a bit rich - calculating the real value to society of different professions

8/14/2019 A Bit Rich - Calculating the Real Value to Society of Different Professions

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A Bit Rich:Calculating the real value to society odi erent pro essions


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Contents

Executive summary 2

Introduction 7

Inequality and high pay in the UK 9

Wage-setting: the iron law of wages and the race to the bottom 12

The story of six professions 14

Conclusions 27

Appendix 1 General note on method 29

Appendix 2 Technical appendices 30Endnotes 36

In this report nef calculates the value to society o a number odi erent jobs and advocates a undamental rethink o how the valueo work is recognised and rewarded.


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IntroductionWe are in the wake o the worst fnancial crisis or a century. Yet this Christmas,many highly paid employees o City banks that are responsible or creatingthis crisis are being paid extravagant bonuses. This comes at a time whenwage inequality remains stubbornly high, due in large part to the increasedconcentration o very high and very low earners in the economy.

The controversies over City bankers bonuses raise undamental questions notonly about the remuneration o senior executives and public servants but also

about the relative value o the work o everyone in our society. How should weassess the wider contribution our work makes?

In this report nef (the new economics oundation) takes a new approach tolooking at the value o work. We go beyond how much di erent pro essions arepaid to look at what they contribute to society. We use some o the principlesand valuation techniques o Social Return on Investment analysis 1 to quanti ythe social, environmental and economic value that these roles produce or insome cases undermine.

Our report tells the story o six di erent jobs. We have chosen jobs rom acrossthe private and public sectors and deliberately chosen ones that illustrate theproblem. Three are low paid a hospital cleaner, a recycling plant worker anda childcare worker. The others are highly paid a City banker, an advertisingexecutive and a tax accountant. We recognise that our incentives are createdby the institutions and systems around us. It is not our intention there ore, totarget the individuals that do these jobs but rather to examine the pro essionsthemselves.

Why wage inequality mattersIn the UK we live in a society o extremes. The incomes o the very rich and thevery poor continue to pull away rom each other. This is in uenced by many

actors but wage inequality is at the heart o them. It is a corrosive, destabilisingissue that is linked to a range o social problems. It disproportionately a ectssome groups particularly women, who predominate in low paid (and unpaid)

work. The least well paid jobs are o ten those that are among the most sociallyvaluable jobs that keep our communities and amilies together. The marketdoes not reward this kind o work well, and such jobs are consequentlyundervalued or overlooked.

Executive summary

Pay matters. How much you earn can determine your li estyle,where you can a ord to live, and your aspirations and status. But towhat extent does what we get paid con er worth? Beyond a narrownotion o productivity, what impact does our work have on the resto society, and do the fnancial rewards we receive correspondto this? Do those that get more contribute more to society? Withcontroversial bonuses being paid out this Christmas in bailed-outbanks, we believe that it is time to ask challenging questions suchas these.


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Why a minimum wage is not enoughThe idea o a subsistence salary goes back to the early classical economists.We still set wage oors today to ensure there is a minimum below whichemployers are not allowed to hire. However these minimums are o ten set verylow. The UK minimum wage is not indexed to average wages, which means itslips behind pay levels in the rest o the economy. The impact o globalisationhas made matters worse, contributing to an increasing specialisation o thework orce that has seen many previously well-paid, semi-skilled jobs beingreplaced by low-skilled, service-based jobs with ew options or progression.

and why an upper limit is requiredLow pay is only one part o the issue. There is little political appetite or reining inhigh pay, and the idea o setting a ceiling on the remuneration o top executiveshas ailed to gain any meaning ul momentum. One reason why a minimumwage has become the norm is that it has been accepted that employers havethe power to set wages. By the same token, in some sectors, a shortage o skillsor the exploitation o monopoly power has allowed a privileged ew to capturevery high rates o pay. Sectors such as fnance are notorious or sky-highsalaries and big bonuses, as remuneration committees are sel -regulating andaccountability to shareholders is o ten weak.

From surplus value to social value

Early theories o value neglected the extent to which the production and tradeo goods and services may have a wider impact on society that is not re ectedin the cost o producing them. These externalities are o ten remote or hard tosee but that does not mean that they are not real or that they do not a ect realpeople either now or in the uture.

Because social and environmental costs are not properly accounted or, themarket tends to oversupply products that may have a signifcantly negativeenvironmental or social impact such as cheap consumer goods and complexfnancial products. In the same way we underpay work that has a high socialvalue, creating high vacancy rates in our most important public services such asnursing and social work. By making social value creation an important societalgoal we could set the right incentives to maximise net social benefts, ensurea greater return to labour rather than capital, and a more equal distribution oeconomic resources between workers.

A closer look at six professionsWe have tested our theory by taking a close look at a sample o highly paid andlow paid jobs. We ound that some o the most highly paid beneft us least, andsome o the lowest-paid beneft us most. Although this will not always hold, itdoes point to a massive aw in the system and highlights the need or re orm.

High-earning investment bankers in the City o London are among the bestremunerated people in the economy. But the earnings they command and theprofts they make come at a huge cost because o the damaging social e ects

o the City o Londons fnancial activities. We ound that rather than beingwealth creators, these City bankers are being handsomely rewarded or bringingthe global fnancial system to the brink o collapse. While collecting salaries of between 500,000 and 10 million, leading City bankers to destroy 7 of social value for every pound in value they generate.

Both or amilies and or society as a whole, looking a ter children could not bemore important. As well as providing a valuable service or amilies, childcareworkers release earnings potential by allowing parents to continue working.They also unlock social benefts in the shape o the learning opportunitiesthat children gain outside the home. For every 1 they are paid, childcareworkers generate between 7 and 9.50 worth of bene ts to society.

Although the role o an advertising executive has high status, the impact o theindustry has always been a point o controversy. It encourages high consumerspending and indebtedness. It can create insatiable aspirations, uelling eelingso dissatis action, inadequacy and stress. In our economic model we estimate


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the share o social and environmental damage caused by overconsumption thatis attributable to advertising. For a salary of between 50,000 and 12 million,top advertising executives destroy 11 of value for every pound in value they generate.

Hospital cleaners play a vital role in the workings o our healthcare acilities. Notonly do they clean hospitals and help maintain standards o hygiene to protectagainst in ection but they also contribute towards wider health outcomes. Theimportance o these cleaners is o ten underestimated and undervalued in the waythey are paid and treated. We estimated, however, that for every 1 they are

paid, over 10 in social value is generated.

Determining the right amount o tax payable is a specialist skill and o ten requirespro essional support. However, some highly paid tax accountants sole purpose isto help rich individuals and companies to pay less tax. We ound that the positivebenefts to society o these activities are negligible. However, every pound thatis avoided in tax is a pound that would otherwise have gone to HM Revenue. Inour model we looked at how this lost revenue could have been better spent. For asalary of between 75,000 and 200,000 tax accountants destroy 47 of valuefor every pound in value they generate .

Waste recycling workers do a range o di erent jobs that relate to processing

and preventing waste and promoting recycling. Carbon emissions are signifcantlyreduced when goods are recycled instead o sending them to incineration or landfll.There is also a value in reusing goods, and we have included this in our model. Our model projects that for every 1 of value spent on wages, 12 of value will begenerated.

The myths of pay and valueThis report sets out to shatter some myths about pay and value. Chie amongthem and the point o the research is to show that there is not a straight orwardrelationship between high fnancial rewards and good societal outcomes. Thisisnt just an intellectual exercise it has big implications or the way in which oursociety and economy are structured. Financial incentives are very power ul, andwe tend to shower them on some o the pro essions that are the most socially andenvironmentally costly. This promotes undesirable behaviour, while positive activitiesare discouraged.

Myth 1: The City of London is essential for the UK economyAccess to fnance or everyone is vital or the UK economy to unction. Yet the Cityo London has primarily been concerned with an aggressive quest or profts. Thishas heaped the worst fnancial crisis or a century on all parts o the economy.Even those closest to the City are increasingly sceptical about its value to theUK economy. On best estimates it contributes 3 per cent a year in value addedcompared to 12.5 per cent value added contributed rom manu acturing.

Myth 2: Low paid jobs create a ladder for people to work their way up opportunities to advance are open to allThe level o income inequality in the UK means that high earners can protect theirposition and that o their children by buying education, assets and advantage. Theladder that might o er a way up or those on low incomes is e ectively kicked away.The only way to improve equality o opportunity and outcome is to shorten theladder in the frst place.

