Economic inactivity by reason (aged 16 to 64)

More people are in work than ever before claim the DWP triumphantly as the unemployment figures show another huge rise in self-employment. Whether these people are making any money, or whether they are pensioners with an ebay hobby, does not seem to matter as the Tories attempt to spin that Iain Duncan Smith’s welfare reforms are working.

Yet all that has happened is the economy has started to grow a bit and so unemployment has fallen a bit. This is what always happens when economies start to grow – and due to a rising population there are almost always more people in work than ever before unless there is a severe economic downturn. It matters barely at all what governments do to unemployed people – in a recession unemployment goes up, and in a recovery it goes down. This is because unemployed people are not responsible for unemployment, despite the multi-billion pound welfare-to-work scam pretending that they are.

But falling unemployment may be good for the country’s economy, but that doesn’t mean it’s a good thing for the people who actually live and work here. The key to this lies in the figures for Economic Inactivity, currently at its lowest level since 1990 according to the ONS. This is seen by politicians of all parties as a good thing. A closer look reveals that is far from the case.

The largest group of people who are economically inactive are those looking after a family, many who will share in their partner’s salary. The second largest group is students, whilst there are also 1.31 million people who have been lucky enough to retire before reaching pensionable age. The other groups include those who are long term sick, whose numbers remain fairly stable, and a million or so ‘other’ – students on a gap year perhaps, or volunteers who can afford not to claim benefits.

If the number of people who are ‘Economically Inactive’ is falling, and it is, sharply, then that means less young people who can afford to be students. It means less parents being able to afford to stay at home with young children, and less people able to afford to take early retirement. This is not good news if you happen to be one of those people, in fact it’s a bit shit.

What it also means is that these often more experienced workers remaining in, or rejoining the workforce, are crowding out those who are unemployed and desperate to find a job. This is almost certainly one reason why despite claims that hundreds of thousands of new jobs have been created, unemployment stood at 2.46 million in the first period after this Government weren’t elected and has since fallen to just 2.24 million. It could also explain why the number of people unemployed over 12 months was 796,000 in August 2010 and after four years of welfare reforms, workfare and sanctions aimed at this group the number has actually risen to 807,000.

A fall in Economic Inactivity really represents a downward shift in the living standards of everyone. Those who are slightly better off are having to work longer and harder, and those at the bottom are more marginalised than ever. It’s good news for the bosses though, as more people are chasing every job and driving down wages for us all. And for the Tories – who can’t bear the thought of a pleb taking early retirement when they could be slaving for another few years – it’s the best news of all.

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The rise in super-salaries has nothing to do with performance and everything to do with keeping up in a status race

Will Hutton
The Observer, Saturday 19 April 2014 20.00 BST

Even American eyes are starting to pop at the sheer extravagance of executive pay. Last week, the New York Times published its annual league table of chief executive pay at the US’s top 100 publicly quoted companies. The average has now climbed to $13.9m (£8.3m).

That is nearly twice the average of £4.4m for CEOs within Britain’s top 100. But since America’s top 100 companies are, on average, around three times larger in terms of turnover than our own, one could argue that executives are even better paid in Britain.

A growing number of US commentators are asking, as are some of the braver remuneration consultants, just why executives in America need to be paid so much. The LA Times, for example, headlined one opinion piece “Obscenely high salaries are stark reminders of US wealth gap”. The NYT talked about the dark side of executive pay driving US inequality. What do these men – and 91 of the 100 are men – actually do with so much money?

The rationale is that such pay is needed to drive “performance”. One of the eye-catching examples was Oracle’s Larry Ellison, already the world’s fifth richest man, who collected $78.4m in 2013. But does he need so much cash to push Oracle’s performance, and if so, why does Larry Page at Google need only $1m? It was true that 26 CEOs on the list saw their remuneration fall slightly, but that was more than offset by some astonishing and quirky rises. A fall in any one year is quickly compensated by a vast increase later.

