Will employers’ gender pay gap figures tell us anything new?

The government is consulting on the detail of its proposal to force companies with over 250 employees to publish their gender pay gaps. We don’t yet know what information employers will have to give. Whatever happens, it will probably yield some interesting data  for wonks to pore over. Apart from that, though, I’m not sure it will tell us anything we don’t already know.

The last five years have seen a gradual fall in the full-time gender pay gap but the overall figure disguises significant differences. For women in their twenties, the gender pay gap had disappeared by the late 2000s. If anything, median pay for women has been slightly higher than that for men of a similar age for the last half decade. Over the same time period, the full-time pay gap for women in their thirties fell until it, too, disappeared. For those in their forties and fifties, though, there is still a big gap between the pay of men and women.

Gender Pay Chart 2014

Source: ONS ASHE

That’s not the whole story though. The age related pay gap gets more severe the further up the pay scale you go. Again, there is not much of a gap for women in their twenties. It’s during their thirties when men’s pay starts to pull ahead in the more highly paid occupations. In the upper income deciles, the thirty-something pay gap shoots up. Women at the 90th percentile earn 16 percent less than their male counterparts.


Source: David Richter, using ONS data.

It’s not difficult to see what’s going on here. The pay gap increases with age and seniority which, given the relationship between the two is perhaps not surprising. This is, by and large, the result of people having families and the decisions they take about who looks after the children.

Debra Leaker’s study for the ONS found that the gender pay gap increased with the number of children people had. More children made little difference to men’s earnings but had a big impact on the pay of women. She also found that there was no gender pay gap for single women.

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Women take the greater share of responsibility for child-care after leaving the workforce to have children and they often don’t return to the jobs they had before. Because they need to be near to their children’s schools, they are more likely to take jobs nearer home. As the Women & Work Commission noted:

Women, particularly women with children, tend to have shorter commuting times than men which limits the range of jobs available to them. This potentially leads to the crowding of women into those jobs available locally, and in either case, depresses wages.

On average, women who have children have a quicker journey to work than women without children. The travel-to-work time of women with more than two children is half that of their male counterparts.

Women often want shorter commuting times than men if they have children to drop off and pick up. Also, for women working part time, it does not make financial sense to commute long distances.

The report also found that the difference between commuting times was greatest in London. Longer commutes mean higher pay, especially in London.

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It’s therefore not surprising that, while the gender pay gap at the median has fallen during the past two decades, it has proved stubbornly persistent at the higher end of the salary distribution. The gap between male and female pay at the 90th percentile has hardly moved in the last 20 years.

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Source: House of Commons Library

Let’s take a hypothetical story of two accountants, Harry and Hermione. They both get good degrees from good universities and join the same City firm. Both start work in London on corporate and international assignments and both earn more or less the same. For a while, in her late twenties, Hermione earns more than Harry.

At around 30, Harry and Hermione get married. At 34, Hermione has her first child and has another a couple of years later. She tries to stick with her job in London but, in the end, the stress is too much and she and Harry realise that one of them will need to work closer to home. It never even occurs to Harry to volunteer so Hermione gets a transfer to the regional office near to their house, working in one of the firm’s back office functions.

Once the children are at school, Hermione returns to fee earning work but still in the local office. Here she works for local SMEs while Harry continues to work in London on the big corporate accounts with the bigger revenues and bigger rewards.

By the time the children are old enough to look after themselves, the world of corporate accounting has moved on and Hermione no longer has what the firm considers to be the right skills and depth of experience for the top-level assignments. The impressive network of contacts she had in her twenties has long since dissipated so her ability to generate new business is nowhere near what it was. She returns to work in the London office but never makes it to the senior ranks and never again matches Harry’s earnings.

Before anyone cries foul, I’m not singling out accountancy firms here. There are similar stories in any number of firms and occupations. This doesn’t just happen in London either. the scenario is played out in all our major cities. In whatever line of work, staying close to home limits career options and, in the majority of cases, it’s the women that do it.