Myth 3: Pay differentials dont matter, so long as we eradicate povertyO course poverty matters. But increasingly it is not absolute levels o poverty alonebut the di erences between people that contribute to social problems such ascrime, ill health, poor educational attainment and addiction. In ocusing so much onimproving the lot o those on very low incomes, we have ignored the di erentialsthat underpin what has become a two-tier society.


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Myth 4: We need to pay high salaries to attract and retain talent in the UKOur case studies show that high salaries dont necessarily re ect talent. Even ithey did, it is not clear that the best and brightest would be prepared to uproot their

amilies and hike across the world or higher wages. The evidence suggests thatmore equal countries manage to retain their air share o innovation and culturalcapital.

Myth 5: Workers in highly paid jobs work harderPeople at the bottom o the income distribution scale spend more time on domesticand caring responsibilities than their highly paid counterparts. They are also morelikely to have more than one job, and or many that is the only route out o poverty.When we take this into account, it becomes clear that those who are paid less work

just as much (or even more) than the better o .

Myth 6: The private sector is more ef cient than the public sectorWork that is cheap is not necessarily work that is e ective. This myth that the privatesector is mor e fcient has motivated the increase in competitive tendering o publicservices to private contractors, and has been used to justi y lower unit costs (andlower wages). However, lower prices are sometimes secured at the cost o servicequality, suggesting that paying higher wages could in act be more e fcient.

Myth 7: If we tax the rich, they will take their money and run

Intuitively we understand that decisions on whether to emigrate are ar morecomplex than how much people earn. They depend on a multitude o actors notonly fnancial circumstances but also cultural amiliarity, environment, proximity to

riends and amily, and quality o public services.

Myth 8: The rich contribute more to societyThe rich pay proportionately less tax than the poor, and many o our tax streamssuch as council tax and VAT are highly regressive. The rich even give less in relativeterms to charity than the poor.

Myth 9: Some jobs are more satisfying, so they require less payJob satis action is related to a number o actors. Autonomy, control in theworkplace, income and status all contribute towards a sense o satis action and

ulflment at work. I high pay is partly intended to compensate or risk, stress andlong hours then we would expect dangerous jobs to be well rewarded. Fishing isthe most dangerous job in Britain, with roo ers and sca olders also high up on thedanger list, and waste recycling collectors are at number 18. Yet in none o theseindustries are rank-and-fle workers highly paid.

Myth 10: Pay always rewards underlying pro tabilityIt is becoming increasingly apparent that there is only a weak correlation betweenpay and executive per ormance. In 2008, or example, the UKs top companies lostalmost a third o their value while the bosses o these companies enjoyed a 10per cent leap in their basic salaries. Empirical studies have demonstrated that payarrangements are geared towards serving the fnancial interests o managers, not

shareholders.

ConclusionsThis report is not about targeting any individuals in the highly paid jobs it scrutinises.Neither is it simply suggesting that people in low paid jobs should be paid more. Thepoint we are making is a more complex one that there should be a relationshipbetween what we are paid and the value our work generates or society.

We need to overcome deep structural issues to act on the implications o thisreport. Many o these were recently spelled out in a nef report The Great Transition ,which charts the change rom our current growth-based economic system to amore sustainable and equitable one. 2 The stakes are high: without proper checksand balances we believe our economic system could squeeze out those aspects oli e that people value most. We urgently need to align incentives with the social andenvironmental value that are generated by the work orce.


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Some policy recommendations

P End the policy silence on high pay. nef has previously advocated a nationalmaximum pay di erential. This has been echoed recently by Compass andothers with calls to establish a High Pay Commission. Its task could be toexamine what the appropriate di erentials should be. The Royal Navy, orexample, has had a de acto di erential o eight, whilst some Japanese frmsvoluntarily impose pay ratios limiting the gap between the top and bottom pay.Determining these multiples should be in ormed by the concept o social valuecreation.

P Learn from the successes of anti-discrimination legislation. Explorethe possibility o positively discriminating towards people rom low-incomebackgrounds to level the playing feld in access to highly paid pro essions.

P Build social and environmental value into prices. Until goods and servicesre ect the real costs and benefts o their production, incentives will bemisaligned with the kinds o positive behaviours society wishes to promote.Getting the prices right would a ect relative proftability and so would alignwhat wages could be paid with the value that is created. Consumption andcorporation tax are two vehicles or doing this, but they need to be applied in aprogressive way.

P Introduce more progressive taxation. The wealthiest do not pay theirair share o tax and the very wealthy may pay none at all. Redistribution,

particularly o assets and land, is an e ective way both to o set inequality andto reward jobs that the market does not. Closing tax loopholes would also be agood place to start.

P Launch a green industrial policy. We have an unprecedented opportunity tomake environmental progress while also addressing wage inequality. The timehas come or a new industrial policy, creating green jobs to replace the middle-income, semi-skilled jobs that have been wiped out in manu acturing.

P Encourage new forms of ownership. Mutually owned building societies,

co-operatives and land trusts are all models in which ownership takes a morecollective orm, and benefts are more evenly shared.

P Radically reform the role of the City. It is time to return fnance to its roleas servant, not master o the economy. Instead o a monoculture o mega-banks deemed too big to ail and answerable only to the demands o privateshareholders, we need a range o di erent fnancial institutions that are

ocused on social value creation. Initiatives such as a fnancial transaction taxwould also reduce the harm ul e ects o trading.

P Invest in universal child care and paid parental leave. Child care provisionin the UK o ten re ects and rein orces socio-economic and gender divisions. Making high-quality, a ordable care available to all gives parents particularlywomen a better choice over returning to work and provides children withgreater equality o opportunity. Extending parental leave, especially to athers,would be a urther investment in positive child development or the beneft osociety. 3 These provisions could be entirely met by recouping the money lostto society through tax avoidance by the wealthiest. This valuable investmentwould also increase gender equality by improving career options or women.


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IntroductionIn the UK today there are huge disparities in levels o pay or di erent

occupations. Over the past decade the ratio between the average rate o pay orchie executives and the average earnings o employees has risen rom 47:1 to128:1. Executive pay has risen by 295 per cent in this period, compared with arise o 44 per cent or employees. 12

There is growing public unease over the extreme rewards bestowed on somein avoured sectors o the economy. This unease suggests that there is a limitto peoples tolerance o highly unequal pay, and that this limit is being severelytested. But it also re ects an underlying sense that the real value to us all odi erent jobs and workers is not being captured in market-led pay scales.

A recent breakdown 13 o the taxpaying population in the UK revealed that the top10 per cent o adults, those on incomes o 36,000 per year or more, take homea disproportionate 40 per cent o UK income. This leaves only 60 per cent o thepot or 90 per cent o the adult working population to share. Some particularlythose in the caring pro essions, the retail sector, catering and environmentalservices are not only earning low wages, but in some cases being paid belowthe statutory minimum.

The costs of inequalityIn the past 30 years the UK has seen a 44 per cent increase in inequality. Onone measure it has switched rom being one o the most equal developedcountries to being one o the most unequal. 14

It is now widely recognised that inequality is not only unjust but also ine fcient

and waste ul.15 The most equal countries per orm best on most social,environmental and economic indicators. 16 nef has calculated that restoringDanish levels o equality in the UK could generate about 7.35 trillion o socialvalue between now and 2050. 17

Inequality and high pay in the UK

People on all levels o income are better o than they were in1979 he would rather that the poor were poorer, provided that the rich were less rich. That way one will never create the wealth or better social services, as we have

Margaret Thatcher, 1990 8

More private wealth means more public wealth too John Major, 1992 9

Its not a burning ambition or me to make sure that David Beckham earns less money

Tony Blair, 2001 10

You are the wealth creators, the men and women who make our nation more prosperous

Gordon Brown in a speech to the City, 2003 11


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When inequality was comparatively low, many ree market economists believedthat increasing it was not only inevitable but also essential a mechanism to createincentives and help ensure market e fciency. It is unlikely that these previousgenerations o economists envisaged that inequality would reach its current levels,where within the same company some employees may earn only two pence orevery 10,000 earned by others. 18 And yet even at the beginning o the decadethe International Monetary Funds outgoing executive director, Michel Camdessus,argued that the gap between the rich and poor within nations (as well as betweenrich and poor nations) was morally outrageous, economically waste ul andpotentially socially explosive. 19

Most o the increased disparity that has emerged in the UK has been seen in theorm o an increased concentration o very high and very low earners. The changing

composition o UK industry away rom manu acturing and towards services andfnance has led to a hollowing out o the middle-income tier o the economy.

