Vince Cable: ‘Recent executive pay increases have not reflected company performance’

By 15.04.13BlogSeptember 2nd, 2020No Comments

Full text of Vince Cable’s speech (15/04/13)

“The factors determining wages and the value of labour represent one of the oldest controversies in economic thinking.  The current debates around what constitutes a living or subsistence wage and the extent of  economic rents earned by the high paid would have been recognisable 200 years ago in the debates around Ricardo, Malthus or Marx who created the classical economics which we apply to labour markets today.

There are three features of the contemporary scene in the UK which are particularly striking and represent a big difference from a generation ago.  First, we have moved from highly regulated to much more flexible labour markets, at least in the private sector (and the contracted out parts of the public sector).  There are islands of collective bargaining but supply and demand now have a bigger influence and government regulation is minimal except for the minimum wage.

Second, the globalisation of trade, capital flows and some categories of labour migration – within the EU Single Market and more generally for these with rare skills have had a big influence on labour markets.  There is much academic controversy over how these different factors have played out but it seems reasonable to conclude that the effect of globalisation on the wages of the less skilled and mobile of the indigenous population in some countries have driven them down relatively and perhaps, in some countries (like the USA) absolutely, contributing to a widening inequality of (pretax) income.  In addition those who have some perceived uniqueness derived from star quality or brand, and who are footloose, can now earn vast monopoly rents in global markets: entertainers, footballers, top managers and bankers.

The third factor is the financial crisis which, in the UK has cut output and incomes in a way and with a severity not experienced in previous downturns.  Overall wages have fallen in real terms; median wages have fallen by 8.5% since 2009.  In 2012, nominal wages and salaries rose by around 1.3% overall, when consumer inflation rose 2.7%, a real cut of almost 1.5%, perhaps the main reason for weak demand and the ‘double dip’ recession.  The 2013 budget predicts that real wages will fall again (2.2% earning growth; 2.9% expected inflation).

These cuts in real earnings have affected the public as well as private sector with a nominal pay freeze for most employees and a 1% increase for lower paid workers.

The impact of falling real wages has had several consequences, some more obvious than others. The fall in wages has been accompanied by a rise in employment, which is what classical economics would predict. The causality is debateable and various factors were operating but the general propensity is reinforced by anecdotal evidence of employees adopting flexible labour practises, and pay cuts, and also moving into ‘second choice’ jobs rather than remain unemployed.

There is a counter view, basically Keynsianism, that cuts in real wages depress consumption and demand and thereby cause unemployment. Unemployment is a lagging indicator and it remains to be seen if labour demand now starts to weaken after a period of rising employment.

These factors also have a bearing on the impact of the minimum wage. The economic analysis has tended to suggest that over the whole period of the National Minimum Wage there was an imbalance of power between employers and workers and so some employers in 1999 were exploiting their workers and paying them less that they were worth.

In addressing this exploitation the National Minimum Wage was able to raise wages – pay has increased more at the bottom end than at the median – and not have an adverse effect on employment. However, since around 2007 the judgement is that the degree of exploitation has been removed and the classical  inverse relationship re-established between the level of (and increases in) the minimum wage and employment, for low paid workers in general and young people in particular.

These factors have to be set along side the impact on the supply of labour, the willingness to work. Low paid workers face a complex range of incentives and disincentives from in work and out of work benefits and tax. The coalition policy of substantially lifting the tax threshold is a positive incentive to work which is concentrated on the low paid.  And other things being equal, an increase in the minimum wage is also an incentive to work, and work longer hours.

The balance of these factors is best addressed not politically but on the basis of independent judgement and advice, which is the role of the Low Pay Commission. Ever since the last government legislated for a national minimum wage, Ministers have been advised by the Commission and have agreed its advice on the basic rate. I propose to follow the precedent established by my predecessors. The recommendation this year is for the minimum wage to rise 1.9%, in line with earnings and more than out of work benefits (1%).

We are also accepting the Commission’s recommendation of a 1% increase for young workers, recognising the higher unemployment rates amongst young people.

We have made a small departure from the Commissions recommendation in respect of apprentices. We have decided that they should receive the same increase as young people, rather than the zero increase recommended by the Commission.

The Commission is concerned that there is widespread non enforcement of the apprentice rate. I am more concerned about the broader policy objective of making apprenticeship an attractive career option for young people and don’t believe that could be achieved by treating apprentices less favourably than any other group.  It is important that both the apprentice rate and the youth rates reflect the value we place on creating positive incentives to work, and it is therefore right to ensure that minimum wage rates keep pace with increases in benefits.

