed be classed as underemployed?
  7. What action, if any, can be taken by the government to tackle the rising problem of underemployment?
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TUC meet in Brighton

Trade union action has been a feature of the British labour market over the past few years, as discussed in this first and second blog. With the government’s austerity measures still in place and ongoing issues over pension provision, there are many explosive issues that will undoubtedly be discussed at this year’s TUC Conference in Brighton.

We have already heard from numerous unions that strike action over the coming year is ‘inevitable’. With rising prices, static or even falling wages, reduced pension provision and increased contributions, the cost of living has become increasingly unaffordable for many members of the trade unions. Dave Prentis, the General Secretary of Unison said:

‘I think people have been pushed into a corner. They are moving into poverty … The threat is that if we can’t move forward in negotiations to find a way through it then we will move to industrial action. There is no doubt whatsoever that we can create disputes throughout next year.’

Although few would argue against the notion that the government’s finances are in a dire state and spending cuts together with tax rises are needed, the controversy seems to lie in exactly when these cuts should take place and how severe they should be. For many, cutting government spending and raising taxes whilst the economy is still in recession is asking for trouble. For others, it’s the right thing to do and everyone should play a part in helping to return government finances to a semblance of balance. The Labour government has traditionally supported trade unions, but even their leadership backed the government’s plan for pay restraint for public sector workers. This, together with the continuing debates over public sector pensions has clearly angered many public sector workers, thus creating this ‘inevitable’ industrial action over the coming year.

Unison and GMB have said that they will be working together in order to try to better pay and conditions for its members, by co-ordinating public-sector strikes around Spring next year. Co-ordinated strikes across a variety of sectors could create havoc for the economy. Not just disruption for the everyday person, but losses for businesses and the economy. A general strike has not taken place since 1926, but it is thought that TUC delegates will be voting on whether or not one should be planned. So, when faced with these inevitable strikes, should the government back down and cut back on austerity or stand up to them and suffer the disruption of a strike, whilst continuing on with bringing its budget back on track? The following articles look at the TUC Congress and the proposed strike action.

Public sector unions plan Spring strikes Guardian, Dan Milmo (9/9/12)
Trade union warns of further strikes Financial Times, Brian Groom (7/9/12)
Trade union officials gather for TUC Congress in Brighton BBC News, John Moylan (9/9/12)
Unite union leader warns of wave of public sector strikes Guardian, Dan Milmo (7/9/12)
Unison and GMB unions planning co-ordinated strikes over pay BBC News, Justin Parkinson (9/9/12)
TUC Conference 2012: a mixture of new and old Channel 4 News (9/9/12)
Government must stand up to these TUC bully tactics Express, Leo McKinstry (9/9/12)

Questions

  1. What is the purpose of a trade union?
  2. What is the difference between individual and collective bargaining? Why is collective bargaining likely to be more successful in achieving certain aims?
  3. If there is co-ordinated strike action, what are the likely costs for (a) the workers on strike (b) the non-striking workers (c) businesses and (d) the economy?
  4. What are the main issues being debated between unions and the government?
  5. Explain the economic reasoning behind Dave Prentis’ statement that people are being moved into poverty.
  6. Do you agree with strike action? Do you think it has any effect?
  7. When do you think is the right time to implement austerity measures? Has the government got it right? As always, make sure you explain your answer!!
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A youthful wage subsidy

Youth unemployment has been one of the main headlines for some months, with data showing a record number of young people out of work.

As part of the government’s £1bn Youth Contract that aims to help young people back into work and help those unable to find employment, Nick Clegg has announced wage subsidies to firms hiring 18-24 year olds will be paid earlier.

Some of the costs of unemployment are obvious. For the individual who is unemployed, it means a lack of income and hence inability to buy goods and services. This then has wider implications for the economy. If people are unable to purchase goods and services, this contributes to a lower level of aggregate demand, which in times of recession, is hardly ideal.

Unemployment also means an inefficient use of resources, meaning the economy is operating below full capacity. Fewer people in work also implies lower tax revenues for the government, at the same time as higher unemployment benefit payments, contributing towards a growing budget deficit. This point is of particular concern, when it is young workers claiming benefits, as it could mean a life of dependency.