Not only are there more highly paid and low paid jobs than there used to be, butthe returns or those jobs have increased at the top and decreased at the bottom. 20 This has implications both or inequality in general and or peoples ability to moveup and down the income distribution ladder or some it is now a ladder withbroken rungs. The causes behind this outcome are complex and are currentlybeing explored by the new economics oundation in conjunction with the Joseph

Rowntree Foundation.

The International Labour Organisation points out that depressed wage levels haveorced many workers and their amilies to und not only investment (predominantlyor housing) but also consumption through debt. 21 The consequences o this were

sharply demonstrated during the sub-prime mortgage crisis in the United States. Aswell as contributing to systemic instability, higher indebtedness inevitably reducesthe ability o the low paid to weather an economic downturn, in which many arelikely to lose their jobs.

Just as inequality has damaging e ects on society at large, so it is damaging orbusiness per ormance. A survey o human resources pro essionals in 2003 22 oundthat respondents overwhelmingly believed that overpaying top executives wasdetrimental to sta morale, commitment and product quality. The suggestion wasthat employee relations, and productivity, began to su er once those at the topo an organisation earned ourteen or more times what was paid to those at thebottom.

This understanding is not new. The Royal Navy, John Lewis department stores andthe Ben and Jerrys ice-cream company have all at times imposed limits on wagedi erentials in the belie that a measure o equality would beneft organisationalper ormance. The act that limits on di erentials have had to be abandoned in somecases does not mean that pay di erences dont impact negatively on productivity.The problem is that sometimes the executive elite uses its controlling bargainingposition to overturn di erential limits, as discussed in the next section.

The emergence of the super-richThe rise o the super rich is very much an Anglo-American phenomenon, with theUnited States leading the way. According to the ILO, average chie executive annualearnings were 500 times the level o the average workers earnings in 2007. 23 Moreeye-opening still is the act that this was up rom 300 times a mere our years earlier.Di erentials between top and lowest earnings in a number o European nations,including France, Germany and Sweden, are typically lower than in the US and UK. 24

The main reasons or lower disparities in income and earnings in some countriesare higher levels o unionisation and collective bargaining, particularly wherethat bargaining takes place above the level o the company concerned. 25 Somecountries that have pursued a social-corporatist approach have established asystem that implicitly recognises the contribution o the average worker to economicper ormance and social value, and acts to share returns more equally amongworkers. In addition to high wage di erentials, the US and UK have relatively low taxrates compared to their European counterparts, so even i the gap between marketincomes is higher, income is still not redistributed on the same scale.


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Its womens work

The vast majority o higher post-war employment or women is attributable to the service o the wel are state jobssuch as nursing and teaching. But womens contributions to ormal and in ormal wel are have tended to be ignoredby policy makers.

Women predominate in low paid jobs, making up 83 per cent o the work orce in personal services and 60 per o thepublic sector work orce as a whole. Only 30 per cent o senior executive positions are held by women. 26 Women are

grossly under-represented in the most highly paid jobs, holding only 11 per cent o FTSE 100 directorships.

This is not just a problem in boardrooms. A recent report by the British Medical Foundation ound that a ter excludingdi erences owing to age, experience and area o specialism, there is an average salary gap o 15,245 between menand women among the UKs 135,000 medics. 27 On average women working ull time earn 18 per cent less per hourthan their male counterparts. 28 The di erence in hourly earnings increases to 25 per cent when women working parttime are included. 29 Although the gap had been closing in the second hal o the twentieth century, convergence hasslowed in recent years. There has been little change since the mid-1990s.

Gender pay inequalities are exacerbated by a perverse system in which a very high or low value is placed on certain jobs quite arbitrarily. This problem occurs not only within the mainstream economy but also outside the ormal labourmarket in home working, or example. Women have always provided most o the in ormal, unpaid wel are within the

amily. They still contribute twice as much time as men on housework and caring or children and other relatives. 30

UK policy in recent years has tended to regard women with children frst and oremost as citizen-workers rather thanas citizen-mothers. This raises the possibility that the unpaid work o caring or and bringing up children is currentlyvalued and prioritised very di erently by policy-makers on the one hand, and mothers themselves on the other. 31 Growth in the service sector and the availability o part-time and casual employment mean that or many women themost ormidable challenge in the labour market is not getting o benefts into paid employment but fnding a way toadvance yoursel once you have a job o some kind. For women, in particular, there is a high risk o getting caught inlow-skilled, part-time work without a hope o promotion or receiving any substantial training.

The goal o economic equality or women in high-income countries has been widely accepted as a laudable one. Butit is a long way rom being achieved. This may be partly due to gender bias, with employers tending to recruit meninto top positions. 32 But a more radical and perhaps convincing reason or why greater equality or women has not

been achieved is that markets as constructed in our economy naturally avour men in the tendency or long workinghours to be required, or example.

Re orming and restraining markets so that they support and oster the non-economic aspects o li e the things thatpeople really value could arguably do more or women than all the positive discrimination in the world. Positivediscrimination and any measures to promote women in non-traditional roles ail to recognise the extent to which ourvery economic systems are male constructs. Our economic structures re ect the values and strengths o men andthe power distribution o existing gender relations. There is a built-in predisposition towards inequality.


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The iron law of wagesThe classical economists Smith, Ricardo and Malthus frst theorised about asubsistence or living wage in the eighteenth century. They all ollowed the ironlaw o wages, or in Adam Smiths words the belie that a man must always live byhis work, and his wages must at least be su fcient to maintain him. 34

In Ricardos view, 35 progress required the accumulation o capital, and landownerswere the passive, aultless benefciaries o this. Ricardo re ected that this was amiserable deal or the landless worker but that the alternative starvation wasworse. The iron law, there ore, was the law by which wages should be regulatedand by which the happiness o ar the greatest part o every community isgoverned.

To ensure the best societal outcomes Ricardo thought that wages should be

le t to the air and ree competition o the market, and should never be controlledby the legislature. This commodifcation o labour would later inspire Karl Marx,who made amous the concept o surplus value. For Marx all exchange value iscreated by the worker, and this value is then appropriated by the capitalist. Hepredicted that this process o valorisation would lead to the eventual collapse ocapitalism, as wages would be squeezed urther and urther, creating a race tothe bottom.

Low-wage Britain a race to the bottom?Li e as described or the ordinary worker by Malthus, Ricardo and Marx may soundbleak. But it is still the reality or many in low-wage Britain. While a minimum wagehas become a statutory requirement, it has never been indexed to wages andno longer sets a real oor. This means that its potential or tackling inequalityhas largely been neutralised. 36 It is currently set well below the living wage thatresearch shows is required to subsist. 37 Neither should gains or the low paid betaken as a given, as evidenced by the recent Conservative private members billthat sought an opt-out rom the minimum wage or employers. 38

One o the reasons why a minimum wage has become the norm is because ithas been accepted that per ect competition does not exist and that employershave monopsony power the power to set wages. It is increasingly evidenthowever, that workers at the top end have the power to command salaries overand above what the market will bear. 39

What Marx correctly predicted was that real wages, or returns to workers,would be eroded over time. 40 As the productivity o workers has increased, theassociated gains have been extracted in the orm o proft, rather than beingdistributed between those that have produced these gains. By progressivelyexpanding the market, essentially by bringing more and more consumers into theglobalised, capitalist system, capital has continued to grow.

Wage-setting:the iron law of wages and the race to the bottom

Labour, like all other things which are purchased and sold, andwhich may be increased or diminished in quantity, has its naturaland its market price. The natural price o labour is that price whichis necessary to enable labourers, one with another, to subsist andperpetuate without either increase, or diminution

David Ricardo, 1817 33


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But there are limits to how ar it is possible or this to continue. At some point,when the market cannot be expanded any urther, Marxs predictions couldyet be borne out. In the mean time a shortage o skills in some sectors, or theexploitation o monopoly power, allows a ew to profteer at the expense oothers.