PriceWaterhouseCoopers is one of a few employers to voluntarily publish its gender pay gap. It was 15.1 percent in 2015 compared to a national figure of 19.1 percent. Presumably this is an overall figure including part-time roles, as that’s what they have compared it against. Compared across grades, says PwC, its gender pay gap falls to 2.5 percent:

[W]e adjust this figure for the different gender demographic across the grades, as we have more men than women at our most senior grades, and the adjusted pay gap figure is 2.5%.

Most of the pay gap is accounted for by the different gender balance in senior and junior grades, which the firm also publishes.

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As you might expect, the further up the hierarchy you go, the greater the proportion of men. PwC’s gender and grade profile is probably not much different from that of any other professional services firm.

Whenever the gender pay gap is in the news there is usually talk of the need for more flexible working and family friendly policies. There are sound reasons for all these suggestions and there is no doubt that they have helped a lot more women to stay in the workforce. At the same time, though, they are reinforcing the gender pay gap at the senior levels. A lot of employers have put a lot of effort into helping women to downshift their careers when they have children. But the trade-off for flexibility is lower pay. The highly remunerated jobs are still done in the big glass towers in the city centre and they require your presence early in the morning and late at night.

Helping women to carry on working after having children also helps them to earn less. That’s why Scandinavian countries, which have done more than most to eliminate gender inequality, still have pay gaps only a few percentage points below ours. Good social democrats they might be but Scandinavian dads still leave their wives to do most of the childcare. Compare this with Italy which has almost no full-time gender pay gap because many of its women simply leave the labour force altogether when they have children. That’s the trouble with statistics. You need to get behind them to find out what is really going on

When details of employers’ gender pay gaps are published, they will show that almost every company pays men more than it pays women. Some firms will look better than the national average, others will look worse but most probably won’t be that far either side. It will be worse in some industries than others. The financial services firms will almost certainly be the worst of the lot but will probably not be that much different from each other. Unless more detailed figures are published, comparing the pay of people in specific jobs, it will be impossible to say whether a gender pay gap is due to something the employer is doing wrong or simply because that’s the way things are in that industry.

As Darren Newman said, the purpose of equal pay legislation was to stop specific forms of discrimination. It was never designed to address the underlying structural issues that lead to women earning less than men. Or, as low pay commissioner Neil Carberry put it earlier this week:

Publishing employers’ gender pay gaps won’t tell us much that we hadn’t already worked out. The PwC figures, for example, are interesting but not surprising. We will find out that men dominate the upper reaches of management and that pay gets more unequal with age. It will be worse in some industries than others but probably not that much different between employers in the same industry.

What we do with that information is anybody’s guess.


Someone just sent me this chart from Pew Research on the relationship between the full-time gender pay gap and the amount of parental leave countries give. Fascinating!

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The financialisation of slavery

Starting on Wednesday this week, the BBC is running a series Britain’s Forgotten Slave Owners. It is based on research by University College London which found that Britain had 46,000 slave owners in 1833, the year slavery was abolished in the British Empire. All are clearly identified in the records of the compensation claims. If you want to see whether any of your ancestors were involved, the database is here.

What has shocked many people is the sheer scale of slave ownership revealed by this research. It wasn’t just a few rich plantation owners. The wealthier middle-classes were in on it too. In those days, a lot of central London was still residential and the addresses of the slave owners are marked on these maps produced by UCL. In the well-to-do areas of Fitzrovia and Marylebone, slave ownership was widespread.

Recipients of slave-compensation who lived in the Fitzrovia area of London

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Recipients of slave-compensation who lived in the Marylebone area of London

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Should we be surprised by this? Given the number of British possessions in the Caribbean, their role in colonial trade and the importance of slavery to their economies, it would be astonishing if those who had money to invest didn’t put at least some of it into enterprises built on slavery. That people in Britain are shocked by this is because British slavery is something we don’t really talk about. We prefer to think of it as something that happened over there.

