The large bonuses received by bankers, often amounting to more than a million pounds, have been contentious for many years. With the banking crisis and subsequent recession, and with both public and government outrage at the size of the bonuses, many thought that the days of such bonuses were over. But such is not the case. “There has been public disquiet that leading banks – which have been seen as a major cause of the financial crisis – have been receiving taxpayer funds, but are not prepared to change their traditional culture of awarding big bonuses to key staff.”
The following articles look at what has been happening to senior bankers’ remuneration in recent months. But what are the market conditions that allow such rewards to continue? Are they a reflection of the marginal productivity of bankers or of their market power, or what?
RBS to keep paying bonuses despite 1bn first-half loss Telegraph (7/8/09)
Lloyds chief plans bonuses for ‘spectacular job’ in making £4bn loss Telegraph (6/8/09)
CS toxic bonuses are up 17%, but gains can’t be realised for four years eFinancial Careers (7/8/09)
Banks: Look, don’t touch Guardian (8/8/09)
Analysis: The plan’s the thing Times Online (7/8/09)
Cutting our bonuses would hit the taxpayer, says RBS Citywire (7/8/09)
France targets bankers’ bonuses BBC News (7/8/09)
Sarkozy weighs into debate over banker bonuses after BNP Paribas compensation sparks anger Los Angeles Times (7/8/09)
Knotting the purse-strings The Economist (6/8/09)
Pay and politics The Economist (6/8/09)
Questions
- Explain why many senior bankers have continued to receive huge bonuses. To what extent is oligopoly theory relevant to your explanation?
- To what extent do the size of the bonuses reflect senior bankers’ contributions to (a) the productivity and (b) the profits of their bank?
- If bankers are to be paid bonuses, what is the best form for these bonuses to take? Consider the incentive effects in your answer.
- Should bankers’ bonuses be regulated and, if so, what criteria should regulators use for determining the acceptable size of bonuses?
Since Labour has been in power the gap between rich and poor has remained more or less unchanged – a fact that might be surprising given a Labour government and fiscal policies that have become increasingly redistributive in nature. In fact income distribution in the UK has not changed since 1991 according to Office for National Statistics figures. Economists measure income distribution in various ways, but two of the key indicators are the Gini coefficient and the Lorenz curve. For more information on income distribution and some useful data, you may like to download an income data spreadsheet from the IFS (zip file). If you are interested in where you fit into the income scale, then you may also like to try the Institute for Fiscal Studies interactive income model. Why not try a range of different scenarios to see where different levels of income fit into the overall income scale.
UK income gap ‘same as in 1991’ BBC News Online (16/12/08)
Questions
- Define the terms (a) Gini coefficient and (b) Lorenz curve.
- Using diagrams as appropriate, show how the Lorenz curve will change when income distribution becomes (a) more equal and (b) less equal.
- Explain how the value of the Gini coefficient will change as income distribution gets more equal. With reference to the IFS spreadsheet (linked to above) descibe how the Gini coefficient has changed in recent years.
- Discuss reasons why income distibution in the UK has stayed the same since 1991 despite a series of redistributive measures adopted by the Labour government since 1997.
The article linked below looks at the extent to which economic downturn and rising inequality are likely to affect crime levels in the UK. Traditionally the view has been that an economic downturn will raise crime, but is it necessarily the downturn that is causing the increased crime?
Consumed by crime Guardian (24/9/08)
Questions
| 1. |
Explain why an economic downturn may lead to increased levels of crime. |
| 2. |
Discuss the extent to which deregulation of markets may have exaggerated the relationship between crime and the level of economic growth. |
| 3. |
Assess the view espoused in the article that “a culture obsessed with material goods” and “competitive individualism” have led to stronger link between crime and economic growth. |
In Gordon Brown’s last budget as Chancellor he scrapped the 10p starting rate of taxation and this change came into effect for the 2008/9 tax year starting April 6th 2008. The move has been criticised by many Labour MPs and by poverty campaign groups as they argue that the scrapping of the rate will make some poor people worse off. They also argue that it will make it more difficult to meet the targets the government has set for reducing child poverty
Chancellor accused of widening poverty trap for poorer workers Times Online (14/03/08)
Benefit move to cut child poverty BBC News Online (12/03/08)
Questions
| 1. |
Explain what is meant by the poverty trap. |
| 2. |
Explain how the abolition of the 10p starting rate of tax is likely to increase inequality. |
| 3. |
Analyse two policies that are likely to reduce poverty. Then assess the extent to which these policies will also help reduce child poverty. |
Widening levels of income distribution have led to increased anger, according to a poll carried out for the Guardian by ICM. The articles linked to below look at this issue from a range of perspectives and using a series of regional case studies.
Anger at gap between rich and poor – ICM poll Guardian (20/2/08)
Diamonds for rich inside M25; hard times for the rest Guardian (21/1/08)
What the Romans did for us: introduce a North-South divide Guardian (21/1/08)
Where Burberry, Bentleys and bling prevail Guardian (21/1/08)
Dark reality hidden behind the picturesque scenery Guardian (21/1/08)
Mills and mail order: end of Empire marks another stage of decline Guardian (21/1/08)
Mind the gap Guardian (21/1/08)
Questions
| 1. |
Define the terms ‘Lorenz curve’ and Gini coefficient’. |
| 2. |
Using diagrams as appropriate show the changes that have taken place in income distribution in the UK in the past decade. |
| 3. |
Assess the principal causes of the growing North-South divide. |
| 4. |
Evaluate two policy options available to the government to reduce the widening gap in income distribution. |