The disconnection between executive remuneration and corporate per ormancemeans that high pay di erentials cannot be rationalised by per ormance delivery.An honest analysis ought to concede that the executive elite has the power todemand and receive excessive pay without being bound to contribute greaterreturns. Remuneration committees are both sel -regulated and sel - ulflling,comprised as they are o members o the executive elite. Shareholders have littlepower to contain management pay.

From surplus value to social valueEarly theories o value saw it either in the labour embodied in goods or services the toil, or trouble o acquiring it41 or the use-value, which later becameknown as utility. What each o these neglects is that the production, trade andconsumption o a good or service may have wider impacts on society which arehard to see, and which are not re ected in the cost o production. Consider, orexample, the cost in terms o current and predicted climate change o carbondioxide emissions rom a range o economic activities. That cost has generally

not been paid by those who produced the emissions, nor by those that deriveutility rom those economic activities. Externalities can also be positive, however a good or service I buy can provide jobs and livelihoods to people I havenever met.

We use the term social value to re er to the combined positive externalities andindividual utilities associated with goods and services whether these accruewithin or outside the market. This is complicated by the act that we experiencethe world subjectively, so our perceptions o positive and negative will di er. Forexample, consider what might happen i a home owner decides to plant a small,commercial orchard in his ront garden. I songbirds come to sing there everymorning his neighbour on one side may experience this as a positive externalitybecause he is an avid birdwatcher. But the neighbour on the other side maywork nightshi ts, in which case the noise o the birds is a negative externality.So the orchard growers business venture is creating both positive and negativeexternalities. In this sense, all value is subjective and what counts as socialvalue is sel -defned. In measuring social value, we explicitly include unintendedconsequences in the overall assessment o how positive the value creation is.

Orthodox economic thinking tells us that our utility is derived rom money. Themore money we make, the more utility we have. It then ollows that the way tomaximise social wel are is to maximise total income. However, we cant just addup everyones income and call this total societal utility. Focusing on individualincomes (or utilities) is bound to be blind to side e ects, and encouragesundesirable behaviour rom a societal perspective.

In contrast the idea o social value is that we can encourage behaviour that ispositive or society. Over time a ocus on social value has the potential to set theright incentives to maximise net social value, create more equal actor sharesbetween labour and capital, and deliver a more equal distribution o economicresources between workers.

Now let us turn to our case studies, to see how this plays out in practice.


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Myth 1: The City of London is essential for the UK economy

I represent a seaside town which or decades had a proftable sweet actory, making

a product called ChewitsI went to see the company when it was in process o retooling; it was proftable and doing rather well. It employed people who had to operateat a relatively skilled level and it provided a good mix o employment. It was then bought by a City company. The machinery was sent to Eastern Europe, the skilled work orcewas sacked, the job mix in the town was worsened, the carbon ootprint o productionwas increased and the land was sold or housing. The UK economy did not beneft, but proft was made in the City

Dr John Pugh, Liberal Democrat MP for Southport 42

The City o Londons wholesale fnancial intermediation markets, which ocus on high value-added fnancial

transactions and trade in international fnancial instruments including exotics such as derivatives, is distinct rom theretail fnance sector (which spans the whole UK economy). The distinction is important, because there is no doubt thatretail fnancial services provided to businesses and individuals are vital to the health o the economy. In contrast, theactivities o City traders in their aggressive search or profts has, according to the Governor o the Bank o England,heaped the worst fnancial crisis since the frst world war on all parts o the economy. 43 Despite this, claims continueto abound as to the importance o the City o London to the wider economy.

The frst thing to note is that the best estimate or the contribution o the Citys fnancial activities to the UK economyis 3 per cent a year, up rom around 2 per cent a year at the beginning o the decade. 44 This compares with UKmanu acturing at 12.5 per cent, 45 even a ter the outsourcing o much o our manu acturing base.

Despite contributing only a small share in value added to the UK economy, City frms do make a sizeable contributionto the Exchequer in taxes in good times. But many years worth o tax contributions have now been wiped outdirectly through the taxpayers bail-out o the sector, and indirectly through the impact o the fnancial crisis on thepublic fnances now deeply in the red. In addition the point has been made, not least in Parliament, that thereare specialists in the City whose day-to-day work is to help individuals and businesses avoid paying taxes losingrevenue to the Exchequer o some 25 billion every year.

Some economists argue that there is a natural rate o entrepreneurship in the economy. But because o the fnancialrewards on o er, the City is likely to attract a disproportionate share o entrepreneurs. This leaves ewer entrepreneursat the disposal o other potentially more productive and less damaging sectors o the economy. 46

James Tobin, in a paper on e fciency in the fnancial sector, identifes a number o di erent types o e fciency. Oneis the use o the stock o human capital, where he argues that it cannot be e fcient or all the brightest graduates toend up in fnance. 47 This goes beyond entrepreneurs though, as many physics and engineering PhD graduates in

the UK end up in the City, rather than doing science or engineering.

The story of six professions


17/44A Bit Rich? 15

The City banker

Parts o the fnancial services industries need to re ect deeply on their role in the economy, and torecommit to a ocus on their essential social and economic unctions

Lord Adair Turner48

High-earning bankers in the City o London are among the best remunerated people in the UK economy. Forport olio managers and traders an annual income o 500,000 means that a City banker can earn in ten workingdays what someone in the UKs middle income bracket earns in a year.

Although City bankers rewards are a closely guarded secret, it is generally understood that the ew senior partnersin the major fnance houses can take home somewhere between 5 million and 10 million a year. 49 A hand ul willearn substantially more. Meanwhile, top hedge- und managers can end up making hundreds o millions in a year.

These enormous earnings are the result o proft taking on a huge scale. The reasons why this is possible arecomplex but are linked to the dominant position o fnance in the economy. This domination is due to a number o

actors. One is the deregulation o the fnancial markets that began in the 1970s. Another is the incentives that existor clever City bankers to create complex chains o transactions to maximise the money they make a share o

which they take home in bonuses. Also, given the scale o the sums being churned through the fnancial system,even a small portion extracted in the orm o commission or ees can add up to a very large amount o money especially when shared between the relatively ew people at the top o the fnancial tree.

Contrary to what we might expect, given the voci erous de ence o the importance o wholesale banking to theUK economy, the City o London contributes only around 3 per cent o value added every year. 50 Claims havebeen made about the trickle down e ects o wealthy City bankers spending in the economy but there is little realevidence to back this up. We hear less about the damaging e ects o the City on society.

These negative externalities, predominantly the risk and reality o regular systemic crises, do not eature in banksbalance sheets. This is because the banks do not have to pay or them, and incentives are there ore structuredaround proft rather than value.

Our analysis ound that or every 1 in value created, 7 worth o value is destroyed by a highly paid City banker. Insummary, our calculation is derived rom the ollowing:

Factors in value created:1 Average annual contribution o the City to UK economic activity, as measured by gross value added2 Tax contributions to the Exchequer3 Jobs provided in the wholesale fnance sector.

Factors in value destroyed:

1 The cost o the current fnancial crisis in terms o loss to UK gross domestic product and economic capacity2 The cost o that crisis in terms o the negative impact on the public fnances.

We might also have thrown the net wider and included other impacts, not least the negative impact on the globaleconomy o the activities o highly paid investment bankers and traders. Far rom being wealth creators, City

bankers are being handsomely rewarded or socially damaging activity. They are not just overpaid; they are overpaidat the expense o others.

WANTEDA fnance pro essional to head up investment services to governments and corporations. Includes buying,selling, and trading securities; managing assets; and giving fnancial advice on capital ormation, mergersand acquisitions. Relentlessly ocused on short-term proft, and relaxed about misunderstanding thecomplex deals you will create and manage, you are likely to be male and in your twenties or thirties.

Remuneration package: Millions


18/44A Bit Rich? 16

Myth 2: Low paid jobs create a ladder for people to work their way up opportunities to advance are open to all

Social mobility the extent to which people move up or down the social ladder iso ten used to justi y wide pay di erentials. I everyone has a shot at reaching the top, theargument goes, then hard work and ability will be rewarded handsomely. It is there ore in

all our interests that millionaires exist because it gives us something to aim or. I we justtry hard enough, we too can climb that ladder.

Rags-to-riches stories have been with us as long as storytelling itsel . There is a chance that the daughters o ournursery workers may become advertising executives. The case o our low paid hospital cleaner may seem less un airover time i her descendants are able to climb the ladder o remuneration, smoothing out the distribution o rewardsacross the generations. But what about the sons o our City bankers becoming hospital cleaners? How many o thosestories have we heard? Where such stories are told, is it not with a hint o disappointment or disapproval or one thathas allen on hard times? I social mobility really were a reality, wouldnt the riches-to-rags stories be just as plenti ul?