There are also some longer-term consequences, in particular for those who have been out of work for some time. They lose their skills, making it harder to find a job and this can pose costs to employers and further costs to the government through re-training. As such, government initiatives to tackle youth unemployment have never been more important.

The wage subsidies that were announced back in November will now be paid when young people have been out of work for six months, instead of nine. This initiative aims to help reduce youth unemployment in areas where it is at its worst. Twenty local authorities have been identified as priorities for the government and will benefit from this scheme. As Nick Clegg said to CBI summit:

“Three months can make all the difference. When you feel like your banging your head against a brick wall, when you live in an area where opportunities are already few and far between, another 12 weeks of rejection letters, of being cut off, of sitting at home waiting, worrying, that can seriously knock the stuffing out of you, making it extremely difficult to pick yourself up …

So jobcentres will be able to make use of the subsidy before people are referred to the Work Programme, capitalising on their links with local employers, and they’ll also intensify support, so more training, more regular coaching, spending more time with young people to knock a CV into shape or prep ahead of an interview.”

There are critics of the scheme, who argue that it is too little, too late and that it will simply displace older workers, thereby creating worse unemployment for another group. Until the economy begins to grow and confidence returns to the markets, unemployment is likely to remain a frequent headline. The following articles consider the wage subsidy and the state of unemployment in the UK.

Wage subsidy could mean more jobs Independent Online, Business Report, Pierre Heistein (14/6/12)
Wage subsidies scheme moved forward The Press Association (27/6/12)
Wage subsidy plan for young workers brought forward BBC News (27/6/12)
Wage subsidies scheme moved forward Independent, Alan Jones (27/6/12)
Nick Clegg announces extra help for jobless in 20 troublespots Guardian, Juliette Jowit (27/6/12)
Young people’s prospects have ‘nose-dived’ says report BBC News, Judith Burns (25/6/12)
Economic gap between young and old significantly worse since 2008 – study Guardian, James Ball and Helene Mulholland (25/6/12)

Questions

  1. Why is unemployment such a big concern for the UK economy? What is so important about youth unemployment?
  2. Which factors have contributed towards such high youth unemployment?
  3. How will the wage subsidy encourage firms to take on more young people? Think about how a rational firm behaves when choosing between 2 workers.
  4. Why does the wage subsidy cause concern for organisations supporting the employment of older workers?
  5. To what extent do you agree with the Guardian article that says that young people have borne the brunt of the recession and subsequent government cuts?
  6. What other things have been undertaken in a bid to reduce unemployment and stimulate the economy?
  7. Think about the costs of unemployment. Categorise them into costs to (a) the individual, (b) friends and family, (c) the government and (d) the economy.
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Directing directors’ pay

Pay rises have been few and far between since the onset of recession – at least that’s the case for most workers. Pay for private-sector workers rose by 2.7% on average over the past year and for many in the public sector there were pay freezes. But, one group did considerably better: directors. According to the Incomes Data Services (IDS), over the past year, the average pay of the directors of the FTSE 100 companies has increased by almost 50%. Not bad for the aftermath of a recession! Much of the increase in overall pay for directors came from higher bonuses; they rose on average by 23% from £737,000 in 2010 to £906,000 this year.

Unsurprisingly, politicians from all sides have commented on the data – David Cameron said the report was ‘concerning’ and has called for the larger companies to become more transparent about how they set executive pay. How much difference transparency will make is debatable. However, Martin Sorrell, Chief Executive of WPP defended these pay rises, by comparing the pay of directors of UK companies with their counterparts in other parts of the world.

However, this defence is unlikely to make the average person feel any better, as for most people, their overall standard of living has fallen. With CPI inflation at 3.3% in 2010 (and RPI inflation at 4.6%) a person receiving the average private-sector pay rise of 2.7% was worse off; with a pay freeze they would be considerably worse off. Essentially, buying power has fallen, as people’s incomes can purchase them fewer and fewer goods.

