With government cuts and pay freezes, many people are worried about their future. Against this background it’s little wonder that people are growing increasingly resentful about the soaring pay of bankers and other leaders of major companies – especially when they reflect on the behaviour of top bankers who were largely responsible for the recession in the West and the debt problems that resulted. And the gap between those at the top and workers on average pay just goes on widening. As the final article below states:
The boss who sells Cillit Bang got paid a hefty £92.6m last year, while his counterpart who builds executive homes pocketed £38.4m and a top miner took home £27m. These are not figures from some international football league, but the bosses of Britain’s biggest companies, who received an average 55% pay rise in the year to June. A top FTSE 100 boss now earns £4.9m – 88 times the average worker’s pay.
On 9 November 2010, a high pay commission was launched to investigate the yawning pay gap between top executives and those on average incomes.
As the high pay commission, set up by the thinktank Compass and backed by the Joseph Rowntree charitable trust, begins its year-long analysis into the widening gap between the lowest and highest paid, a Compass poll shows that 99% of people believe that top executives are overpaid.
The commision will seek answers to questions such as the following: Why has the gap widened so massively? What is the role of globalisation in the process? Why has competition not worked to compete top pay down? Why don’t company owners impose more restraint on executive pay? Is there a form of collusion to push executive pay ever higher? Are executives worth it?!
Articles
Let’s make CEOs justify their wages Guardian, Martin O’Neill (19/10/10)
FTSE 100 bosses criticised as boardroom pay leaps by 55% Guardian, Simon Goodley and Graeme Wearden (29/10/11)
Investigation launched into soaring executive pay Guardian, Jill Treanor (9/11/10)
Eighty-five per cent of people say top executives ‘should be paid less’ Telegraph, Ian Cowie (9/11/10)
Top executives paid ‘far too much’ Financial Times, Nicholas Timmins (9/11/10)
A mission to the outer limits of pay Financial Times, Andrew Hill and Esther Bintliff (9/11/10) (first part of article)
Sharing the spoils of business fairly Guardian, Deborah Hargreaves (13/11/10)
The High Pay Commission
The High Pay Commission, home page
Questions
- Desribe what has happened to executive pay of the top companies over recent years.
- How are executive pay packages determined?
- How relevant is marginal productivity theory in explaining executive pay?
- What are the incentive effects of having extremely high pay?
- What scope is there for collusion in determining executive pay?
- Why don’t company owners impose more restraint on executive pay?
- What are the social impacts of excessive executive pay?
- What could the government do to address the problem?
You might think that small environmentally-friendly companies would be moving into the green energy market: that setting up a wind farm, for example, would be a perfect business opportunity for a small company. In fact, the big companies are taking over this market. As the Der Spiegel article below states:
Europe’s wind energy sector is currently experiencing a major transformation. New massive offshore wind parks are soon expected to crop up off Europe’s coastline. Big companies like Siemens and General Electrics are increasing their stakes in a market worth billions. But experts warn that a new energy oligopoly may soon emerge.
So what is it about the wind energy market that makes it suitable for an oligopoly to develop? The two articles explore this question.
Winds of Change Der Spiegel, Nils-Viktor Sorge (1/11/10)
GE and Siemens Outpacing Wind Pioneers, Becoming Clean Energy’s “New Oligopoly” Fast Company, David Zax (2/11/10)
Questions
- What market failures are there in the wind energy market?
- What barriers to entry are there in the wind energy market?
- What economies of scale are there in this market?
- How are changes in this market affecting the minimum efficient scale of companies?
- Would there be room in the market for enough competitors to prevent collusion?
- How might the authorities prevent (a) open and (b) tacit collusion in the wind energy market?
- Do small wind energy companies have any market advantages?
The possibility of currency and trade wars and how to avert them were major topics at the G20 meeting in Seoul on 11 and 12 November 2010. Some countries, such as the USA and the UK have been running large current account deficits. Others, such as China, Germany and Japan have been running large current account surpluses. But balance of payments accounts must balance. Thus there have been equal and opposite imbalances on the financial plus capital accounts. Large amounts of finance and capital have flowed from the trade-surplus to the trade-deficit countries. In particular China holds a vast amount of US dollar assets: a debt for the USA.