When he was elected president, Abraham Lincoln’s initial aim was to confine slavery to the Southern States. Events overtook him but, after abolition, the American entertainment industry succeeded in confining the blame for slavery to the Southern States. Thanks, largely, to the proliferation of American books and films on the subject, people tend to have a stylised view of transatlantic slavery. The two enduring images are the slave ships and the cotton plantations of the American Deep South.

But this is like reading the first and last chapters of a book. The shipping of Africans to the Americas, initially by the Portuguese, is the start of the story. The great plantations of Alabama and Mississippi were its final phase. By the time the cotton economy boomed, the transatlantic trade was over. In between, there were 300 years when most slaves were put to work growing rice, tobacco, coffee and, of course, sugar. Many of those slaves were in what became the northern states of the USA and in British possessions in the Caribbean.

Even when we discuss Britain’s involvement in slavery, we like to put a geographical boundary around it. Just as Americans like to see it as a Southern thing, we point to the grand buildings of Bristol, Liverpool and Glasgow as legacies of the slave trade. The UK release of 12 Years a Slave in 2014 kicked off a new round of breast-beating as our west-facing ports were reminded of their shameful past.

Now, though, thanks to the UCL research, we know that people all over the country profited from the slave trade. Many of them did not own land. Their slaves were managed by someone else and hired out to the plantations. The financialisation of the slave trade is a subject that has received very little attention but it enabled thousands of people who would never visit a plantation, let alone wield a whip or give an order, to invest in and profit from slavery. Small investors in the UK provided the expansion capital for the slave-owners and received handsome profits in return.

The financialisation of slavery reached its peak in the early 19th century. It enabled the rapid development of the Deep South’s cotton economy. The demand for cotton was increasing but the planters needed investment to get them going. In a detail that perhaps a lot of people missed, the plantation owners in 12 Years a Slave refer to mortgages on their slaves. They borrowed money, using their slaves as collateral, to finance their expansion.

Edward E. Baptist of Cornell University, author of The Half Has Never Been Told (HT Sunny Singh) explains how this finance was raised:

The cotton and slave trades were the biggest businesses in antebellum America, and then as now, American finance developed its most innovative products to finance the biggest businesses.

In the 1830s, powerful Southern slaveowners wanted to import capital into their states so they could buy more slaves. They came up with a new, two-part idea: mortgaging slaves; and then turning the mortgages into bonds that could be marketed all over the world.

Does something about that sound familiar? It should do.

The financial product that such banks as Baring Brothers were selling to investors in London, Hamburg, Amsterdam, Paris, Philadelphia, Boston, and New York was remarkably similar to the securitized bonds, backed by mortgages on US homes, that attracted investors from around the globe to US financial markets from the 1980s until the economic collapse of 2008.

[M]ortgage-backed securities shifted risk away from the immediate originators of loans onto financial markets while promising to spread out and thus minimize the consequences of individual debtors’ failures. Investors who purchased latter-day mortgage-backed securities planned to share in streams of income generated by homebuyers’ mortgage payments.

Likewise, the faith bonds of the 1830s generated revenue for investors from enslavers’ repayments of mortgages on enslaved people. This meant that investors around the world would share in revenues made by hands in the field. Thus, in effect, even as Britain was liberating the slaves of its empire, a British bank could now sell an investor a completely commodified slave: not a particular individual who could die or run away, but a bond that was the right to a one-slave-sized slice of a pie made from the income of thousands of slaves.

The slave-backed securities of the early 19th century worked in the same way as the mortgage-backed securities of the early 21st. They spread the risks and provided a means by which capital from all over the world could be channelled into the Deep South. This also meant that, even after abolition, British investors could still profit from the slave trade. They no longer owned slaves. Instead, they owned slave-based derivatives; financial instruments made up of mortgages on enslaved people.

I couldn’t find any information on the extent of British investment in slave-backed securities but the involvement of Baring Brothers in the design and marketing of these products suggests that there must have been considerable demand in Britain. (This was also, incidentally, the trade that took Lehman Brothers from Alabama cotton broker to Wall Street finance house, giving the bank’s history a fascinating symmetry.)  Even after emancipation, then, British investors were still profiting from the slave trade. As, too, were investors in other parts of Europe. Even countries like Germany, which had little direct involvement in slavery, provided finance through these bonds.