However, the data have given David Cameron an opportunity to draw attention to the issue of more women executives. He believes that more women at the top of the big companies and hence in the boardroom would have a positive effect on pay restraint. However, this was met with some skepticism. The following podcasts and articles consider this issue.

Podcasts and webcasts
Directors’ pay rose 50% in past year BBC News, Emma Simpson (28/10/11)
‘Spectacular’ share payouts for executives BBC Today Programme, Steve Tatton of Income Data Services (29/10/11)
Sir Martin Sorrell defends top pay BBC Today Programme, Sir Martin Sorrell, Chief executive of WPP (28/10/11)
‘A closed little club’ sets executive pay BBC Today Programme, John Purcell and Deborah Hargreaves (28/10/11)

Articles
Cameron says Executive pay in U.K. is ‘Issue of concern’ after 49% advance Bloomberg, Thomas Penny (28/10/11)
Directors’ pay rose 50% in last year, says IDS report BBC News (28/10/11)
Cameron ties top pay to women executives issue Financial Times, Jim Pickard and Brian Groom (28/10/11)
£4m advertising boss Sir Martin Sorrell defends rising executive pay Guardian, Jill Treanor and Mark Sweney (28/10/11)
Executive pay soars while the young poor face freefall: where is Labour? Guardian, Polly Toynbee (28/10/11)
My pay is very low, moans advertising tycoon with a basic salary of £1 MILLION a year Mail Online, Jason Groves and Rupert Steiner (29/10/11)
More women directors will rein in excessive pay, says David Cameron Guardian, Nicholas Watt (28/10/11)
David Cameron and Nick Clegg criticise directors’ ‘50% pay rise’ BBC News (28/10/11)
The FTSE fat cats are purring over their pay but that’s good for the UK The Telegraph, Damian Reece (28/10/11)

IDS press release
FTSE 100 directors get 49% increase in total earnings Incomes Data Services (26/10/11)

Questions

  1. What are the arguments supporting such high pay for the Directors of large UK companies?
  2. How are wages set in a) perfectly and b) Imperfectly competitive markets?
  3. Why is the average person worse off, despite pay rises of 2.5%?
  4. Why does David Cameron believe that more women in the boardroom would act to restrict pay rises?
  5. To what extent do you think that more transparency in setting pay would improve the system of determining executive pay?
  6. Do senior executives need to be paid millions of pounds per year to do a good job? How would you set about finding the evidence to answer this question?
  7. Is the high pay of senior executives a ‘market’ rate of pay or is it the result of oligopolistic collusion between the remuneration committees of large companies (a form of ‘closed shop’)?
  8. What would be the effect over time on executive pay of remuneration committees basing their recommendations on the top 50% of pay rates in comparable companies?
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Imprisoning prisoners with wage cuts

Through new legislation, the Ministry of Justice is aiming to make ‘offenders … take personal responsibility for their crimes’. The idea is to cut the wages of prisoners who work in communities, with the objective of raising £1m a year for victim support services. Any prisoner earning above £20 a week after tax, national insurance, child support payments etc, will face a 40% deduction in their pay. The money raised will be used to ‘repair the damage done by crime’ and begin to remove the burden from the general taxpayer. Critics, however, argue that this legislation will create a disincentive effect and discourage prisoners to work in the community before their release. It may also create additional bureaucracy for the external firms that employ them and at the end of the day may not even affect most prisoners, as many receive earnings, after all deductions, below £20 and so would not be liable. The following articles consider this policy.