Social mobility can only work i it is in both directions. A common measure is the extent to which a athers incomepredicts that o his sons. Using this measure, researchers have ound that countries with the narrowest incomedi erentials the more equal countries have higher social mobility. 51

As has been pointed out, the American dream really is only a dream i you live in America. In the UK, meanwhile,social mobility has been at or some time. 52 Most people end their lives in the same circumstances as their parentsand grandparents be ore them in terms o relative income within society.

Ultimately, there are only a very limited number o positions available as City bankers. For the ablest children o ourrecycling plant workers to climb the ladder, an equivalent number o City bankers children would have to move down.Those with high incomes can protect their position and that o their children by buying assets and advantage. Thismeans that the ladder o ering opportunity to others is e ectively kicked away. The only way to improve equality oopportunity and outcome is to shorten the ladder in the frst place.

Myth 3: Pay differentials dont matter, so long as weeradicate absolute poverty

UK social policy since 1997 has largely ocused on those on low incomes and theunemployed. Work has been seen as a primary route out o poverty. Cash trans ershave been aimed at the low paid, particularly those with children.

In addition, Labour has asked to be judged on its record on child poverty, setting ambitious targets in this area. Notonly was high pay not targeted but it was actively encouraged. Peter Mandelson was amously intensely relaxedabout people getting flthy rich. The frst decade o the twenty-frst century has seen a new climate o tolerance

or tax avoidance, corporate excess and privilege. Labour seems to have bought in wholesale to the trickle downtheory that it once derided. No wonder Margaret Thatcher once described New Labour as her greatest achievement.

A huge aw in the policies o successive governments is that they have ailed to grasp not only that di erentialsmatter in themselves but also that equality is a precondition i you want to achieve low levels o poverty. Wehave known or a long time that social problems, such as crime, ill-health, poor educational attainment and drugaddiction, are o ten economic in origin. What we now know as well is that it is not absolute levels o poverty alonethat matter but the di erences between people. Where di erences exist, these can a ect our well-being, levels otrust, our commitment to the stewardship o the planet and even our economic per ormance. 53

In spite o trans ers o resources to the poor, the per ormance o policies designed to counter child poverty has beensluggish according to the Governments own indicators despite our having gone through a time o plenty. Lettingthe top earners have ree rein to raise enough money to cast pennies at the bottom has not worked. High pay needsto be a target o policy in the way low pay has been, not least because it is such a huge source o market ailure.


19/44A Bit Rich? 17

The nursery worker

Youve got lives in your hands youve got such an incredible responsibility and get paid nothing or it

UNISON report, 2006 54

Although early childhood education and care benefts all children. good child care

can compensate, at least partially, or a disadvantaged home li e Cleveland and Krashinsky, 2006 55

In many countriesemployment in nurseries and day-care centres is o ten seen assuitable or those who are very young, unqualifed, transient, or all three

Childcare Transition , UNICEF report, 2008 56

Child care is a crucial service in the UK. It enables some parents o children under fve to continue working when theyhave young children, with all the associated benefts that brings to individuals, amilies and society. In Sweden, 70%o all mothers and 80% o lone mothers have a job. 58 This compares with 56 per cent o lone mothers in the UK. 59 Thehigh rates o maternal employment in Sweden have helped keep child poverty rates very low at just 4 per cent. 60 For both amilies and wider society nurturing and protecting our children could not be more important. Yet child careis a pro ession with very low status in the UK, and is one o the most poorly paid occupations in our economy.

O course, there is varying quality in childcare provision. Our analysis rests on an assumption o good childcare, romwhich there are substantial benefts. There are clear economic benefts: parents are able to continue working, withthe productivity and public fnance implications o that. Where childcare is good, employers are likely to see reducedrates o absenteeism and distraction at work. 61 There are also quality-o -li e benefts in being able to work outsidethe home, particularly or women. Countries with widespread child care provision have high emale employment, sochildcare may make a contribution to gender equality. 62

In addition to these benefts, there is evidence that children gain rom positive early learning opportunities outsidethe home. 63 Compared with other European countries that fnance universal child care systems as a critical part otheir social investment, the UK carries a much higher fnancial and non-fnancial cost burden rom social problems. 64 Evidence rom studies o the impact o early child care on how deprived children are in later li e, strongly suggeststhat the cost o social problems could be mitigated by expanding early-years support through high-quality child careprovision.

When we take account just o the li estyle and equality benefts rom being able to work outside the home, we fndthat every 1 paid to a childcare worker generates 7 worth o benefts or society. I we expand this to includethe social value o reduced social problems as a result o children getting a better start in li e, the potential beneftcon erred by child care workers increases to a whopping 9.50, almost ten times their pay.

WANTEDA worker to look a ter the emotional and physical needs o small children (under fve years o age) in nurseries

and day-care centres.57

You will ensure the childrens sa ety and acilitate early learning. You will also have animportant role in supporting parents by being aware o and available to discuss each childs growth, progress,development and needs. The success ul candidate is likely to be a school-leaver or equivalent. You shouldexpect remuneration substantially below the level o responsibility o the post, with ew opportunities or careeradvancement.

Salary scale: 10,00013,000


20/44A Bit Rich? 18

Myth 4: We need to pay high salaries to attract and retaintalent in the UK

...In budget a ter budget I want the nationto do more to encourage the risk takers,those with ambition, to turn their ideas into reality and make the most o their talents

Gordon Brown, 2004 65

For this myth to be true a number o other myths must also be true: that the highly paid are frst and oremost rationaleconomic actors; that social mobility is a reality that rewards peoples talent and e ort; and that there is per ectcompetition in the labour market. As we will show all o these assertions are on very shaky ground.

For this myth to be true, the best and brightest people in the UK would need to be in the most highly paid jobs. Thebest and brightest rom across the world would need to be concentrated in a small number o countries that o eredthe most avourable conditions. Not only is this not true, but there doesnt seem to be a reliable relationship betweentalent, entrepreneurship and income.

It would appear that according to a number o indicators, the reverse is in act true. For example, there is a weakbut signifcant tendency or more equal societies to gain more patents per head than less equal ones. More equalcountries also eature heavily at the top o the list o the countries where the most books are published per head. 66 Inequality, it could also be argued, wastes the talents o a large proportion o the population.

In a report or the Work Foundation, Li e at the Top ,67 the ollowing insights were shared:

(1) Nearly 60 per cent o chie executives o FTSE-250 companies had worked in their frms or more than eightyears, substantially above the average tenure o fve-and-a-hal years. This suggests that rather than therebeing a uid market o top executives switching frms to capitalise on the best remuneration, companiesnurture and retain their senior sta .

(2) Contrary to claims that the labour market or senior executives is global, 86 per cent o FTSE-250 chieexecutives are o UK nationality.

(3) While French and German chie executives are paid less than their UK counterparts, there is greater businessproductivity in France and Germany.

Finally, it is not possible to square the causes o this recession with the idea that we are hoarding talent in the UK.Gross incompetence at the top o many o our banks has been directly responsible or the calamity o late 2008. Surelythis isnt the best our money can buy.

Case study: Kentucky Fried Chicken 68

In 2005 health concerns around ood, particularly ast ood, were mounting. Morgan Spurlocks flm Supersize Me had been released the previous September, and Jamies School Dinners had been screened on Channel 4. Thegovernment had begun to set and to introduce new standards or school meals. Against this backdrop KFCs saleswere alling dramatically.

The company engaged an advertising agency, and ran a campaign eaturing the appeal o their ast- ood taste. Thestated advertising objectives were as ollows:

(1) Create a desire or ood, bringing KFC to the ront o peoples minds

(2) Evoke a new empathy with amilies by identi ying with mums

(3) Prompt a craving or KFC among a youth audience.

Describing the campaign in its submission or an advertising award, the agency noted: Feeding the kids had become a raught and guilt-ridden experience. Mums wanted to eel that someone understood and empathised withthe realities o eeding a young amily [KFC] had to make them eel good about buying it.