The financialisation of slavery led to its industrialisation. The cotton plantations were much bigger than those of the old Upper South. From 1831 to 1837 cotton production almost doubled. The demand for labour drove a massive transfer of slaves from the North and Upper South to the Deep South. Some historians calculate that twice as many people were sold south as were shipped to North America in the transatlantic trade. (For more on this see previous post.) Even after abolition, through their slavery bonds, 19th century British investors financed as much misery as their ancestors did.

This was no cover up though. None of the information has been kept secret. Because of the financialisation of slavery, there are detailed records available on production, management and ownership. The UCL team and Edward Baptiste simply went looking where no-one else had. It is convenient to put a geographic boundary around slavery and restrict it to the masters and overseers in the the Deep South and the Caribbean, or the captains of slave ships from Bristol and Liverpool. But it could not have happened on the scale it did without investment from the northern US states and Europe. Evidence of this widespread involvement in the slave trade was there all along. We just chose not to look for it.

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Osborne wobbles but 2020 is still a big ask

I have long thought that George Osborne would eventually have to scale back his planned public spending cuts. Sooner or later, the circles in the 2015 dilemma would wobble. Taxes would increase, cuts to services and welfare would be scaled back and the deficit reduction timetable would be lengthened. I didn’t expect it to happen so soon, though. I thought we’d get at least one more sabre-rattling budget before a combination of ‘unexpected events’ gave cover for a retreat.

So, like many other people, I was surprised when I saw the public spending projections. What looked insane in December and was modified to merely ludicrous in March now seems almost reasonable by comparison. The £42 billion cut in day-to-day public service spending has become an £18 billion cut with an extra year to achieve it.

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Source: OBR Economic and fiscal outlook

That’s not to say that there won’t now be significant reductions in public service spending. As Paul Johnson said, defence is the main beneficiary of the slower pace of cuts. It has been added to the ring-fenced departments:

The gentler path does not however represent a let up in the overall scale of cuts – other than for defence. Spending in unprotected departments (those other than health, overseas aid, schools and, now, defence) will still have fallen by about a third in real terms between 2010- 11 and 2019-20.

How has the Chancellor managed to slow the pace of public service cuts? By pushing the deficit reduction timetable out to the last year of the parliament, increasing taxes by £6.5 billion and cutting welfare by £12 billion.

And, of course, that’s where the problems start with all this. The welfare cuts will hit the working poor, as we knew they would. Given ring-fencing of other benefits there was nowhere else the axe could fall. The Chancellor has acknowledged that the only way tax credit expenditure can fall without impoverishing millions of people is if wages rise. It is by no means certain, though, that his living wage will make that much difference. I’ll go into this in more detail in a later post but there are lots of good reasons why it might not. Furthermore, the attempt to reduce housing benefit costs by holding down council and hosing association rents is really another cut to public service funding in disguise.

The impact of the budget proposals, on top of what had already been announced, are likely to be horrendous and, as this IFS chart shows, will fall most heavily on the poorest.

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Welfare cuts on this scale will cause a lot of distress to many of the hardworking families the government keeps telling us about and will create problems for the government just at a time when lots of other things are getting difficult. I still don’t think they are achievable and I don’t believe the government wants or is prepared for that kind of aggro.

If the cuts don’t, in the end, deliver £12 billion savings, the government will need to raise taxes, increase public service cuts or push its deficit reduction timetable into the next decade, which is what the IMF thinks will happen. I’m not sure George Osborne would want to miss his deficit target for another parliament but even this modified timetable is still a big ask. He had one wobble on Wednesday. Will we see another one before the decade is out?

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Feeding the property addiction

A couple of scathing pieces on George Osborne’s plan to cut inheritance tax.

Janan Ganesh in the FT (my emphasis):

A Briton sets up a business, risking her savings and employing people on the way. If she makes a profit, it is taxed. If she sells the company, she is taxed on the capital gain.

