My UCC colleague, Vittorio Buffachi had an op-ed in the Irish Times yesterday supporting Jeremy Corbyn's proposal of a salary cap to address income inequality. Unlike the critics cited in Vittorio's article, I would not describe Jeremy Corbyn’s proposal as idiotic or lunatic, but neither is it an effective way of addressing the problem of income inequality.
Opposition to the proposal is characterised as a neoliberal response that places the market and incentives above all else. This may be true of some of the ideological opposition, but the most fundamental problem for me with the proposal is that it would be ineffective and inefficient. There are better ways to reduce inequality than implementing and monitoring a pay cap for high earners.
First it's necessary to address one of the arguments in the article, which is that “there is an assumption that inequality between wages is the best way to stimulate productivity, since the prospect of earning a high income is the only incentive behind economic activity”. I think this a bit back to front. Differences in productivity lead to differences in wages. There is little evidence that increases in wages stimulate productivity improvements, and what increases there may be are short-lived.
The assumption in labour markets is that businesses pay individuals more because those individuals can generate more income for the business. For example, we see what appear to be obscene salaries earned by professional footballers, but these are driven by the earning potential of clubs from having these players in their team. Oscar moving to a Chinese club is earning multiples of what he could earn in England. He has not become a better player – in fact he’s probably going to be less effective with poorer team mates – but he will be more productive (based on our narrow and limiting measure of productivity) because the club will generate revenue for more ticket sales, on-field success, and merchandising.
There are complications of course in measuring a worker’s productivity and the extent to which it is attributable to her, and/or the equipment she uses, and/or the combination of her abilities with co-workers. There are also the effects of bargaining power between businesses and workers that can mean workers are ‘underpaid’ where there is, for example, higher unemployment, or ‘overpaid’ where they have specific, highly demanded skills. When it comes to executives of course there is also the problem that their pay tends to set by colleagues on the board of directors, rather than market effects, and we get an insider problem.
Returning to the salary cap, I think it is likely to be ineffective partly because high-earners tend to have more than one source of income, and also have opportunities to structure income in different ways. A base salary is rarely the entire remuneration of executives. A salary cap will simply see an increase in more creative means of payment, such as share options, pension payments, and non-vouched expenses. Monitoring and implementing this becomes an ineffective use of resources. We’ve seen in Ireland how hard it is to monitor and implement salary caps in the health services, banks, the banks' regulator, and universities. The salary cap becomes little more than a symbolic gesture, though this is not to dismiss the importance of symbolic gestures at times.
However, if the real target is income inequality then more effective measures would include the introduction of a basic income for all citizens, which would ensue basic financial security and reduce inequality from the bottom-up rather than the top down. A salary cap would reduce income tax take from high-paid workers, leaving low paid workers in absolute terms either no better off or worse off from less government spending power.
Along with a universal basic income, a wealth tax (as suggested by Picketty) would be far more effective in addressing income inequality – as opposed to wage inequality which is only a subset of income inequality.
It is now generally accepted that, of all the EU members, Ireland has most to lose from a hard Brexit, not least because of the level of trade between Ireland and the UK. This explains the anxiety shown by Irish politicians, government agencies, and the Irish media on Brexit since the referendum shock las June. Despite all of that attention, there remains too much uncertainty about the Brexit process to estimate the precise effects.
History and geography has tied the Irish and UK economy together through trade, and while the share of trade between the countries has reduced since both joined the European Union, they share approximately €1 billion in trade every week. The impact of, at best, currency fluctuations and, at worst, the imposition of tariffs will be substantial and damaging. Brexit will be painful for the Irish economy, and the harder the Brexit the more pain we can expect.
It is unlikely that 2017 will bring about much more clarity on the likely outcome of Brexit. If Brexit is to happen then the preferred ‘soft Brexit’ option would leave the UK within the European Economic Area with access to the common market. The dreaded ‘hard Brexit’ would mean the UK negotiating a bilateral trade deal with the EU which is likely to see the introduction of trade barriers and tariffs.
The softer options are better for the UK and for Ireland, though they may involve UK contributions to the EU to access the single market and/or free movement of people between the UK and the EU. Both of these would not be politically palatable in the UK.
What we can expect in 2017 is for Prime Minster Theresa May to trigger Article 50 and begin the process of negotiating the difficult process of extricating her country from the EU. She has committed to doing this by the end of March. The British government clearly doesn’t have a plan for Brexit and is scrambling to find one. This explains the sometimes contradictory messages coming from the British government and meaningless statements such as the “red, white, and blue Brexit”. The Conservative government has committed to providing a strategy for Brexit to parliament in advance of invoking Article 50. It is unlikely that strategy will be comprehensive or enlightening, and the government will claim that a more detailed plan would hamper their negotiations.
In the meantime, EU leaders sit and wait for the British to get their act together. There is little incentive for Chancellor Merkel, President Hollande, and other leaders of larger EU members to adopt anything other than their best poker faces. The Brexit process is unprecedented and triggering Article 50 will set in train a series of negotiations whose outcome is unpredictable. In this context it makes sense to be non-committal and let the British come with their opening offer. Even after a formal application to leave is submitted, the European leaders are unlikely to prioritise Brexit negotiations. They have their own domestic concerns with elections scheduled in France, Germany, and the Netherlands in 2017.
Two critical factors that will need to be clarified early in the negotiations process are whether an Article 50 application to leave can be withdrawn and whether there can be a “transition period” beyond the two years allowed for in Article 50. It is difficult to overstate how substantial the Brexit process will be. For example, the UK has not negotiated a trade deal on its own in over 40 years. It is unlikely that any civil servants have experience of doing so. EU laws, rules, and regulations are embedded in British laws over the last 40 years and it will be arduous to unpick all of them.
There is a risk that 2017 could also see a UK election. It could be prompted by Prime Minister May seeking to strengthen her hand going into negotiations and trying to take advantage of ongoing Labour party troubles. On the other hand, perceived failures in negotiations might embolden Brexiteers to seek to replace her as Conservative leader. Signs that EU leaders are being tough on single market access and the movement of people could feed perceptions among hardliners that the unwelcome soft Brexit has to be opposed from the top of the government.
Ireland has more at stake than any other EU member from Brexit. However, our worries are not likely to be eased much in 2017 as British and EU leaders begin negotiations. The ultimate shape of Brexit will only emerge in 2018 and beyond, and in the meantime we can expect more uncertainty and posturing from British and EU leaders. The Irish need to persist in making our case, but it may be some time before the decision-makers turn their heads to listen.
I'm an economist so many of these posts will be about economic issues. But since everyone is allowed a view on economics I am inclined to go beyond my profession to throw my tuppence ha'penny into other issues.