The campaign was a great success or KFC, returning over 4 in proft or every 1 spent on advertising. It is ironic,however, that the advertising industry is able to reap urther gains later by helping to rein in the very behaviour itpromotes in the frst place. The Department o Health recently commissioned top ad agency M&C Saatchi to developits 75 million anti-obesity advertising campaign.


21/44A Bit Rich? 19

The advertising executive

Whether its lip balm or blue jeans, more is more says Nita Rollins, who headsmarketing intelligence at the digital marketing agency Resource Interactive. Nothingsucceeds like excess. The average number o Lip Smacker-brand lip balm and glossesowned by Bonne Bell customers is ten but, Bell notes, the girls who have 100 make up

or the ones who dont have ten. USA Today , 13 April 2007 69

The advertising industry o ers the potential or high earnings and high status in a creative environment. But therole o advertising in society has always been a subject o controversy. Those in support argue that advertisingprovides valuable in ormation that helps consumers to make e ective choices about what they buy. Outside themarket, advertising is used to try to in uence other choices and behaviour through government health promotioncampaigns, or example.

Others argue passionately about the detrimental impacts o advertising. It creates insatiable aspirations anddissatis action, they say. It promotes eelings o inadequacy and stress. It encourages overspending, and henceindebtedness. Arguments also ocus on the view that advertising is not about disseminating ull in ormation but aboutmanipulating people through the selective use o in ormation.

On a larger scale economists most amously JK Galbraith have argued that advertising has very negative e ectson society. It does this by creating socially (and environmentally) waste ul wants where needs have already beensatisfed. 70 For Lippke, the aim o advertising is to turn people into consumers. 71 According to this view, althoughpeople are able to resist purchasing a specifc item, they are unable to resist the consumer li estyle.

As with the other highly paid pro essions we have examined, we have been care ul to calculate the good attributed tothe advertising industry as well as the bad. We wanted to ensure a air and balanced estimate. The overconsumptionthat advertising generates creates jobs someone has to make the stu , and then someone has to sell the stu .

But what about the negative e ects o overconsumption? We have calculated the costs to UK society o obesity,anxiety-related mental health problems and indebtedness. Then there are the substantial environmental costs romclimate change and resource depletion. It is estimated that in rich countries such as the UK, the level o consumption

is three times as much as the planets environmental resources can sustain. 72

Advertising agencies are keen to demonstrate the returns they create or their customers. These estimates oadditional sales generated allowed us to calculate the share o overconsumption attributable to advertising, and thenthe damage that causes. We ound that or every 1 o value created by an advertising executive, 11.50 is destroyed.This is almost the exact reverse o the hospital cleaner.

WANTEDSenior account executive or whom enough is not enough. Do you have a air or convincing people they wantthings they dont need? The success ul candidate must be able to bring research and creative processestogether, and suspend his or her social and environmental conscience.

Salary range: 50,00012 million


22/44A Bit Rich? 20

Myth 5: Workers in highly paid jobs work harder

It has been claimed that workers at the top end o the income scale work long hoursand there ore deserve higher earnings. There are several actors, however, that are notusually taken into consideration when calculating hours worked.One o these actors is the act that the poorest in our society are just as likely to work long hours in a main job and/or

to take on multiple paid jobs. Many need to do so to make ends meet.73

Neither does this myth take account o thenumber o hours worked outside the market economy. It is o ten argued that providing care in a amily setting shouldnot be included in national accounts because production o services within households is a sel -contained activity,with limited repercussions on the rest o the economy. This, as eminists and others have shown, is simply nottrue. As has been extensively documented elsewhere, 74 the non-market economy (or the sphere o reproduction )is necessary or a more complete understanding o the market economy (the sphere o production ).Without thereproduction o labour power on a daily and generational basis, productive activities would grind to a halt.

In this sense the inclusion o hours worked in the non-market economy or di erent income groups is crucial tothe understanding o peoples contributions to the economy as a whole both in the productive and reproductivespheres. Data rom ONSs Time Use Survey 2005 show that people at the bottom o the income scale spend, onaverage, 82 more minutes per day on providing housework than their higher-income counterparts.

I these fgures are disaggregated urther, considerable di erences arise between lower and higher incomegroups in providing certain types o housework, such as cooking and cleaning. In addition to this, data showsthat lower-income groups provide 13 more minutes per day in childcare than higher income people do. Althoughthe di erence o care provided or adults is quite small, one could still argue that lower-income groups spendapproximately 18 more minutes per day solely on care, which accounts or 8.4 extra hours o work per month. Insummary, i we consider the impact o unpaid labour on paid labour, or even the interrelationships between them,we can certainly make the point that lower-income individuals work just as hard (or even harder) than their higher-income counterparts .

Myth 6: The private sector is more ef cient than the publicsector, hence the higher salariesWork that is cheap is not necessarily work that is e ective. This myth about thesupposed e fciency o the private sector has contributed to an increase in competitivetendering o public services to private contractors. It has also been used to justi yspending less on a service. But lower prices o ten come at a cost.In the case o hospital cleaning UNISON has shown how cost savings have been generated by paying sta less andallowing working conditions to deteriorate. Cost cutting can reduce the time spent on cleaning and a ect the qualityo the cleaning service as a whole. Competitive tendering can thus lead to all sorts o negative consequences. 75

The BBCs Panorama 76 programme uncovered cleaners working 12-hour shi ts or six consecutive days to earnsu fcient wages to live on. There are reports o cleaners not eligible or sick pay coming into work unwell. Whenthings like this occur, the service can ail to deliver the things that really matter to people such as good patientcare and lower Hospital Acquired in ection rates. In short the savings are a alse economy.

Similar trends emerge when we broaden the question to include goods and services that traditionally all outside opublic services. Our current system in which e fciency means doing more or less can actually crowd out manyo the things that we value as a society. It means it is e fcient or City bankers to devise more and more creativefnancial products rather than provide sustainable access to fnance. It means it is e fcient or advertisers to motivateconsumers to eat more and more cake, regardless o the costs in obesity-related health problems or the state. Italso means it is e fcient or the cake that the advertising agencies promote to be extravagantly packaged andexported hal way across the world regardless o the environmental impact. We need a new defnition o e fciency,one that takes account o outcomes. 77 E fciency savings will be misleading unless we include the true social andenvironmental outcomes o the goods or services being produced. The concept o e fciency wages is use ul here.This term describes the situation where it is more e ective to pay sta above the minimum wage. It can build loyalty,increase incentives or sta to do their job e ectively, and enable people to enjoy a decent standard o living.


23/44A Bit Rich? 21

The hospital cleaner

Its very interesting that when you put a cleaners outft on, people dont treat you in thesame way, and thats a pity because it doesnt recognise the contribution that theyremaking

Dr Mark Goldman, Chie Executive, Heart o England NHS Foundation Trust 78

Hospital cleaners dont just clean deserted buildings. As shown above, their role is inextricable rom the working othe hospital and the treatment o patients. 79 It is recognised that cleaners play an important role in achieving widerhealth outcomes and in gaining the trust and confdence o patients. Despite this pivotal role their job has low payand low status.

Cleaning services in hospitals have o ten allen oul o the e fciency agenda and the disruptive re orms and cuts ittends to bring. There has been increasing specialisation o hospital work in the NHS, including the contracting outo hospital cleaning services. There used to be a presumption that this was cheaper and a more e fcient use oresources. However there is widespread evidence that this has not been the case, as cheaper costs have been at theexpense o pay, working conditions and service quality.

Contracting out and over-specialisation have encouraged what has been described as a two-tier work orce in theNHS. Health Minister Andy Burnham has himsel described the distance between hospital cleaners and the rest othe NHS amily.80 There are high turnover rates and high vacancy levels or cleaners.

UNISON ound that outcomes or patients su er when cleaners have no allegiance to the NHS and when there is apredominance o agency workers with short-term contracts and poor working conditions. 81 The costs are elt not onlyby cleaners, in the orm o low pay and low status, but by all o us as a highly segregated work orce is poorly equippedto deliver the best outcomes in hospitals.

Attempting to disentangle cleaning contributions rom overall hospital outcomes is almost impossible cleaners area undamentally important part o the mix. We have there ore looked at just two discrete outcomes. Firstly, a reductionin Hospital Acquired In ections: we include how much this costs the NHS and an estimate o the costs to patients.Secondly, the contribution o cleaners to the wider social value created by the hospital.