Another Briton buys a home. Through chronic undersupply in the market, or travesty of a market, the price goes up by half in a few years. The only tax on the property is paid to the local council, at bands set a quarter of a century ago. If the homeowner sells, and it is his only house, he incurs no tax.

Yet another Briton inherits a house worth, say, £600,000, three times the national average. She pays no tax.

One of these capital-rich individuals built their asset from nothing, one bought theirs and watched passively as it grew and the other’s principal talent was the dumb luck to be born into the right family. It takes an obtuse theory of justice to tax them in anything other than ascending order. The British state does the opposite.

And Chris Dillow:

For every pound UK banks lend to manufacturers, they lend almost £36 to home-buyers: £35.3bn vs £1264.8bn (pdf).

If people are looking to get rich merely from rising house prices, they’ll be diverted from productive activity.

“Our rich are job-creating innovators,” said Chris Blackhurst after the Sunday Times Rich List was published. Some of them are but, unless you count investing in an ever-rising property market as innovation, most are not.


Even those great British entrepreneurs who started with next to nothing usually invest in property as soon as they have made enough money. Even the leftie ones do it. And who can blame them? They’d be daft not to. Building a business is hard. Parking your cash in the UK property market is a much easier way of making money than developing new products or services.

But, as that comment in the Mirror’s graphic says, to invest in property you need a lot of money to begin with. You can’t start up with a few hundred quid and make your fortune. Property investment doesn’t take you from rags to riches, it takes you from riches to a lot more riches.

The distribution of property wealth is much more uneven than that of income. The Gini coefficient for household income after tax in the UK is around 0.35. For annual pre-tax income it is up at 0.5. (See previous post.) For property wealth, though, it is 0.64.

That’s not just because of the super rich though. As Janan Ganesh points out, much of the property wealth is the fossilised income of older middle earners based on houses bought when middle incomes were relatively high and which have shot up in value since.

Compared to other G7 and EU countries, the UK has one of the highest levels of property wealth per adult.

Non Financial wealth

Source: Credit Suisse Global Wealth Databook 2014

ONS data shows that property forms the largest single component of wealth in the fourth to eighth deciles of the distribution. The rich have their wealth spread across a range of assets but for those in the middle, most of it is tied up in their houses.

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Which is why, as both Chris and Janan say, taxing it is unpopular and reducing taxes on it gets votes.

For the economy as a whole, this is bonkers. Our tax system penalises those who generate wealth while going easy on those who just sit and watch it grow. If, or more likely when, taxes rise, it would make sense to tax property. A land value tax, for example, would be more progressive than income tax, would collect tax from some people who currently don’t pay it and would help to redistribute income to younger generations. It would also discourage land-banking and encourage investment away from property and into more productive activity.

It is unlikely to happen though. Too many people are too wedded to the idea of watching their property value increase. Our tax system is perverse. It reinforces Britain’s preference for property speculation and rental income over business investment. With his inheritance tax proposal, George Osborne will make it that bit more so.

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Grab a graduate

London is full of European graduates doing admin jobs, so an HR director told me a few weeks ago. It’s a theme I’ve heard a lot over the past couple of years. Bright young Europeans are coming to the UK and doing jobs for which they are overqualified. This not surprising, given the economic problems in some EU countries but that’s not the whole story. Working in London is good for the CV and helps people get better jobs when they go back home. One Spanish graduate told me that working in the UK is almost a pre-requisite for getting a good job in Spain. If you haven’t worked abroad, she said, employers think less of you. A stint in London, then, is almost becoming an extension of a young person’s education.

So much for the anecdotes, though. Is there any evidence behind this?

I spotted this chart in last week’s OECD report on immigration.

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Since the recession, the UK’s over-qualification rate among non-native highly educated workers has risen by one of the highest rates in the OECD. This suggests that a lot of well-educated people have found work in the UK but in relatively low skill jobs.

A recent report on skills by the Institute for Public Policy Research (IPPR) found that, during the last decade, the number of highly qualified workers in Europe rose faster than the number of highly skilled jobs.