The trade and finance imbalances are linked to exchange rates. The USA has accused China of keeping its exchange rate artificially low, which boosts Chinese exports and further exacerbates the trade and finance imbalances. The USA is keen to see an appreciation of the Chinese yuan (also known as the renminbi). The Chinese response is that the USA is asking China to take medicine to cure America’s disease.
So was the meeting in Seoul successful in achieving a global response to trade and exchange rate problems? Has it averted currency and trade wars? Or were national interests preventing a concrete agreement? The articles look at the outcomes of the talks.
Articles
G20 pledge to avoid currency war gets lukewarm reception Guardian, Phillip Inman and Patrick Wintour (12/11/10)
G20 fails to agree on trade and currencies Financial Times, Chris Giles, Alan Beattie and Christian Oliver (12/11/10)
Main points of the G20 Seoul summit document Reuters (12/11/10)
Factbox: Outcome of the Seoul G20 summit Reuters (12/11/10)
No deal: Seoul’s G20 summit fails to deliver on currencies, trade imbalances The Australian, Laurence Norman and Ian Talley, Dow Jones Newswires (12/11/10)
G20 to tackle US-China currency concerns BBC News (12/11/10)
The expectations game BBC News blogs: Stephanomics, Stephanie Flanders (12/11/10)
Obama: Imbalances threaten growth BBC News (12/11/10)
Obama leaves G-20 empty-handed on currency spat msnbc (12/11/10)
The ghost at the feast The Economist, Newsbook blog (12/11/10)
Forget summit failures, look at G20 record Financial Times, Christian Oliver, Chris Giles and Alan Beattie (12/11/10)
Obama warns nations not to rely on exports to US BBC News (13/11/12)
G20 summit distracted by ‘currency wars’ Guardian, Mark Weisbrot (12/11/10)
Current account targets are a way back to the future Financial Times podcasts, Martin Wolf (2/11/10) (Click here for transcript)
Ben Bernanke hits back at Fed critics BBC News (19/11/10)
Why should you care about currency wars? BBC News, Stephanie Flanders (9/11/10)
G20 sites
G20 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
Questions
- What are the causes of the large trade imbalances in the world?
- What problems arise from large trade imbalances?
- What is meant by beggar-my-neighbour policies?
- Are moves towards freer trade a zero-sum game? Explain.
- Are moves towards protectionism a zero-sum game? Explain.
- Are attempts to get a realignment of currencies a zero-sum game? Explain.
- How successful has the G20 been over the past two or three years?
- Would it be desirable for governments to pursue current account targets?
On November 11, the government published a White Paper on welfare reform. Central to the proposals is the replacing of the range of out-of-work benefits, housing benefit and tax credits with a single universal benefit. The system will be introduced for new claimants in 2013 and for those currently on benefits sometime after 2015.
When the unemployed find work, the benefit will be withdrawn at a rate of 65p of each £1 earned. At present, because of the complexity of the system, some claimants on multiple benefits can find that the withdrawal rate is almost 100%. When income tax is added in, the tax-plus-lost-benefit rate does sometimes exceed 100%. Thus some people find themselves in a poverty trap, whereby it’s not worth getting a job. It’s financially benefical to stay on benefits.
The other crucial element of the proposal is to deny people benefits who turn down a legitimate job.
a. Failure to meet a requirement to prepare for work (applicable to jobseekers and those in the Employment and Support Allowance Work-Related Activity Group) will lead to 100 per cent of payments ceasing until the recipient re-complies with requirements and for a fixed period after re-compliance (fixed period sanctions start at one week, rising to two, then four weeks with each subsequent failure to comply).
b. Failure to actively seek employment or be available for work will lead to payment ceasing for four weeks for a first failure and up to three months for a second.
c. The most serious failures that apply only to jobseekers will lead to Jobseeker’s Allowance payment ceasing for a fixed period of at least three months (longer for repeat offences). Actions that could trigger this level of penalty include failure to accept a reasonable job offer, failure to apply for a job or failure to attend Mandatory Work Activity.
