Wednesday, 21 April 2010

Bankers and inequality

Paul Sweeney: New research from the LSE’s Centre for Economic Performances shows that in the decade from 1998, the top 10 per cent of workers in the UK saw their share of total annual wages rise from 27 per cent to 30 per cent. The majority of this went to the top 1 per cent and can be mainly accounted for by bonuses to financial sector workers.

The study is done as part of LSE CEP election analysis. This group does interesting studies of productivity, but currently is conducting reviews of the British election economic policies.

Hopefully, some of our economists will undertake a similar study for Ireland. From the CSO data for Ireland, hourly earnings are stable in the private sector, except in construction and, in financial services, where they have fallen, especially the bonuses. But not entirely for public servant Richie Boucher and too late for Fingleton, Sheehy, Drumm, Fitzpatrick, McAteer …………..and the rest!

In the UK, the LSE CEP found that, by 2008, the increased share that bankers were taking amounted to an extra £12 billion per year in wages alone. It says that “The size of these bonuses and their structure may have been a contributing factor to the financial crisis. Bankers paid large cash bonuses on the basis of short-term returns often unadjusted for risk have incentives to take on excessive risk.”

The British Labour Party proposed tax increases on big earners, and the LSE study finds that “There is very little evidence whether such tax rises will cause a significant number of firms and workers to leave Britain.”

The study concluded by saying that “The financial crisis raised awareness of the sheer size of bankers’ bonuses over the last decade. This group of workers have been the biggest gainers in the labour market, and they have significantly increased their presence at the top of the income distribution. The structure of bonuses has come in for sustained criticism as it allegedly increased risktaking in the financial sector to dangerous levels and contributed to the unravelling in 2007/8. The evidence suggests that simply changing the cash/equity split of such payments will not solve these problems nor will deferral if not associated with clawbacks.”

It argues that the recent sharp rebound in bonuses during 2009/10 “is likely to increase the popularity of higher marginal tax rates – or special bonus taxes – in spite of the potential negative effects from international mobility of workers and firms.”

So higher taxes will be both popular, but unfortunately, also necessary. Here we are already levying them, not for increased public services, welfare etc., but largely to bail out the banks and also to meet the basic day to day bills of the ship of state!

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