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It also found that, compared to the rest of Europe, the UK had a relatively high number of graduates overqualified for the work they were doing.

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Last year, research by the CIPD found that over half the graduates from the old Eastern Bloc countries were employed in low-to-middle skill work.

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It also pointed out that EU migrants are concentrated in the 25-34 age band. In other words, most come to the UK when they already have some work experience. Graduates from the EU arrive here work-ready with good qualifications and, usually, excellent English.

Most of the employers surveyed in the CIPD study said that they did not recruit migrant workers as a way of paying lower wages or avoiding training investment. Nevertheless, the report concludes that the increase in the number of graduates from the EU has made competition harder for Britain’s youngsters.

[T]he evidence in this report suggests that, particularly in low-skilled jobs, the availability of EU migrants, especially those from EU8 nations, has added to the competition facing young UK-born workers.

This report shows that EU8 migrants are disproportionately represented in low-skilled jobs and are likely to have more employment experience and to be better qualified than young UK-born workers going for the same type of employment.

The competition for jobs in the low-skilled segment of the labour market has been amplified by the squeeze in the number of mid-level-skilled jobs that exist in the UK.

At a Resolution Foundation event earlier this year, Andrea Salvatori presented some findings from his work on job polarisation. He looked at the change in the composition of occupational groups over the past 3 decades. There are more graduates doing middle skill jobs now than there were 30 years ago while “non-graduates have also seen a major shift in the distribution of their employment from middling to bottom occupations.”


Not only are there fewer mid-level jobs but a lot of those that used to be done by non-graduates are now filled by people with degrees. Those without degrees are finding the competition tough. As Tony Dolphin pointed out last year, it is becoming very difficult for people without qualifications to maintain their position on the skill ladder.

Mid-skilled workers who lose their jobs initially try to find a comparable job that makes full use of their talents. Some succeed but, because of the shrinking number of mid-skilled jobs, many do not. They do not have the qualifications to move up the skills ladder, so eventually they are forced to move down it and compete for low-skilled jobs.

For young people with little work experience, it’s even harder. This comment in the CIPD report is telling:

Some employers expect oven-ready young people who leave school pre-equipped with the self-management and employability skills to immediately succeed in the workplace.

Or, as one HR manager told me recently, “You can get graduates with excellent English and 2 years work experience willing to do clerical jobs. And they’re good at them. What’s not to like?”

There’s a lot not to like, says the CIPD:

Put simply, we have too many low-road employers in the UK, competing on low cost and not enough who are building competitive advantage through enhanced leadership and management capability, effective work organisation, job design and smart learning and development interventions.

A couple of months ago, I wrote about some remarks Alison Wolf made about the impact of immigration on training, noting that the decline in training investment coincided with the rise in immigration. According to the most recent UKCES data, training spend per employee and per person trained is now lower in real terms than it was in 2005. Maybe she’s onto something. After all, why go to the bother of training people when you can just grab a work-ready graduate?

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Productivity stuck on auto-creep

Tim Scott’s piece on productivity earlier this week led me to this ACAS report on the subject. As you might expect, they focus on what has been happening in the workplace:

A range of macro solutions have been offered by Government and others, including capital and financial investment in infrastructure. But it is now understood that these can only yield lasting improvements if workplaces are operating at their best. The way workplaces are organised, the part played by managers and leaders, and the role and involvement of employees can help deliver better outcomes for individuals, organisations and the economy.

In an ACAS paper published in February, Ian Brinkley remarked:

The macro-economists have tortured just about every dataset they can get their hands on in just about every way possible.
It is always possible that a new insight will provide the missing part of the explanation, but so far we are coming up short.

In other words, lots of very clever people have looked everywhere and still can’t work out what’s wrong.

He continues:

There is a growing consensus that the bit of the productivity puzzle we cannot easily explain is based on what is going on in the workplace – in other words, there is a significant part of the fall in productivity shortfall that is attributable to employment relations in its widest context.

Or, as Tim says,“It’s the workplace, stupid!”

