The animation is brilliant! You can see the full lecture below.

While the economy is still struggling to come to grips with the severe recession that hit the UK in 2007-08, real wages for most workers have declined. But the average pay package among the UK’s top executives increased by £500,000 in the past financial year, according to a report by employment consultancy Hewitt New Bridge Street.

The report says that the pay hike was partly due to weak targets set for the bosses but primarily due to an “improvement in economic conditions”. At the same time, wages of a third of the employees of blue chip companies still remain static since the 2009 wage freeze for 60% of the workforce. 

I’m sure that the workers of many of these companies would like to know why gains from these improved conditions could not be shared with them, at a time when reduced purchasing power is having a major impact on consumer confidence.

Pay for performance?
Executive pay over the last two years has risen on average by 5% despite a 1% fall in share prices over the same period. In fact, in the last ten years the salary packages for executives in the FTSE 100 companies have quadrupled while share prices have declined showing no relation of their pay to a key performance indicator.

Why such massive pay increases then?
CEO pay packages at top firms are set by a board of directors which often comprises of executives from other similar companies. The CEOs in question may be serving or are likely to serve on other companies’ boards performing a similar function. It is a small circle where “you scratch my back and I’ll scratch yours” is an indulging self-serving game. Also, the compensation is recommended by consultancy firms who try to match what is offered by other companies. Most importantly though, the consultancy firms are hired by the same elite group and the consultants have every reason not to upset their paymasters. 

Why do shareholders not object?
Some shareholders do object. Just recently, 47% of the largest supermarket Tesco’s shareholders revolted against boardroom pay at their annual meeting, and it was not the only instance this year. However, in many cases where large shareholders like banks, pension and mutual funds are involved, they may not object since their own executives would not like to draw attention to their high salary packages. In any case, shareholder objections in most cases are not binding on the board of directors and cannot overturn directors’ decisions on compensation plans.

Surely, some CEOs deserve their million pounds annual compensation packages?
I would not question the absolute figures but if the executives are paid 100s of times relative to the average worker, it certainly seems obscene and excessive.

Let’s say that the profits of a company double under a CEO. Should all the credit go to the CEO alone? What of other workers who must have contributed to the growth? What about suitable market conditions playing a role? What if the growth in profits relative to the previous term were only an indication of the poor performance by the previous executive? 

Leadership matters immensely but so does the contribution of those who are led. There’s no easy way to numerically compare a CEOs talent and contribution compared to the rest of the workforce. But a fair society and a fair economic system would recognise the contribution of all workers in the economy and not tolerate the grotesque levels of income and wealth inequality that are prevalent today.

Years of research show significant social costs of excessive inequality. And the latest report on inequality shows that the UK is now one of the most unequal among the economically developed countries. 

While some inequality may be justified to provide incentives for performance and create efficiencies in the economy, maximum wage level must be tied to a reasonable proportion of the minimum wage, say 10-20 times, to ensure that the gains of economic growth are distributed fairly across the population.

Otherwise we have an absurd system where “to make the rich work harder you pay them more, to make the poor work harder you pay them less – or so it seems,” in the words of Billy Hayes, the general secretary of the Communication Workers’ Union.

Unemployment in the UK declined by 49,000 to 2.46m in the last quarter. However, the number of claimants seeking jobseeker’s allowance fell by only 3,800 which is less than what many economists had expected, raising concerns about a slower than expected recovery.

Here are some other numbers to take home from recent reports and statistics on the UK job market:

• The number of 18 to 24 years old who are out of jobs for two or more years increased by 42% over the last year to reach 72,000. In the same age group, numbers of those unemployed for over a year has increased from 104,000 to 184,000. According to the Recruitment and Employment Confederation’s Youth Employment Taskforce, the direct cost of youth unemployment is £4.7bn a year.
• Jobseekers over the age of 50 are finding it particularly difficult to get back into the market. Numbers of those out of job for more than 12 months has increased by 52% over a year to reach 170,000, the worst numbers in a decade. While the government plans to extend the retirement age limit, the job market is struggling to find place for a number of over-50 workers.
• An extra 40,000 people over the age of 65 have taken up jobs amidst fears of reductions in expected pensions.
• According to the Chartered Institute of Personnel and Development, it is likely that private sector job creation will not keep pace with public sector cuts for at least the next two years, as nearly one-third of employers, among the 600 surveyed across all sectors, were looking to downsize in the coming three months.
• Another survey among businesses in Wales shows that around 84% of those businesses have no plans to recruit this year.
• Scotland saw a rise in unemployment by 34,000 over the last quarter to reach 223,000, or an 8.4% unemployment rate compared to 7.8% for the UK.
• Vacancies have increased by 9,000 over the quarter to reach 481,000.
• Real wages continue to decline among those employed as earnings growth rate falls behind the rate of inflation.