On this basis, our research fnds that we reward hospital cleaners very badly or what they contribute. For every 1 wepay them they generate over 10 in social value. This is likely to be an underestimation, as the entire unctioning othe hospital relies on them. Nonetheless the case is clear; their contribution is greater than their reward.

WANTEDHardworking, caring and conscientious individual required to clean hospital patient rooms, baths, laboratories,o fces, halls, and other areas; wash beds and mattresses; remake beds; keep utility and storage roomsin clean and orderly condition; distribute laundered articles and linens; replace soiled drapes and cubiclecurtains; disin ect and sterilize equipment and supplies; use germicides and sterilizing equipment; per ormother duties as described under CLEANER. You will not be concerned with the risk o in ection rom exposureto body uids and aeces, nor will you care about working with corrosive cleaning products. You will supportthe equality, diversity, rights and responsibilities o individuals be courteous at all times and maintain patientconfdentiality. You must be able to work night shi ts and unsociable hours.

Salary: 6.26 per hour


24/44A Bit Rich? 22

Myth 7: If we tax the rich, they will take their money and run

Orthodox economic theory suggests that people will choose to live and work wherethey stand to gain most in terms o personal fnances. 82 Given the opportunity, thetheory says, they will move rom a high tax jurisdiction to a low tax one to keep a highershare o their pay.

Intuitively, however, we understand that decisions on whether to emigrate are ar more complex than that. Theydepend on a multitude o actors beyond just the fnancial, including cultural amiliarity, environment, proximity to

riends and amily, and quality o public services. 83

I it were the case that higher taxes caused wealth to ee we would expect to see an exodus o the wealthier citizenso Sweden, Denmark, Norway and France the countries with the highest tax rates. A glance at the latest Forbesbillionaires list84 reveals that o our Norwegians on the list all live in Norway, the two Danes live in Denmark, fve othe nine Swedes live in Sweden, and eight o the ten French live in France.

And at an aggregate level there is little evidence that higher taxes reduce national income and wealth. A nationsincome is measured in terms o GDP. Adjusting or di erent population size, we might expect to see a reduced GDPper head in those countries, like Sweden, that have the highest tax rates. But GDP per head in Sweden is $52,057

per year, signifcantly higher than the levels in the UK ($43,089) and Germany ($44,471) where taxes are lower.85

What this suggests is that economic per ormance or prosperity is not adversely a ected simply because o highertaxes.

Myth 8: The rich contribute more to society

Some o the super-rich like to hide behind the myth that they contribute more to oursociety than the rest o us. Think o all the tax they pay, the argument goes, and their

very visible charity donations.In the United States the economist Simon Head has calculated that the average weekly wages o the bottom 80 percent o the working population ell by 18 per cent rom 1973 to 1995, while the pay o the corporate elite rose 19 percent be ore taxes. This increase reached 66 per cent a ter the tax accountants had worked their magic. 86 In the UKexecutive pay increases in the past decade have vastly outstripped those or employees, on top o which the richpay proportionately much less o their income in tax than the poorest. 87

Not only do the rich pay less tax, but they o ten orm a power ul lobby to erode the tax base o the economy. Theyhave supported the propagation o the misguided view that tax cuts are good or stimulating growth and evenincreasing government tax revenues. The Nobel Prize- winning economist Paul Krugman claims that this is not truein the context o the United States. The tax cuts o the Bush administration that disproportionally benefted the most

a uent had disastrous consequences or the economy. They contributed to converting the $230 billion surplusinherited by President Bush into a $300 billion defcit. 88

Rich people who avoid paying tax o ten justi y this by re erring to the ine fciency o public services. Some hidebehind a smokescreen o high-profle charity donations. However, the rich actually donate less in relative terms tocharity than the poor. The top f th o households give less than 1 per cent o their income, while the poorest tenthgive 3 per cent. In act, inequality in income terms is echoed by unequal philanthropic giving. 89 It is as i the small-change contributions o the super-rich are merely a salve to a guilty conscience or some. Polly Toynbee has statedthat true philanthropy in the modern world is tax- riendliness: public acknowledgement that a reputable mechanismexists to extract money rom those who have too much and give to those who have nothing. 90


25/44A Bit Rich? 23

The tax accountant

My name is Ronan Voight and Im a specialist tax adviser. Ive been in this game or over 20 years and have a client list as long as your arm. I have worked closely with ex-Inland Revenue and HM Customs and Excise Inspectors or most o my working li e, so I doknow what Im talking about. My clients are mostly wealthy people who I assist to avoid paying tax. One client o mine just sold his business or over 1.2 million. I arranged or him to pay just 8,000 in tax 91

The role o tax accountant is a job that many young university graduates aspire to. Companies such as Deloitte andKPMG have large tax sections with attractively presented tax experts. However what these experts actually do, airlyexplicitly, is help rich individuals and companies pay less tax.

The work o tax accountants is legal as long as they manage to stay on the right side o the thin line betweentax avoidance and tax evasion. As distinct rom tax evasion, tax avoidance is the practice o legally using the taxregime to reduce the amount o tax payable. In reality the distinction between the two is semantics. As the ormerChancellor Denis Healey once put it: The di erence between tax avoidance and tax evasion is the thickness o aprison wall. 92

The amount o money lost in tax avoidance can never be precisely calculated but it is estimated that 12 billionis lost rom companies and 13 billion is lost rom individuals each year. 93 In reality, however, every pound a taxaccountant saves or a client is a pound that otherwise would have been collected by HM Revenue. In our model,there ore, we have calculated the opportunity cost which that 25 billion represents. On one calculation, it couldhave covered the annual cost o a national system o universal child care and parental leave, which is 21.4 billion.This would have generated a total social value o 50 billion per year through reduced social problems. 94

This doesnt take account o a range o other potential impacts. Christian Aid has calculated that the practice oshi ting profts to dodge tax bills costs developing countries over 60 billion per year. 95 In addition there are othercosts to our economy. Markets dont unction e fciently when companies dont publish the e ects o tax avoidanceon their profts.

Determining the right amount o tax payable is a specialist skill and o ten requires pro essional support. In thisreport we are not re erring to everyday accountancy tasks, which may play an important social role but highly paidtax specialists who help wealthy people and companies pay less tax. The amount o value generated by theseactivities is negligible. We have included their salaries as a value to them, and assumed that they pay some incometax. On our calculations, there ore, tax accountants destroy 47 in value or every pound o value created. Taxavoidance is e ectively ignored by government. Instead government campaigns have hounded beneft claimantsover raud. The 25 billion lost every year through tax avoidance dwar s the 900 million lost in beneft raud. 96

Tax avoidance has been legitimised by a burgeoning pro ession o tax accountants who support and encourage it,rather than challenging it. Not only is this morally questionable but it means that we are all losing out. No examplehighlights more e ectively how we have got our priorities wrong.

WANTEDAre you committed to helping the super-rich avoid paying their air share? You need to understand tax lawdevelopments to ensure clients will remain in ull compliance legally with all tax laws yet will pay the lowesttax law ully possible. While you will not be as well paid as the people you serve, you will have the satis actiono knowing that the taxman is not getting as much as he should either.

Salary: 75,000-200,000 plus excellent benefts package
http://en.wikipedia.org/wiki/Denis_Healeyhttp://en.wikipedia.org/wiki/Denis_Healey


26/44A Bit Rich? 24

Myth 9: Some jobs are more satisfying, so they requireless pay

Justi ying low pay through a vague concept o job satis action is a dangerousapproach. Factors a ecting job satis action are complex, and not determined byoccupation alone. Levels o reported job satis action are in uenced by a range o

actors such as autonomy and control in the workplace, levels o income, incentivepay and bonus schemes, and the extent o opportunities to do work-relatedtraining.97

Workers in the public sector report higher levels o job satis action than those in the private sector. But thegap between the two has been closing. Satis action levels in the public sector declined especially sharplyduring the 1990s. 98 This coincided with the introduction o private-sector and market disciplines into the publicsector.

I we take at ace value claims that big earners get paid well to compensate or stress and long hours, then wewould expect other highly stress ul or dangerous pro essions to be highly paid. Fishing is the most dangerous

job in the UK, with roo ers and sca olders also near the top o the list and re use collectors at number 18. 99 Yetnone o these pro essions are highly paid.

Perpetuating this myth has consequences or the rest o our society, because o the relationship between payand status. It sends damaging signals about what we care about in society, and con ers low status on someo the most important jobs.

