Who Pays Your Wages?


The notorious £1m bonus of RBS boss, Stephen Hester, was being defended on Radio 4 on Friday. I'm not going to have a go at the interviewee (Christopher Wheeler, an analyst at Mediobanca) – it was a difficult job to defend a bonus of nearly £1m when everyone, even the government and the Daily Mail seem to think it's wrong, and anyway, Hester has now said he won't claim it. I just want to pick up on one comment :


“... unfortunately businessmen have to generate the revenue to pay for public services and that's one of the reasons they get paid a great deal of money; they have a lot of jobs to protect and more importantly to generate hopefully funds where we can do all these things which we need to do in the public sector.”


A similar comment was made during the pensions strike last November. It sounds like common sense. However, I believe it is insidious and wrong. There are differences between the public and private sectors in the degree of competition and how we choose whether we pay for them, and you can argue whether this means either sector is more cost-effective than the other in any particular circumstances but that is not what was being claimed. The implication was that the public sector somehow rides on the back of the private sector, that bankers earn the money to pay for teachers.


Intuitively it sounds correct, so what is it about it that's right? Most of public sector pay comes from taxes of one sort or another (but not all: there are fees and charges and other income). But public sector workers pay those taxes too, so everyone is paying. In the same way, we pay the wages of advertising executives when we buy products (and we don't have much choice in where the money goes).


But there's also an interpretation where the private sector does the 'real work', the work that counts, that they produce real wealth and that public sector work is an add on, that it is using that wealth to do other, 'nice to have' things. But in what sense are bankers producing 'real wealth'? If you were going to count anything as 'real wealth' it might be things we couldn't live without – food, water, (air) and perhaps clothes and accommodation. But the rest of the economy doesn't really 'live off the back' of those industries – rather they are basic needs which have to be satisfied before others are.


Another difference might be that the private sector produces 'goods', the things people want and consume while the public sector clears up problems. That doesn't quite work though. Yes, someone in some sense 'wants' private sector output, because they are prepared to pay for it – but the same goes for the public sector; we just choose through the democratic process. And is a derivatives trader or a weapons manufacturer producing outputs that consumers want more than, say, a town park?


If it’s not the nature of the product, maybe it’s something to do with the money. Perhaps we use real money to buy private sector products whereas when we pay taxes that go towards wages to produce services in the public sector it’s … it's … hmm, not sure that one works really.


Or is the key difference that you pay general taxes that go towards lots of different things once a year while in the private sector there are lots of individual transactions. Not really, because you can equally pay annual subscriptions for bundles of services in the private sector (or pay for specific services, like parking, in the public sector).


No, both the public and private sectors produce products and services that are in some way wanted which are paid for in a variety of ways. The output of one sector is not inherently more valuable than the other. For both sectors, the production of those outputs requires labour and capital which could be used for something else.


Where there are differences between the sectors is in markets, tradeability and choice. While even this isn’t totally black and white, (you could choose to live in another local authority area), there is more truth to this. Markets are a pretty efficient mechanism for resource allocation in some circumstances. Competition can drive improvement. But they are not the only, or always the best means of doing that. Is one office worker going to work harder because their organisation operates in a competitive market than another who is there to produce public value? It is an empirical question of when public, private or some other form of organisation is best (with an ethical dimension, such as what outcomes do you take into account and how do you value them – for instance the cost of people being tired and stressed against a given level of increased output).


Those arguments about public vs private, (and increasingly co-operatives, mutuals etc.) have been going on for a long time and will continue. But what they do not support is an argument that the private sector “pays for” the public sector. That is an assumption that insidiously supports an unwarranted set of prescriptions, such as defending bankers' bonuses while cutting the public sector.

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Gavin Crosby 9 Years Ago
thanks for this Adrian, i find the implication that dedicated and competant workers will only be attracted to hugely paid jobs insidious as well. Most of the comments in defense of the bonus seem to suggest that 'if you want the best, you need to pay' is the only argument at play . It seems to me though that once you've broken through a certain pay point this becomes completely irrelevant. It kind of suggests that anyone who earns more like the average wage cannot possibly be the best at their job, and if you are not motivated by a bonus approaching 100% of your salary then you cannot be expected to be giving 100% to your job. We all know that's not correct - particularly in my area (youth work and community learning) where so many fantastic services are delivered by volunteers. Now i'm not belittling the skills of Mr Hestor, I'm sure he has worked at management, leadership, risk taking, etc etc. over his long career, but to suggest that no one would do a similar job for half , a quarter, less even money is ridiculous. If i had been recruiting to that position, clearly i'd want someone with a proven record in the field, but i might also be wanting someone who was motivated by the possibility of rescuing money for the nation, not just for themselves.
Adrian Barker 9 Years Ago
Gavin, Thanks for the comment. I tend to agree with you. The pay can't be justified on the grounds that it's needed to motivate people. There is a sense in which it is 'the going rate' but only in that those involved have decided to award themselves inflated pay and they then compare themselves with each other. Part of the solution must be a change of attitude and culture to one which sees such disparities as unacceptable. Adrian
Colin Devon 8 Years Ago
Bit late to comment but as Tim Harford puts it, we are all wealth creators .