Nonetheless we entirely accept the recommendation of the Commission that we should focus on enforcement; and not just for apprentices. There are lots of abuses of the minimum wage. There is the cash economy of unrecorded wages (which can include tax evasion or benefit abuse too.) Some restauranteurs make assumptions about tips which may or may not be valid. Other employers make deductions for uniforms or benefits in kind (like transport or housing). Sections of the community who are desperate for work (having lost benefit entitlement) are particularly vulnerable.

I am absolutely clear that employers must pay their staff at least the minimum wage. This is why we are stepping up our compliance action, particularly for apprentices. We are working across Whitehall on a series of tough new measures to ensure we tackle the non compliance issue across the board.  HMRC will continue to play a crucial role in enforcing payment of the minimum wage.

Our package for apprentices approaches non-compliance from a number of different angles. It includes educating employers and apprentices, requiring Training Providers to make employers and apprentices aware of their rights and responsibilities with regards to pay; targeted communication and enforcement, and exploring legislative and non-legislative options to name employers who break minimum wage law.

Of course, in strengthening our enforcement of employers’ obligations to pay at least the minimum wage to apprentices, we must clearly distinguish between that and the position on work experience, as part of education and training courses that are exempt from the minimum wage. We must not inadvertently deter employers from providing valuable work experience opportunities.

One of the other new developments in the debate is the idea of a ‘living wage’ which has emerged from the London Citizens movement.

It specifies a wage rate higher than the minimum wage, particularly applicable to places, like London, with relatively higher costs of living. The living wage operates through moral pressure rather than legal sanctions.

Politicians are frequently asked to sign up to the ‘living wage.’ The problem with the current debate is that the ‘living wage’ means different things to different people. At one extreme it is simply aspirational, an expression of solidarity with low paid workers: higher pay as a nice thing to do, if employers could afford it. At the other extreme it amounts to a demand for a higher minimum wage. Either way it is dishonest to pretend that there are no consequences. It is possible that in some uncompetitive markets, employers earn a monopoly rent which could and should be distributed to employees. It is more likely that higher pay will be passed on to consumers, or be absorbed in lower investment or reduced employment. Higher wages may be the most economically or sociably desirable outcome but there would be consequences.

In practice the demands for a ‘living wage’ include replacing a national minimum wage with regional variations, with London enjoying a higher minimum wage than the rest of the country. The argument is that the cost of living is higher in London; but unemployment is also higher which points in the opposite direction. Moreover London is a complex regional economy with enormously different local labour markets (reflected in different unemployment rates across London boroughs). There are other arguments too against reinforcing regional pay differentials through moral or legal pressures; not the least being that it reinforces the ‘pull’ of successful regions.

But I do want to see the arguments around the ‘living wage’ grounded in evidence rather than rhetoric and political point scoring. First principles would suggest that widespread adoption of the ‘living wage’ would substantially increase unemployment but also stimulate demand and increase incentive to work. It would be arrogant and irresponsible for any politician to claim to predict the net effects.

Let me turn to the aspect of pay you are focusing on this morning: high pay and the evidence we have of widening inequalities in earnings. There are several elements to the story of earnings inequality but one of the most important is the explosion in the executive earnings both in absolute terns and in relation to median incomes. Continuing a strong trend, chief executives’ earnings rose 15.8% last year, almost entirely due to bonuses.

Analysis of executives’ pay shows that recent increases do not reflect company performance or other real economy factors; rather, it reflects behaviour in which company boards consistently seek to position themselves in the top quartile, creating a upward ratchet.  Some shareholders have pushed back against executive self-aggrandisement:  the so-called shareholder spring.

The government’s response has been to reinforce the control of shareholders over the companies they own by requiring binding votes on executive pay policy and more transparency over remuneration packages.  The new legislation will come into effect in October and I believe we shall see a moderation of executive pay as a consequence.  There are specific problems in the banking sector though there is evidence of a sharp decline in bonus pools.  In crafting policies to deal with executive pay I draw on the ideas of the High Pay Commission.  Of its 12 recommendations, we are taking forward in principle all but one.

The issues raised here relate to pre tax income, while the distribution of take home pay depends also on tax and benefits.  The current top rate of income tax, of 45% plus national insurance, is higher than for the whole period since 1988, while marginal and average tax rates have been cut for the low paid.

Some of us would be more radical in taxing wealth.  But we undoubtedly have a progressive system leaning against the widening inequality in pay.”