The act that some o our brightest university-educated minds are competing fercely or jobs in advertisingand investment banking, while there are high vacancy rates or nurses and social workers, suggests resources

are not being directed to best use. The act that people fnd work with a social purpose rewarding may be are ection o the positive impacts o these occupations on society as a whole. Workers should there ore berewarded, not penalised, or doing this kind o work.


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The waste recycling worker

The collection o waste rom individuals and businesses is a job that is o ten taken or granted. We pay the people whodo this low wages, and the job they do has lower status than the vast majority o employment in our society. However,when people stop collecting the rubbish society breaks down. The Winter o Discontent, in 1979, is memorable orimages o over owing bins and piled-up rubbish, even occupying Leicester Square. Those days were brought to mindagain during recent industrial action in Leeds.

We have included in our analysis a pro ession that deals with the waste our economy produces, ocusing on thecontribution o a recycling worker. There are limits to what can be achieved through recycling but what we do withwaste is important. Critics o recycling o ten claim that it may have little or no beneft to the environment due to theamount o energy used in the recycling process. However large-scale li e-cycle analysis by the Waste and ResourcesAction Programme (WRAP) ound that between 10 and 15 million tonnes o carbon are saved through recycling in theUK each year. 100 A large proportion o the UKs recycling is done by local authorities. This work involves hard gra t,and has high injury and accident rates.

The costs o disposing o what we no longer need go beyond the problems created by landfll. In reality, we never

really throw anything away. A modern glass bottle would take 4,000 years to decompose 101 and even longerin landfll. This is wasted potential. In our model we have tried to estimate how people value the products that arerecycled. To capture this we have looked at the waste recycled by a typical worker or a small frm called AardvarkRecycling. Aardvark distributes the compost it produces to schools, allotments, community groups, growing groupsand residents gardens.

The alternatives to recycling are not appealing. Landfll sites are unpopular with local residents and account or nearlyhal o all UK methane emissions. In total our model estimates that or every pound paid to a recycling worker over12 in social value is generated. This includes:

P Cutting the social cost o carbon emissions (which are reduced through recycling)

P Reducing the disamenity or local nuisance impacts 102 rom living close to a landfll site

P The contribution o the recycling industry towards GDP

P The reuse value o recycled goods.

Even i we exclude the estimates we made o reuse value, the ratio is still over 11 or every pound spent.

WANTEDHardworking individual required. Must be ft and healthy and capable o hard physical labour. Duties includedriving a 7.5-tonne truck on collection rounds, picking up materials rom sacks or wheeled bins (may involveheavy li ting), warehouse duties which include unloading trucks, using a orkli t truck, using baling andshredding machinery. Your commitment to environmental issues will o set the unpleasant nature o the workand the early morning starts.

Salary: 6.10 per hour.


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Myth 10: Pay always rewards underlying pro tability

You have to realise: i I had been paid 50 per cent more, I would not have done it better. I I had been paid 50 per cent less, then I would not have done it worse

Jeroen van der Veer, former Chief Executive, Royal Dutch Shell 103

The perceived wisdom is that high pay or senior corporate executives re ects high per ormance and companyproftability. Executive pay has rocketed over the past decade as shareholders have accepted the argument thatcompany per ormance requires top talent, and that top talent commands a very high price.

A parliamentary report on executive pay and severance deals 104 cited research showing that between 1993 and2002, the median base salary or the highest paid directors rose by 92 per cent, while in ation rose by 25 per andaverage pay by only 44 per cent. This trend has continued since then. Five years ago the top ten UK executivesbanked some 70 million, but by 2007 they had doubled their take-home pay to 140 million. They were paidsignifcantly more again in 2008, when their income rose to 170 million. The upper limit on bonuses also rose roman average o 40-60 per cent o salary in 1998 to 100 per cent o salary by 2003. Meanwhile the parliamentary reporthighlighted a lack o evidence that per ormance standards had toughened to re ect higher pay.

It is becoming increasingly apparent that there is only a weak correlation between pay and executive per ormance.

In 2008 Britains top companies lost almost a third o their value, as the FTSE plunged amid the onset o the deepestrecession in living memory. But at the same time the chie executives o these companies saw a leap in their basicsalaries o 10 per cent in the year. Although bonus payouts were lower than be ore, basic pay or this elite groupincreased more than three times the 3.1 per cent average pay rise or ordinary workers in the private sector.

Companies have been quick to impose pay reezes on sta and to implement redundancy programmes to lowercosts, but directors basic pay increased by more than double the rate o in ation. 105 Public outrage at bankers paydidnt stop many o the chie executives o ailed banks getting at severance deals. West Bromwich Building Societyhad a loss o 48.8 million in the fnancial year ending in March 2009 but paid its ormer boss, Stephen Karle, astaggering 520,600 pay-o . 106 Lehman Brothers paid $24 million in severance packages to the collapsed frms topthree London executives as 4,500 London sta were ordered to clear their desks. 107

The understanding that executive pay relates little to corporate per ormance is not new. Empirical studies corroboratingthis fnding include those conducted by Harvard pro essors Bebchuk and Fried in 2004. 108 They argued that executivepay arrangements were intended to beneft the fnancial interests o managers, not shareholders. They believedthat shareholders, o ten pension unds representing the average workers uture fnancial wel are, were captive toexecutive in uence on this matter.


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Our Social Return on Investment analysis is not just an intellectual exercise ithas big implications or the way in which our society and economy are structured.Financial incentives are very power ul, and we tend to shower them on some othe pro essions that are the most socially and environmentally costly. This promotesundesirable behaviour, while positive activities are discouraged.

We have not aimed or precision in our calculations there may be aspects ovalue that were le t out. The point was to draw attention to the issue. We have notincluded detailed recommendations because it is clear to us that there are deepstructural issues that need to be addressed, and change will not come overnight.

This does not mean that governments are powerless. Much more needs to be doneto reduce inequality, and the ocus o policy needs to be at the top o the incomescale. There has been little or no political appetite or reining in high pay and thisre ects a systemic malaise and complacency that have created a climate or market

ailure. It is time to learn the lessons o that ailure, and to challenge high rates osenior executive pay.

It is important to separate out the pro essions we have examined rom the peopleactually doing the work. This is not about picking on individuals, and many o thosein the highly paid pro essions discussed may be very good people. We recognisethat it is the institutions and systems that promote sel -interested behaviour, andit is these institutions and systems that need to change. Most people are simplyresponding to incentives, so we need to ensure that the incentives on o er alignwith the social and environmental value that our economy needs to deliver.

Some policy recommendations

P End the policy silence on high pay. nef has previously advocated a nationalmaximum pay di erential. This has been echoed recently by Compass andothers with calls to establish a High Pay Commission. Its task could be to

examine what the appropriate di erentials should be. The Royal Navy, orexample, has had a de acto di erential o eight, whilst some Japanese frmsvoluntarily impose pay ratios limiting the gap between the top and bottom pay.Determining these multiples should be in ormed by the concept o social valuecreation.

P Learn from the successes of anti-discrimination legislation. Explorethe possibility o positively discriminating towards people rom low-incomebackgrounds to level the playing feld in access to highly paid pro essions.

P Build social and environmental value into prices. Until goods and servicesre ect the real costs and benefts o their production, incentives will bemisaligned with the kinds o positive behaviours society wishes to promote.Getting the prices right would a ect relative proftability and so would alignwhat wages could be paid with the value that is created. Consumption andcorporation tax are two vehicles or doing this, but they need to be applied in aprogressive way.

Conclusions

This report challenges a host o economically and sociallydamaging myths about pay and value. Chie among them andthe point o our research is the idea that there is a straight orwardrelationship between high fnancial rewards and good societaloutcomes. As we have seen, this simply is not the case.


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P Introduce more progressive taxation. The wealthiest do not pay theirair share o tax and the very wealthy may pay none at all. Redistribution,

particularly o assets and land, is an e ective way both to o set inequality andto reward jobs that the market does not. Closing tax loopholes would also be agood place to start.

P Launch a green industrial policy. We have an unprecedented opportunity tomake environmental progress while also addressing wage inequality. The timehas come or a new industrial policy, creating green jobs to replace the middle-income, semi-skilled jobs that have been wiped out in manu acturing.

P Encourage new forms of ownership. Mutually owned building societies,co-operatives and land trusts are all models in which ownership takes a m

a bit rich - calculating the real value to society of different professions

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