Divided we stand is the title of a new report by the Organisation for Economic Co-operation and Development (OECD). Its sub-title is “Why inequality keeps rising”. The report shows how the gulf between rich and poor has widened in most countries, both developed and developing. As the introduction states:
In the three decades prior to the recent economic downturn, wage gaps widened and household income inequality increased in a large majority of OECD countries. This occurred even when countries were going through a period of sustained economic and employment growth.
The report analyses the major underlying forces behind these developments. Its conclusion is that inequality looks set to continue widening, especially with the worldwide economic slowdown and rise in unemployment. However, the report says that “there is nothing inevitable about growing inequalities. Globalisation and technological changes offer opportunities but also raise challenges that can be tackled with effective and well-targeted policies.”
So just what is the extent of inequality? How has it changed over time? And what can be done to reduce inequality? The webcast produced by the OECD to accompany the report looks at the problem, and the report and articles look at what can be done about it.
Webcast
Record inequality between rich and poor OECD (5/12/11)
Articles
Governments need will to fix growing inequality Times Colonist (Canada), Paul Willcocks (8/12/11)
Capitalism defies the laws of gravity Sydney Morning Herald, (7/12/11)
UK pay gap rises faster than any rich nation – OECD The Telegraph, (5/12/11)
The Income Inequality Boom: It’s Real and It’s Everywhere The Atlantic, Derek Thompson (6/12/11)
Income inequality growing faster in UK than any other rich country, says OECD Guardian, Randeep Ramesh (5/12/11)
OECD inequality report: how do different countries compare? Guardian datablog (5/12/11)
Inequality in Britain: faring badly in an unfair world Guardian (5/12/11)
OECD calls time on trickle-down theory Financial Times, Nicholas Timmins (5/12/11)
Wage inequality ‘getting worse’ in leading economies BBC News, Adam Fleming (5/12/11)
OECD Report and Documents
Governments must tackle record gap between rich and poor, says OECD OECD Press Release (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – Introduction by Angel Gurría, OECD Secretary-General, at Press Conference OECD (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – 4-Page Summary of Report (5/12/11)
An Overview of Growing Income Inequalities in OECD Countries: Main Findings OECD (5/12/11)
Questions
- Why may inequality be seen as a ‘bad thing’ for society as a whole and not just the poor?
- Does it matter for the poor if rich people’s incomes grow at a greater rate than those of the poor so long as the incomes of the poor do indeed grow?
- Explain what is meant by the Gini coefficient. What has happened to the Gini coefficient over the past few years across the world?
- Are there any common explanatory features in the economies of those countries where income inequality is growing rapidly? Similarly, are there any common explanatory features in the economies of those countries where income inequality is not growing, or growing only very slowly?
- What are the causes of rising inequality?
- Identify policies that can be adopted to tackle growing inequality.
- What problems arise from policies to reduce inequality by (a) reducing inequalities in disposable income; (b) providing more free services to all, such as healthcare and education? How might these problems be mitigated?
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 total EU budget in 2010 was €123 billion. Just under half of this (€58 billion) was spent on supporting agriculture. The programme of support – the Common Agricultural Policy (CAP) – has changed over the years. For a start, despite its being a large proportion of the EU budget, this proportion has actually been falling. In 1980, the CAP accounted for 69% of the EU budget; in 1990 it was 60%; in 2000 it was 52%; in 2010 it was 47%.
The types of support have also changed. The main method in the past was effectively to set minimum prices for various foodstuffs and for Intervention Boards to buy up any surpluses that arose from such prices being above the market equilibrium. Massive food ‘mountains’ resulted. Sometimes these surpluses were dumped on the world market; sometimes they were thrown away; sometimes they were simply kept in storage. Export subsidies and import levies (taxes) were also used to reduce surpluses. This, of course, was highly damaging to farmers in many countries outside the EU, especially in various primary exporting developing countries.
Reforms have taken place in recent years. The most important has been to replace high intervention prices with direct payments to farmers unrelated to current output. Whilst such payments still provide a substantial outgoing from the EU budget, being unrelated to current output, they do not encourage farmers to produce more and thus do not generate surpluses. Prices in most cases are allowed to be determined by the market.
The EU has just announced further reforms. These include:
• Capping total CAP spending at current levels until 2020
• Capping the total payment to any one farm to €300,000
• Relating subsidies to acreage rather than previous output
• Making 30% of the direct payments dependent on farmers meeting environmental criteria.
The following videos and articles examine the proposals and assess their likely benefits, their likely drawbacks and their likelihood of being implemented.
Videos
EU plans to reform Common Agricultural Policy for farmers BBC News, Jeremy Cooke (12/10/11)
EU unveils controversial agricultural reforms Euronews (12/10/11)
Towards a new Common Agricultural Policy Euronews (14/10/11)
Queen to lose out in shake up of Europe’s farm payments Channel 4 News (12/10/11)
Cautious welcome for EU agriculture policy shake-up STV News (12/10/11)
CAP reform proposals YouTube, Dacian Cioloş, European Commissioner for Agriculture and Rural Development (in French with English subtitles) (12/10/11)
Articles
EU farm chief: CAP plans represent profound reform Reuters, Charlie Dunmore (12/10/11)
UK to dismiss Common Agricultural Policy reforms as inadequate Guardian, David Gow (11/10/11)
EU Farm Policy Debate Pits Top Receiver France Against U.K. Bloomberg Businessweek, Rudy Ruitenberg (12/10/11)
EU plans CAP reforms for ‘greener’ farm subsidies BBC News (12/10/11)
Common Agriculture Policy farm subsidy plan unveiled BBC News (12/10/11)
Q&A: Reform of EU farm policy BBC News (12/10/11)
CAP reform: Shepherd and steward of the land BBC News, Jeremy Cooke (12/10/11)
EU agriculture policy ‘still hurting farmers in developing countries’ Guardian: Poverty Matters blog, Mark Tran (11/10/11)
EU aid to farmers to continue over next decade Financial Times, Joshua Chaffin (12/10/11)
EU publications
CAP Reform – an explanation of the main elements Europa Press Release (12/10/11)
The European Commission proposes a new partnership between Europe and the farmers European Commission Press Release (12/10/11)
EU farm policy after 2013: Commission proposals welcomed with reservations European Parliament Press Release (12/10/11)
Legal proposals for the CAP after 2013 European Commission: Agriculture and Rural Development (12/10/11)
Questions
- Explain why the old system of price support under the CAP led to food surpluses. Use a diagram to illustrate your analysis.
- What is the significance of price elasticity of demand and supply in determining the size of these surpluses?
- What reforms have been introduced to the CAP in recent years? What effects have these had?
- Explain the new proposals for the CAP after 2013.
- What are the likely benefits of these proposals?
- What are the likely drawbacks of the proposals?
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.
Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?