Posted Friday 8 March 2013
The EU recently agreed to restrict bankers' bonuses to no more than twice their annual salary. This was soon followed by Swiss voters voting to curb executive pay. The British Government opposes the EU restrictions but if implemented, how would they affect UK business? The effect is unlikely to be as dramatic as some people fear.
The background to this is that the share of national income going to the UK's super rich (currently those with an annual income of more than £156k) has doubled within a generation - an enormous change by historical standards.
In 1950 the share of national income going to the top one per cent of the income distribution was 11 per cent. This share steadily fell to six per cent by the late 1970s, when it then took off again to reach almost 16 per cent by 2008. This increase coincided with big changes in British economic policy associated with Margaret Thatcher, often referred to as neoliberalism. This was a shift away from economic policies that emphasised full employment as the main target, to policies that emphasise price stability, balanced budgets and economic liberalisation.
This is all part of a general trend toward increasing inequality. Research shows that this inequality is not caused by the bottom half of income earners falling behind. It is caused by top managers, in particular those in the financial industry, taking off in the income race.
The EU directive to cap bankers' bonuses relates specifically to the financial sector and aims to control the fairly small group getting increasingly richer. It is also thought that the pay structure in the financial sector encourages excessive risk taking. Therefore, the attempt by the EU is not only about creating a more equal income distribution; it is about reforming management priorities within the financial sector and reducing risk. The Swiss proposal to cap executive pay is broader in as much as it is about management of remuneration in general.
I would be fairly relaxed about suggestions that financial companies might react to the EU proposals by paying bankers greatly increased salaries instead of bonuses, or relocating out of the UK.
If they shift from making payouts as bonuses towards regular salaries, economically speaking that would probably be a good thing. Think of the Royal Bank of Scotland which has made a loss and still pays bonuses. Their top management is essentially saying: "Everyone else in the industry pays bonuses, so we have to pay bonuses too." In other words, it's not a bonus for performance anymore; it's part of the regular pay. If it's part of the regular pay, it should be part of the salary package and not dressed up as a bonus. In terms of honesty and of taxation this simply makes more sense.
How many companies would move out of the UK is extremely difficult to say. Some may, but the more important question is how bad would this be for the British economy?
Research indicates that the financial services industry is a mixed blessing for Great Britain and for London in particular. This is because it creates a lot of income disparity and because of its structure. Unlike the structure of the car industry for example, the financial industry does not need a lot of physical input. The spill-over effects from the financial industry to other sectors of the economy is weaker than for other industries.
At the same time, because it is the financial services industry, it drives up the value of the pound. It does this by being an attractive place for foreign businesses to invest their funds. A stronger pound makes British manufacturing less competitive as it makes our products more expensive for foreign buyers. Therefore, there is a tendency to drive out manufacturing.
Rebalancing Britain's economy would mean us having a smaller financial services industry and hopefully a larger manufacturing industry, which I would prefer.
Obviously the high street branches of banks will still have to be in the UK - they are not going to relocate those to Shanghai! So the part of the financial services industry that is most relevant to businesses and households will not relocate and I would not expect a strong economic impact on the economy. The impact on job numbers in the financial services industry would also not be that dramatic. The retail side of it is fairly labour intensive; it is also not all that well paid. What financial companies might do is relocate their headquarters, so some top incomes would go, but not the mass of jobs.
Engelbert Stockhammer is a professor of economics at Kingston University. His main area of expertise is macroeconomics and has published numerous articles in international peer-reviewed journals including the Cambridge Journal of Economics, Structural Change and Economic Dynamics, and the Journal of Post Keynesian Economics. Stockhammer is the author of the 2004 book The Rise of Unemployment in Europe and A Modern Guide to Keynesian Economics and Economic Policies (with E. Hein) in 2011. Professor Stockhammer is a research associate at the Political Economy Research Institute at the University of Massachusetts at Amherst and a member of the coordination committee of the Research Network Macroeconomics and Macroeconomic Policy. He has worked with a number of non-governmental organisations concerned with economics and carried out research for the Austrian Chamber of Labour and the International Labour Organisation.
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