A recent paper by the National Institute of Economic & Social Research (NIESR) suggests they might be right. The productivity fall, say the report’s authors, has happened across the board.

The most striking feature is the widespread weakness in total factor productivity within firms, pointing to the importance of a common factor in explaining productivity weakness.

Commenting on the paper in the FT, Matthew Klein says:

Adding to our confusion is a fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector and (mostly) can’t be blamed on the inability of good firms to grow at the expense of bad ones. Moreover, there is no noticeable difference in the performance of companies that relied heavily on bank lending before 2008 and those that didn’t, nor is there a significant difference between big and small companies.

Rather, all businesses experienced a big drop in underlying productivity since 2008.

So the collapse in productivity isn’t because of dependence on bank lending nor zombie firms taking resources that should go to better ones. The productivity problem can’t be blamed on the skill level of the workforce either. What we seem to be seeing is a general and sharp decline in productivity across UK organisations.

So what has happened? What has been going on in Britain’s workplaces?

The NIESR report makes a suggestion, though, tantalisingly, it leaves the discussion for another day.

[We conclude that other common factors, which we do not explore in this article, for example general demand weakness coupled with flexible wages, are likely to have been central in explaining the stagnation in UK productivity growth.

This goes back to the hand car wash argument, where cheap labour means that firms don’t need to invest in equipment. Instead, new and existing firms just find ways of profiting from the ready supply of cheap labour.

Some might argue that the labour market needs to be more flexible so that managers can push workers harder and sack those who don’t perform but recent IMF paper concluded that labour market deregulation does nothing to improve productivity and might even make it worse.

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Research in the US and in the UK, France and Germany has shown that unfair dismissal laws encourage firm level innovation. by providing protection for employees to take risks and by encouraging firm to take risks on new projects.

A flexible labour market and stagnant wages, therefore, might have the opposite effect. When managers have more power, employees keep their heads down and their bosses get lazy.

As Gary Miles of Roffey Park said when the Beecroft proposals were announced, removing employment protection lets poor managers off the hook. It absolves them from tackling performance issues. If it gets easier to sack people without explaining why, you don’t need to spend time trying to understand the source of the problem, you just blame the worker, sack him and get someone else. Of course, Beecroft’s proposals were not enacted but the raising of the unfair dismissal threshold and the introduction of tribunal fees has had a similar effect. An employer’s risk of being taken to a tribunal is much reduced.

All this is circumstantial, of course but so far, every attempt to explain the productivity puzzle has drawn a blank. The UK’s stagnating productivity has come at a time when employment protection has been eroded, training investment has been in decline and non-regular employment, such as zero hours contracts, self-employment, temporary employment and part-time work, has increased. As I said earlier this year, the productivity puzzle leaves Britain’s managers with some serious questions to answer. With one of the largest graduate workforces in the EU and one of the largest shares of high-skilled jobs our productivity should be higher than it is.

Like ACAS, the UK Commission for Employment and Skills has been calling for improvements to management practices for some time. Yesterday, Sara Mosavi said that management needs to shift up a gear if Britain’s productivity is to be improved. She’s right but when cheap and flexible labour allows you to coast along on auto creep and still make money, why would you bother?

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There’s a bit about Fastow’s hero-to-zero story I still don’t get

I was at the FT’s Camp Alphaville yesterday. It was an excellent event but it was on Britain’s hottest July day on record and the whole thing was in tents. As I don’t much like the heat, I stayed in the main tent, which had big cooling units in it, for much of the day.

I’m glad I did because it was there that I saw the fascinating presentation by Andrew Fastow, the former CFO of Enron. He started off by confessing his guilt, admitting his part in ruining thousands of people’s lives and saying that he deserved to go to prison. Then he began to tell the story of his fall.

First he held up his CFO of the Year award from 2001. Then he held up his prison ID card. Both, he said, he had been given to him for doing the same things. Describing himself as the Chief Loophole Officer, he explained how he had exploited the grey areas of the law to conceal a lot of Enron’s borrowing, thereby presenting a misleading picture of the company’s finances.