The following podcasts and articles look at the details of the proposals and discuss their merits and drawbacks,
Podcasts and webcasts
Not going to work if you can is ‘not an option’ ITV, part of speech by Iain Duncan Smith (11/11/10)
IDS: Staying on benefits ‘irrational choice’ BBC Today Programme, Chris Buckler, Iain Duncan Smith Smith (11/11/10)
Iain Duncan Smith unveils new benefits system BBC News (11/11/10)
Welfare reform success ‘far from certain’ BBC Today Programme, Norman Smith (11/11/10)
Articles
Benefits system overhaul ‘to make work pay’ BBC News (11/11/10)
At-a-glance: Benefits overhaul BBC News (11/11/10)
Benefits explained: A basic guide to entitlements BBC News (11/11/10)
Is welfare reform doomed to fail? BBC News, Norman Smith (11/11/10)
A bold and principled approach to benefits Telegraph (11/11/10)
Reshaping the benefits system The Economist, Blighty blog (11/11/10)
Unemployment benefits shake-up ‘a fair deal’ Independent (11/11/10)
Tougher welfare sanctions spark ‘destitution’ warnings Independent (11/11/10)
Iain Duncan Smith: it’s a sin that people fail to take up work Guardian, Patrick Wintour, Randeep Ramesh and Hélène Mulholland (11/11/10)
Preacher Duncan Smith aims for holy grail of welfare policy Guardian, Randeep Ramesh (11/11/10)
Documents, official information and data
Universal Credit: welfare that works Department for Work and Pensions, Links to White Paper (11/11/10)
Benefits and financial support Directgov
Economic and Labour Market Review (see tables in Chapters 2 and 6), National Statistics
Questions
- Explain what is meant by the ‘poverty trap’ (or ‘welfare trap’).
- Summarise the reforms to benefits proposed in the White Paper.
- Examine whether the Coalition government’s proposal for a universal benefit will lead to greater fairness.
- Will a withdrawal rate of 65% provide a strong incentive for people out of work to take a job?
- Why may some be paying a combined tax-plus-lost-benefit rate of 76%?
- Why is there an inherent trade-off between making work pay (and thus eliminating the poverty trap) and keeping the cost of welfare benefits down? Would reducing the level of benefit be an appropriate answer to this trade-off?
- One aim of the benefits reform is to reduce unemployment. What type of unemployment is likely to be affected?
- Find out the current level of unemployment and the level of job vacancies and, in the light of this, comment on the likely effectiveness of the policy in reducing unemployment (a) shortly after the new system is introduced; (b) over the longer term.
Student fees are set to rise to between £6000 and £9000 per year from 2012 (see Will students be Browned off?. But I’m sure you know that already! Not surprisingly, there has been considerable debate about the effects on student debt and whether potential students will be put off from applying to university. But there is another issue, explored in the article below. This is the question of the ‘marketisation’ of higher education.
With the exception of the STEM subjects (science, technology, engineering and maths) universities will no longer receive any teaching subsidy from the government. Teaching will have to be funded from student fees. This means that provision will depend on supply and demand. If there is a high demand for certain courses, then the courses will be financially viable for universities. If not, they will have to close (unless the university chooses to cross-subsidise them from other profitable courses).
This might be fine if the market for university places were perfectly competitive and if questions of inequality of access were fully taken into account. But the higher education market is not perfect. The article looks at some of these imperfections and why, therefore, a pure market system will fail to achieve the optimum allocation of university places.
Browne’s Gamble London Review of Books, Stefan Collini (4/11/10)
Questions
- What information failures are there in the market for higher education places?
- What externalities are involved in higher education and will this lead to an over or underprovision of higher education in a pure market system?
- Apart from externalities and information asymmetries, what other market failures apply to the market for student places in HE?
- What are the arguments for subsidising non-STEM subjects (as well as STEM ones)? Should these subsidies vary from course to course and from university to university?
- What is the best way of tackling the problem of unequal access to higher education?