Life must be very hard for bankers in the UK. Not only are they being partly blamed for the current financial crisis, but they may now have to survive on just their salary. Imagine trying to have a happy Christmas when you’ve only earned £200,000 over the past year: it really will be a cold and hard Christmas for them. Unless of course, the government does call the bluff of the RBS directors who have threatened to quit if an estimated £1.5bn bonus pool for staff at the investment arm of the bank is blocked. Let’s not forget that RBS is largely owned by the public: 70% or an investment of £53.5bn. It’s our taxes that will be used to pay these bonuses giving 20,000 RBS bankers a salary that is at least 3 times greater than the national average.
RBS directors have threatened a mass walkout if the government does withhold the ‘competitive bonus package’. Given that many blame bank directors for plunging us into the credit crunch, some may laugh at their argument that if the bonus package is withheld, then ‘top talent will leave the bank’. However, it is a serious threat: pay out or we leave and you’ll see the profitability of the bank decline, making it less likely that taxpayers will see a ‘return’ on their investment. RBS needs to make profits to repay the taxpayer, but is the taxpayer willing to pay out? RBS directors argue that if its bankers do not receive bonuses, then RBS will lose out in recruiting the best talent. Why would a banker choose to work for a bank that doesn’t pay out bonuses?
Lord Mandelson said: “I understand the point that RBS directors are expressing – they say they have to remain competitive in the market in recruiting senior executives, and this is why it’s important that all the banks are equally restrained, and RBS is not singled out.” One solution here would be a one-off windfall tax on bonuses, or even a permanently higher rate of tax (a ‘supertax’) on bonuses.
Over the past year or so, not a day has gone by when banks are not in the news and the next few days look to be no exception. This is another issue that affects everyone, so read the articles below and make up your mind! The government has an important decision to make, especially given than it’s the taxpayers who will decide on the next government.
‘Bankers need to join the real world’ minister says BBC News (3/12/09)
UK seeks to calm fears of RBS walk-out over bonuses Reuters, (3/12/09)
RBS chief Stephen Hester set to walkout over bonus row Scotsman, Nathalie Thomas (3/12/09)
RBS directors threaten to quit over bonuses Big On News (3/12/09)
Thousands of Bankers paid £1m in bonuses Sky News (3/11/09)
Barclays bankers to get 150pc pay rise Telegraph, Jonathan Sibun and Philip Aldrick (3/12/09)
PM reacts to RBS Director’s threat ITN (3/12/09)
Banks criticise plans for windfall tax on bonuses BBC News (7/12/09)
Will biffing bankers also biff Britain? BBC News, Peston’s Picks, Robert Peston (3/12/09)
Roger Bootle: Bank reform hasn’t gone far enough (video) BBC News (25/12/09)
- How are wages determined in the labour market? Use a diagram to illustrate this.
- Why do bankers receive such a high salary? (Think about elasticity.)
- What are the main arguments for paying out bonuses to bankers?
- If bonuses were blocked, and the RBS directors did walk out, what do you think would be the likely repercussions? Who would suffer?
- One argument for paying bonuses is that bankers need an incentive. Excluding monetary benefits, are there any other methods that could be used to increase their productivity?
- When we consider the labour market, we look at economic power. Who do you think has the power in this case and what do you think will be the outcome?
You may ask how on earth bins are related to the post. The simple answer is that these are two things that may not be collected. They say that one wedding brings on another, but it looks like that this also applies to strikes. The Winter of Discontent in 1978-9 saw widespread industrial action, where the country almost came to a stop. Is this really where we are now?
The postal strike has been widely publicised, but it’s not just your post that may not arrive. Bus drivers have been striking against First Bus in Greater Manchester and various other places following pay freezes. British Airways is to face the possibility of strike action over new contracts, working practices and pay freezes after talks broke down. The Spanish company Iberia had to cancel over 400 flights over two days due to protests, and in Leeds, rubbish hadn’t been collected for eight weeks.
So, what’s causing all of this discontent? Are we going to see more and more workers protesting over contracts, hours of work and notably pay?
One key thing about strikes is that they affect everyone, whether it’s walking past piles of bin bags; not receiving birthday cards; getting to work late; cancelling holidays or receiving fines for late payment, and even for not submitting your tax returns. These are all problems that people have been facing, not to mention the loss of income some businesses have seen, especially resulting from the postal strike. With the government looking to reduce public-sector debt by increasing taxes or spending cuts, including public-sector pay freezes and controls on banking bonuses, we could be in for another winter of discontent with further disruptions to come.
- What is the purpose of a strike and how effective are they likely to be? What are the costs?
- One of the reasons for strike action is pay freezes. What happens in an individual labour market when pay is frozen? What happens to the demand and supply of labour? Illustrate your answer with a diagram.
- Some news articles have referred to ‘picket lines’ forming. What are they?
- What is the difference between collective bargaining and individual bargaining? Which is more effective?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- Do you think the strike action is right? Why or why not? What are the things you have considered?
- Discuss whether we are heading towarads another ‘winter of discontent?’ Can it be stopped?
The UK and global labour markets are changing significantly. In the UK we have faced a level of immigration of around 500 – 600 thousand people (the government does not know the exact figure), while in the global economy the International Monetary Fund (IMF) has estimated in its latest World Economic Outlook that the global labour force has quadrupled in the last quarter of a century. So what is the impact on the UK labour market? Many assume that the effect is negative, but as is always the way with these things, you will find plenty of economists who will argue the opposite. The article below from the Times Online looks at these national and global issues.
Workers count cost of a global labour flood Times Online (29/4/07)
Migrants create job market slack Times Online (20/5/07)
||Using diagrams as appropriate assess the impact of recent immigration on the UK labour market.
||Discuss the extent to which changes in the global labour force and UK immigration have affected the level of wages in the UK labour market.
||Discuss the extent to which the global labour force is likely to change in the next decade.