Bankers don’t deserve their bonuses. They should be taxed and the money used to help our struggling young people

This isn’t about trashing the economy, it’s about making it more competitive so it works for everyone

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Long-term youth unemployment is a blight on the British economy. Young people didn’t cause the recession but are being hit hardest. The bankers, on the other hand, did cause it and they have been the biggest gainers in the labour market. They have also significantly increased their presence at the top of the income distribution. Barclays’ chief executive, Antony Jenkins, last month announced that although earnings had fallen and profits fell by a third the bonus pool had not, but had increased by 10 per cent to £2.38bn, even though dividends were frozen. Hardly surprisingly the shareholders aren’t happy and are poised to kick out Sir John Sunderland, the £189,000-a-year non-exec head of the board’s remuneration committee. They seem to have learnt nothing. Back to them in a bit.

Currently around 250,000 youngsters under the age of 25 have been continuously unemployed for at least a year on the broader ILO unemployment count, up by 50,000 since May 2010 when the Coalition was formed. Approximately 56,000 18- to 24-year-olds have been claiming jobseeker’s allowance, up from 26,000 in May 2010. These are the kids that are most likely to be permanently scarred by their unemployment experience at big cost to themselves and everyone else. It is thus to be welcomed that Ed Miliband announced Labour’s jobs guarantee scheme that would be implemented if they won the next election in 2015, and paid for by a bank bonus tax and a squeeze on high-earners’ pensions.

The pledge includes a five-year package for the long-term unemployed where under-25s on jobseeker’s allowance for more than a year would have to take a taxpayer-subsidised job for six months or risk losing benefits. Firms and voluntary sector groups would provide 25 hours’ employment a week over six months at the national minimum wage, with the Government paying the wages and employers’ national insurance. Another £500 per employee would be supplied towards training (which would be compulsory for participants) and administration costs. This is a repeat of Alistair Darling’s highly successful and popular bankers’ bonus tax that funded measures that lowered youth unemployment, subsequently abolished by David Cameron.

A strong justification for taxing bankers’ bonuses was provided in an important new paper on the subject by my old pal and director of the centre for economic performance at the London School of Economics, John Van Reenen, and Oxford’s Brian Bell, published last week. They analyse the role of financial sector workers in the huge rise of the share of earnings going to those at the very top of the pay distribution in the UK.  Surprisingly, they found that bankers’ share of earnings showed no decline between the peak of the financial boom in 2007 and 2011, three years after the global crisis began. Bankers in the top percentile actually increased their share of the total wage bill by 0.2 percentage points between 2008 and 2011. Nor did bankers’ relative employment position deteriorate in this period.

For the UK, top percentile workers have substantially increased their share of the income pie. In the 1970s they took around 6 per cent of total UK income but by the end of the 2000s this had risen to 15 per cent.  In the decade preceding 2007, the top percentile increased their share of total income by 3.4 percentage points. Since 1999, somewhere between two-thirds and three-quarters of the total income gain for those in the top 1 per cent has gone to bankers, even though they account for only one-third of the top percentile of workers. Furthermore, annual salaries have hardly changed for those in the top percentile over this period: their entire gain is due to increased bonuses.

The authors point out that “even more remarkably, while the crisis years have seen a fall in the share of income going to the top percentile, top bankers’ pay had fully recovered by 2011 to the point at which they were taking slightly more of total income than they were before the crisis began … the financial crisis seems to have been so far little more than a blip for the pay of bankers”.

The chart plots the share of total income including investment income going to the top 1 per cent and top 0.1 per cent of income earners in the UK and US.  A broadly similar pattern emerges for both countries. The rich took a large share of income in the years between the First World War and the Great Depression. There then followed a sharp decline, which continued until the end of the 1970s when the well-known sustained rise in inequality began. This was only interrupted by the recent financial crisis. For example, in the UK, the share of the top 1 per cent fell from 19.6 per cent in 1919 to 5.7 per cent in 1978 before rising to 15.4 per cent in 2007.

 In terms of policy, Bell and Van Reenen consider whether there is really any problem to be addressed. If bankers are paid in a competitive labour market and simply rewarded for their talent, they argue correctly, there seems little reason for government intervention, at least on efficiency grounds. The authors contend though that “imperfect competition” and the guarantees and subsidies the sector receives from the government “due to the ‘too big-to-fail’ problem” means bonuses may well have arisen due to non-competitive behaviour, hence the need to regulate them.

Interestingly, this week the Bank of England, recognising a potential problem, also announced it is consulting on proposals to ensure bonuses can be clawed back from individuals. In response, John Van Reenen told me “strengthening clawback provisions is essential to reduce the rewards for failure. But they are unlikely to be enough: better governance and tougher competition is also required”. This isn’t about trashing the economy, it’s about making it more competitive so it works better for everyone rather than the few who got us into this mess in the first place. “Hey Jimmy, I have a job for you funded by those nice bankers”.  Good work.

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