It is beginning to be obvious that performance has hardly anything to do with the sustained rise in executive pay. Why should British CEOs in charge of smaller, generally less complex companies be paid proportionally more than their counterparts in the US? Does it make sense that 60% of pay comes in options to buy shares, so that executive focus is wholly on doing those things – cutting investment, avoiding risky innovation, using cash to buy company shares etc – that keep up the share price. CEO pay has been sky high in the US for a decade and has doubled in Britain over the same period, but has economic and corporate performance been that stellar in either country? Some economists argue that it is the direct cause of the collapse of business investment in both countries. Even the most eloquent apologists are increasingly mute.

The answer is that these “super-salaries” have almost nothing to do with performance and everything to do with CEOs keeping up with each other in a status race. In my interim review on fair pay for the UK government three years ago, I noted that one of the best determinants of any CEO’s pay in the US was the size of his or her social network. The more examples of highly paid members in one’s network, the more generous a remuneration committee felt it had to be. Ellison will doubtless point not to other CEOs of publicly quoted companies to justify his pay, but to Leon Black, chair of the private equity group Apollo, who pocketed $546m last year.

In Conspicuous Consumption, a book published in 1899 when inequalities in wealth and income matched those of today, economist Thorstein Veblen captured this social dynamic well. There is a logic to the already very wealthy needing more wealth: they show it off to demonstrate where they are in the social pecking order. Veblen writes that, while the livery worn by personal servants, the nature of pets and the grandness of parties may seem to be economically irrational if not futile, to the very rich, these are subtle, socially honed indicators of standing.

For example, rich men’s wives at the end of the 19th century had a particularly important role, he argued, as highly visible ” ceremonial consumers of goods”. The sophistication of the household they ran, the quality of its furnishings and the extravagance of their clothes indicated the standing of their husbands. They had transmuted from being male chattels, said Veblen, to becoming lead players in driving conspicuous consumption. Economically irrational, certainly, but in social terms wholly comprehensible.

We now live in an era of “conspicuous executive pay” – only understandable as a social phenomenon because its extravagance has ceased to have economic logic. In the 1890s, Veblen observed that one of the reasons sports such as shooting and yachting were so attractive for conspicuous consumption was that they were the best ways of acting on predatory, aggressive, “aristocratic” behaviour – crucial to the very wealthy – but in a peaceful way.

So today the successful CEO shows the predator instincts behind his success by doing something extravagantly but peacefully competitive – taking part in the America’s Cup (Ellison), ballooning (Richard Branson) or racing at Le Mans. Owning an island in the Pacific (Ellison owns Lanai in Hawaii) or Caribbean shows your need for extreme privacy and luxury – the quintessential expression of a natural aristocrat. Meanwhile, your exquisitely dressed partner – usually but not always a wife – runs a household in Manhattan or central London with an underground cinema and swimming pool and top private chef. The sexes may have grown more equal between the 1890s and the 2010s, yet it is still women – as wives – who are typically leaders in “ceremonial consumption”.

The problem is that these are no longer the harmless peccadilloes of the super-rich needed to incentivise performance. Rather, the US and British economies are increasingly being run to deliver these lifestyles but with disappointing wider economic results.

What can be done? Cornell University professor Lynn Stout proposes that all tax relief should be withdrawn on any CEO pay packet that is 100 times the minimum wage – ” simple and sweet”. The Brookings Institution’s Leonard Burman suggests that income tax brackets should be adjusted for inflation and for target levels of income inequality. Financial Times money editor, Merryn Somerset Webb, argues that all gifts of capital during life or as inheritances – and I would include selling profitable share options – should be taxed as unearned income. You could add a twist and adjust the gift tax rate to achieve target levels of wealth inequality.

There are remedies: what is needed is the political coalition to deliver them. The dilemma is that society needs successful business and politicians, especially on the left, do not want to be painted as anti-business. Yet something must be done. The reaction last week to the NYT figures suggests a long overdue change in the US debate, which sets the tone worldwide. From this year, for example, US companies are compelled to publish the ratio of top pay to the median (which I also called for in my pay review). It’s a straw in the wind – and Labour, if elected, will follow suit. Maybe, just maybe, the times are a’changing. They need to.

observer