Prisoners’ wages docked to fund victim support Associated Press (26/9/11)
Prisoners’ wages to help crime victims BBC News (26/9/11)
Prisoners to pay victims of crime The Press Association (26/9/11)
Victims handed £1m as prisoners suffer wage cut Independent, Nigel Morris (26/9/11)

Questions

  1. To what extent do you think the above policy is (a) equitable and (b) efficient?
  2. What might be the adverse effects of such legislation, from the point of view of both prisoners and the firms that employ them?
  3. What are the income and substitution effects in the context of a worker’s decision to work more or less hours?
  4. Using indifference analysis, explain how a fall in the prisoners’ net pay (due to this latest deduction) might have an impact on their desire to work more or less.
  5. Using your analysis from the previous question, explain the importance of the income and substitution effects.
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A 50p controversy

Cutting the budget deficit is a key government objective, but at the moment it seems to be in conflict with another objective, namely economic growth and thereby avoiding a double-dip recession. In order to raise tax revenue and meet the cries for more equity, the 50% tax rate above £150,000 was imposed, affecting some 310,000 people. However, in a recent letter from some top economists to the Financial Times, they called for the scrapping of the top rate of tax. They argue that it is hindering entrepreneurship and encouraging potential top rate tax payers to leave the UK, thereby hindering the economic situation. George Osborne has asked HMRC to evaluate just how effective the top rate of tax has been at generating government revenue.

In contrast to these calls for scrapping this top rate of tax, some of the richest people in the world have said that they would be happy to pay this rate of tax. In the words of Sir Stuart Rose, the ex-boss of Marks and Spencer:

“How would I explain to my secretary that I would pay less tax on my income, which is palpably bigger than hers, when her tax is not going down.”

Those against scrapping the tax argue that it will be ‘monstrously unfair’ and ‘phenomenally immoral’. This, combined with official figure that suggest by 2015/16 the top rate tax will bring in an extra £3.2bn more revenue than had the tax remained at 40%, certainly adds weight to their argument. In total, over the five year period, it is predicted to bring in an extra £12.6bn.

The policy to increase the tax threshold to £10,000 will meet with the critics’ approval, but less so, if it is accompanied by a scrapping of this top rate tax. Furthermore, the government’s coffers will take a significant beating if both of the above occur!

Another option to replace the 50% tax rate is a higher tax on high value homes – the so-called ‘mansion tax’. Whatever happens with taxation, one thing is clear: the government needs to find a way to generate tax revenue, without putting the economy back into recession. If the 50% tax rate encourages people to leave the UK to avoid the tax or to forego entrepreneurship, it will directly be acting as a disincentive. Fewer jobs will be created due to a lack of entrepreneurship, output may be lower and hence growth will not reach its potential. Crucially, the international competitiveness of the UK economy is being badly affected, as it becomes a less attractive place for investment and talented workers. The following articles consider the 50% tax rate and the controversy surrounding it, despite it only being a temporary policy.

Stuart Rose ‘would pay more tax’ BBC News (9/9/11)
Lawson: ‘dangerous’ and ‘foolish’ to keep 50p tax rate Telegraph, Louisa Peacock (10/9/11)
Rose calls 50p tax rate ‘only fair’ Financial Times, Elizabeth Rigby (9/9/11)
Top 50p tax rate damages economy, say economists BBC News (7/9/11)
George Osborne loses nerve on plan to cut 50p top tax rate Independent, Nigel Morris (8/9/11)
Top tax rate will raise £12.6bn more in revenue, official figures reveal Guardian, Polly Curtis (7/9/11)
Laffer curves and the logic of the 50p tax Financial Times, Tim Harford (9/9/11)
Row over ending of 50p tax rate threatens to spark Tory rebellion Guardian, Patrick Wintour and Polly Curtis (7/9/11)
I’d happily pay more tax, says former M&S boss Sir Stuart Rose Independent, Andy McSmith (10/9/11)

Questions

  1. What are the main arguments in favour of keeping the 50p tax rate?
  2. What are the main arguments in favour of scrapping the 50p tax rate?
  3. What does the Laffer curve show? Is it relevant in the case of the 50p top rate of tax? What does it suggest about the ability of the tax to generate income?
  4. How does the top rate of tax affect the international competitiveness of the UK economy?
  5. Why is there a trade-off between raising tax revenue and boosting economic growth through the use of the 50p tax rate?
  6. Why is there concern about the highest rate of tax actually causing tax revenue to fall?
  7. What are the equity arguments concerning the scrapping of the 50p tax and raising the tax threshold? Is there an equity argument in favour of the 50p tax rate?
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