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Amidst recent protests by garment workers in Bangladesh and Cambodia for a living wage and decent working conditions, a new sweatshop case was uncovered by the Observer at Indian factories where workers are paid 25p an hour and forced to work overtime to manufacture clothes for M&S, Next and Gap. A few workers who voiced complaints were beaten up and fired from their jobs. This story from the garment industry is nothing new nor is it surprising anymore. But what are we going to do about it?

I suspect, many of us have come to accept what mainstream economists like Paul Krugman, Jagdish Bhagwati, and Jeffrey Sachs have preached for too long. “Bad jobs at bad wages are better than no jobs at all“.

At the time of slavery, these economists would have given a similar argument for slavery being better than no jobs at all. By their logic, husbands can perpetrate violence on their wives, as long as they provide them shelter and food, especially if their wives are unskilled and cannot get a job due to market or social constraints. Just because slaves would “voluntarily” choose slavery over starvation, and oppressed wives would continue to suffer their husbands instead of ending up with prostitution, does it justify the status quo? In fact, there is often a worse option to compare with when attempting to justifiy the most horrific and exploitative practices.

We should know better than find comfort in the ethically deviant arguments supporting sweatshops. Due to civil society campaign pressures, many big companies in the UK, including M&S, Next and Gap, have signed up to a code of conduct called the Ethical Trading Initiative. However, this form of self-regulation has not improved labour conditions by much so far.

Most of the global garment retailers work through a network of sub-contractors. This setup allows the retailers to distance themselves from unfair practices of their sub-contractors. On the one hand, the retailers may ask their sub-contractors to adhere to labour standards. But on the other hand, they apply intense pressure on these sub-contractors to reduce costs. Competition is fierce among the sub-contractors and they know that costs are the main factor in securing contracts. Labour standards therefore get a short shrift.

The greatest power consumers can exercise in this struggle for labour rights is by discriminating in favour of ethical retailers and manufacturers. However, there are serious constraints in doing so. Most people’s income is in some proportion to the overall price of goods in the market. This makes it difficult for a large section of the population on average income to pay a significantly higher price for ethically produced clothing.

Nevertheless, big social changes have only come at the cost of some sacrifice. If we all can do our bit, according to our respective financial capacities, we can send a strong message to the retailers. We can start by looking at the alternatives.

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Just in case you were wondering why you couldn’t reach this website for nearly a day, this blog’s server was under siege due to ‘denial-of-service‘ attacks. Normal service should resume now. In the future, you can also read this blog at: http://www.oureconomy.co.uk

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British banks are being urged to lend more to small businesses. As some banks return to profit, the government and many media commentators are demanding that the banks must avoid diverting bailout funds and profits to increase bonuses and salaries for its employees. Instead businesses should be helped to create more jobs. But why do we need to beg banks to lend money? Is it not something that they would do anyway if the odds were in favour of getting good returns on the loans they would make?

A reason for the sub-prime mortgage crisis was that the banks were guilty of carelessly lending to people who could not pay back their loans. Also, the banks were mindlessly betting for profit on the likelihood of defaults on such loans. After the causes of the crisis came to light, the banks were expected to learn from these mistakes. They were rightly asked to keep more reserve capital in proportion to the loans they make and do their homework well before lending to prospective borrowers.

So the rationale behind banks’ reluctance to lend money to businesses may very well be that in the tough economic climate with consumer demand suffering due to job losses, failing businesses and declining real wages, many prospective clients of the banks are not seen to be creditworthy. These businesses may not have assets or business plans to guarantee safe returns. Or the banks do not believe that they will make enough returns on the money lent to small businesses in comparison to other profitable ventures in speculative markets.

If the borrowers are not creditworthy, the banks are right not to put massive sums of public money at risk again. If, however, investment in speculative markets provides better returns than investing capital in the real economy, then the government must enact regulations to disincentivize influx of money into speculation. The US government’s financial reforms have stopped short of that. Global banking reforms are not looking ‘tough‘ enough either. We have to wait and see the how the regulatory reforms proposed by the coalition government in the UK shape up.

There is a lot of justified anger against banks for filling up the coffers of their top-level management despite them being responsible for a number of bad decisions that led to the current crisis. The managers take little personal risk as public money underwrites their business.

If the government is really serious about dealing with management profiteering, it must stop barking at the banks or begging them to change their unscrupulous ways. It has full powers and indeed the responsibility to enact laws to cap salaries and bonuses of high ranking bank managers in order to make funds available for viable businesses. But by forcing banks to lend without adequate demand for business loans or creditworthiness in the market, the government may simply be leading the economy into the makings of another credit default crisis.

If small businesses, especially locally oriented ones were to prosper, they need a boost in local consumer spending. This spending must increase, not by increasing consumer debt, but by increasing real wages of people in employment. Many big businesses in the UK are in fact running financial surpluses and this must be shared among its workers whose wages form the backbone of consumer demand in the economy.

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