Here is an example:


(Picture by Neil Hume)

Instead of Enron borrowing $970 million for a pipeline, the bank set up a company which acquires the pipeline. It then allowed Enron to use it for a fee and a guarantee to cover its maintenance, any risks associated with it and its de-commissioning or re-sale afterwards. The bank put up the money and Enron paid it for doing so but legally the transaction was not a loan so didn’t have to be declared as such. It looked and sounded like a loan but, as far as the accounts were concerned, it wasn’t.

“There may be a fundamental difference between a company following the rules and a company presenting a true picture of its financial position,” he said. To illustrate this, Fastow told us the touching story of how he explained his conviction for fraud to his 15-year-old son, during a prison visit.

Let’s say your rule is that you will not drink any alcohol when you go to parties. Other kids try to persuade you to have a drink but you refuse and stick to your rule. Then a friend tells you he has this alcoholic beer-flavoured sweet. If you chewed that, you wouldn’t actually be drinking alcohol so you wouldn’t have broken your rule. Would this be OK? “Of course not,” his son replied. That, explained Fastow to his son, is the difference between breaking the principle and the rule. “I’m the guy who chewed the beer pill.”

The trouble is, in corporate America, lots of people were chewing beer pills. The creative accounting for which Andrew Fastow won his award was accepted practice in may organisations, including Enron’s competitors. If you weren’t doing it, your company would be at a disadvantage. Everything he did, he insisted, was signed off by Enron’s auditors, its lawyers and the board. At one point, Fastow calculated the amount of debt that the company was hiding and took the spreadsheet to the board. Instead of being concerned by the level of debt, the board congratulated Fastow on the great job he was doing keeping it off the books. That, he said, showed the mindset that they were in. No-one thought they were doing anything wrong. Furthermore, he said, a lot of people in large companies still don’t and similar things are still going on.

These days Andrew Fastow lectures on business ethics and he told a great story about a task he set for a group of students. He gave them some company accounts and asked them to work out the debt-to-asset ratio. He then asked them to go through the accounts, find the footnotes, work out how much debt was off-balance sheet and do the calculation again. This time, the debt-to-asset ratio was more than twice that of their original figure.

Asked for their views on the company, the students were clear. There is no way they would invest in it or work for it. They wouldn’t go anywhere near such an unethical organisation. Fastow then told them these were their own university’s accounts. The students were outraged. They would complain to the university authorities and demand that they come clean about the debt. But then Fastow explained that, if they did that, fees would have to go up by 10 percent. At this point, the students’ indignation evaporated and they unanimously decided to take no further action. “It took them 4 minutes to sell out,” he said.

And that’s why so much off-balance-sheet accounting still goes on. The rewards for sticking to the rules while ignoring the principles are too great and if all your competitors are doing it we, you’d be daft not to, wouldn’t you?

It was an interesting and entertaining talk. Andrew Fastow held our attention for well over an hour. He ran over but nobody minded. The FT has a write up of the session here.

I was still left with some nagging questions though.

Maybe I missed it but it wasn’t clear at what point his activities crossed the line from unethical to illegal. Perhaps that was the point he was trying to make – that he isn’t sure either. After all, lots of other people were doing it and Enron’s gatekeepers approved all of it. In which case, either there is something he is not telling us or lots of other people who should have gone to prison never got caught. What is more, if similar deals are still going on, are lots of other CFOs risking prison if their companies collapse and they get found out?

Or is it that Andrew Fastow was the example, the sacrifice, after which people learned to cover themselves more effectively so that they could carry on exploiting loopholes without the risk of prosecution?

He has done similar speeches around the world and I’ve looked at some of the write ups but I’m still none the wiser. I’m also no expert in US corporate law and I have only a superficial knowledge of the Enron case, so there may well be something I’ve missed.

Nevertheless, I’m still left with the question. Could it really be that the very same deals that won Andrew Fastow an award in 2001 got him jailed in 2006? If everything he did was within the rules, if lawyers and accountants approved it, and if lots of other people were (and still are) doing it too, how come he went to prison and very few others did?

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