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
- What are the arguments supporting such high pay for the Directors of large UK companies?
- How are wages set in a) perfectly and b) Imperfectly competitive markets?
- Why is the average person worse off, despite pay rises of 2.5%?
- Why does David Cameron believe that more women in the boardroom would act to restrict pay rises?
- To what extent do you think that more transparency in setting pay would improve the system of determining executive pay?
- 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?
- 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’)?
- 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?
The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it has recently been increased to £6.08 – 15p rise. Rises have also been seen for 18-20 year olds, 16 and 17 year olds and apprentices. Undoubtedly this is good news for workers receiving the minimum wage, but what does it mean for firms and national unemployment data?
Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment. Furthermore, firms are already facing difficult times with the economic climate: sales remain relatively low, but costs are still high. By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers.
It is hoped that the size of the increases will help low paid workers, as costs of living continue to rise, but won’t cause firms to reduce their labour force. This is one reason, in particular, why the increase in the minimum wage for young workers is smaller than that for adults. Youth unemployment is relatively high and so it is essential that firms keep these workers on, despite their increased costs.
Although the TUC has welcomed the increases in the National Minimum Wage, saying they will benefit some 900,000 workers, the General Secretary of Unison has said that it isn’t high enough.
“The rise to £6.08 is a welcome cushion, but with the price of everyday essentials such as food, gas and electricity going up massively, it won’t lift enough working people out of the poverty trap.”
The following articles consider this issue.
Minimum wage rises by 15p to £6.08 an hour Telegraph (3/10/11)
Minimum wage up by 15p to £6.08 BBC News (1/10/11)
150,000 social care workers paid below legal minimum wage, research reveals Guardian, Shiv Malik (3/10/11)
Unions want £8 an hour minimum wage Press Association (1/10/11)
Hunderds of thousands of women to benefit as minimum wage hits the £6-an-hour mark for the first time Mail Online, Emma Reynolds (29/9/11)
Unions demand minimum wage of £8 an hour Telegraph (30/9/11)
Changes will benefit workers Sky News (2/10/11)
Questions
- Is the minimum wage an example of a price ceiling or a price floor?
- If the National Minimum Wage was imposed below the market equilibrium, what would be the effect?
- If imposed above the market wage rate, the National Minimum Wage may create unemployment. On which factors does the extent of unemployment depend?
- Why is it expected that female workers are likely to be the main ones to benefit? What does this say about gender inequality?
- Why does the General Secretary of Unison not believe the higher National Minimum Wage will help people out of the poverty trap?
- How will the National Minimum Wage affect a firm’s costs of production. Illustrate the likely impact on a diagram.
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
- To what extent do you think the above policy is (a) equitable and (b) efficient?
- What might be the adverse effects of such legislation, from the point of view of both prisoners and the firms that employ them?
- What are the income and substitution effects in the context of a worker’s decision to work more or less hours?
- 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.
- Using your analysis from the previous question, explain the importance of the income and substitution effects.
No, bonfire night hasn’t been moved, but the 30th November could certainly be a day to remember. This day has been ‘selected’ by Unions for a nationwide day of action in response to government plans to increase workers’ pension contribution. The action would undoubtedly lead to massive disruption to public services across the UK and if an agreement is not reached with Ministers, we are likely to see further days of industrial action. In the words of the TUC boss, Brendan Barber, if no agreement is forthcoming, there will be ‘the biggest trade union mobilisation for a generation’.
The so-called pensions crisis has been an ongoing saga with seemingly no end in sight. As the UK population gets older, the strain on the state pension will continue to grow. The dependency ratio has increased – there are more and more pensioners being supported by fewer and fewer adults of working age. If the level of benefits is to be maintained, workers must either work for longer or make larger contributions to make up the deficit.
Plans are already in motion to increase the retirement age, but this in itself will not be sufficient. If pension contributions do increase, workers will undoubtedly find themselves worse off – a larger proportion of their gross income will be taken and hence net incomes will be lower. With less disposable income, consumer expenditure will fall, and given that consumption is the largest component of aggregate demand, the economy will take a hit. This is even more of a concern given the pay freezes we have already seen, together with rising inflation. People’s purses will get squeezed more and more, So, while raising pension contributions may help plug the pensions deficit, it could spell trouble for the economic prospects of the UK economy.
In addition to the potential longer term effects, there will also be a significant short term effect, namely, the loss of output on the day of the strike action. If workers are absent, the company will produce less than their potential and in some cases, the lost output can never be regained. If the postal workers go on strike, businesses may find packages go undelivered, customers experience delays, bills are not paid and so on. In all, strike action on the scale that is planned will have an impact on everyone, so it is in the interests of the economy for some sort of agreement to be reached. As Mr. Barber said:
‘If there’s no progress, then potentially we will see very widespread industrial action across the public services’
The following articles look at this conflict.
Unions plan ‘day of action’ over pensions Financial Times, Brian Groom (14/9/11)
TUC: ‘Strikes will be the biggest for a generation’ says Brendan Barber Telegraph (14/9/11)
Unions call for ‘national day of action’ over pensions BBC News (14/9/11)
Unions call collective day of strike action in November Guardian, Helene Mulholland and Dan Milmo (14/9/11)
Ed Miliband to warn trade unions that they must modernise Independent, Andrew Grice (13/9/11)
Trade unions plan day of action over pensions on Nov 30 Associated Press (14/9/11)
Are the trade unions about to save Britain? Telegraph, Mary Riddell (12/9/11)
Pension row unions in day of action The Press Association (14/9/11)
Unions set date for pensions strike as ‘unprecedented ballot begins’ Telegraph, Christopher Hope (14/9/11)
TUC to attack ministers over public sector pensions BBC News(14/9.11)
Secret plan for union strikes to cripple the country Telegraph, Christopher Hope(14/9/11)
Questions
- What are the main costs of strike action to (a) the individual going on strike (b) the firms which lose their workers (c) small businesses (d) the economy?
- What is meant by the dependency ratio? What action could be taken to reduce it? For each type of action, think about the costs and benefits.
- If pension contributions do increase, explain how workers will be affected. How will this affect each of the components of aggregate demand?
- Based on your answer to the above questions, what is likely to be the impact on the government’s macroeconomic objectives?
- What other action, besides striking, could unions take? Is it likely to be as effective? Do you think strikes are a good thing?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it normally affect equilibrium wages and employment?
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
- What are the main arguments in favour of keeping the 50p tax rate?
- What are the main arguments in favour of scrapping the 50p tax rate?
- 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?
- How does the top rate of tax affect the international competitiveness of the UK economy?
- Why is there a trade-off between raising tax revenue and boosting economic growth through the use of the 50p tax rate?
- Why is there concern about the highest rate of tax actually causing tax revenue to fall?
- 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?