Counting Peanuts in the Monkey House

How much should we pay MPs, given that there is no objective criteria to determine their salaries? There isn't a market that can provide a "clearing price", and the suggestion that candidates should make salary bids part of their election manifesto would institutionalise corruption. Nor is there any obvious measure of productivity, unless you want to encourage a greater output of poorly-scrutinised bills. Even international benchmarks are unhelpful as there are widely differing approaches to pay, expenses and outside earnings. The popular answer is that their pay should reflect our subjective opinion of their relative worth, which is a social judgement, not a market evaluation - i.e. closer to a form of barter than monetary exchange, so one MP equals three estate agents, or 0.75 of a brain surgeon.

This belief is founded on an assumption about class and rank, hence the tendency to use roles with traditional social standing, such as lawyers, doctors and headteachers, as the peer group. The problem is that 30 years of neoliberalism has seen these roles transformed in two ways. First, they have benefited from widening income inequality as part of the upper half of the middle class. As the earnings of the top 1% have accelerated away, this has helped drag the earnings of the next 9% up. Second, they have become more internally polarised due to the increased rewards to "leadership" and the mainstreaming of bonuses. Are MPs now to be compared to corporate lawyers, heads of commissioning GP consortia and academy "superheads", or are they to be compared to legal aid solicitors, locum doctors and the heads of comprehensive community schools?

Fearful of drawing too much attention to the growth in inequality before 2008, all of the parties acquiesced in an informal stitch-up that saw headline pay restrained while incomes were boosted through liberal office allowances, nod-and-a-wink expenses and generous pension contributions. Meanwhile, in the spirit of the age, MPs continued to pursue their outside commercial interests, and in some cases decided to combine the two domains through lucrative lobbying and "cash for questions".

The current thinking of the Independent Parliamentary Standards Authority, which now sets MPs pay, appears to be that it should be linked to average earnings, with a multiple of around 3. This contrasts with a multiple of 5.7 when pay was first introduced in 1911, though this was soon corrected by inflation during WW1. The multiple was around 2.5 during the 1920s, and then wobbled around 3.25 between the mid-30s and the oil shock of 1973. It dropped to 2.5 during the era of high inflation and public pay policies (and after expenses were separated-out in 1971), jumped up to 3 during the Major years, and has gradually declined since then to around 2.7 now (see chart below). On the face of it, they have a reasonable argument for an uprating now to a multiple of 3.

The problem is that "average earnings" in this model is the statistical mean, not the median. In other words, the aggregate of everyone's earnings divided by everyone who works, rather than the point at which 50% of the population earn more and 50% earn less. As the FT noted when this pay rise was first mooted in July, "Mean earnings have grown faster than median earnings since 1980, largely because of higher pay at the top of the income scale. In other words, Ipsa has made its measurement more sensitive to the rise in income inequality". Hooking their pay to median earnings might be fairer in terms of relative worth, but it would condemn MPs to an ongoing decline relative to the top-end of the income scale if inequality continues to rise. The choice of the mean is therefore a vote of no confidence in the prospect of inequality narrowing any time soon.

There are many drivers of unequal earnings growth: technology has increasingly automated median-skill roles, leading to job polarisation; globalisation has created competitive downward pressure on unskilled wages while raising the premium for high-skill roles; and politicians have lightened the tax burden on the wealthy. But perhaps the most emotionally significant for MPs has been the exemplary role of bankers since the 1980s. This has not only set the bar high in London, it has had a cascade effect through related employment sectors such as law and business services, from which MPs are disproportionately drawn. "Why shouldn't we have some of that?" isn't an edifying motive, but it's perfectly understandable.

One of the features of neoliberal corporate practice has been its apparently schizoid attitude towards rank and status. First names are used, ties may be dispensed with, and a flatter organisation chart appears (as mid-tier roles evaporate). Yet at the same time there is greater reliance on independent salary benchmarking (you're no longer just competing with the firm up the road) and executive remuneration committees (whose wisdom is little more than an old saw about peanuts and monkeys). Though this is justified by reference to "paying the going rate", it is clear that the primary driver is status, a social currency, rather than market pricing.

The reported distaste of politicians for the proposed 11% pay increase is not mere hypocrisy; it also reflects embarrassment at the growth in income inequality during the neoliberal era, and a realisation that after the 2008 "setback", this unequal growth has returned and that the chief beneficiaries are many of the same bankers, corporate lawyers and executive chancers who filled their boots the first time round. Galloping price inflation at the top end of the London property market is not just the result of Chinese investors buying up Battersea Power Station for its excellent Feng Shui. The flats there will be very handy for Westminster.