Why even the bosses are at war

Huge disparities in the private sector allow FTSE-100 chief executives astronomic pay rises while le

In hot and humid Singapore last week, I enjoyed some time out in the botanical gardens, especially the orchid garden. There was even a hybrid orchid named after Margaret Thatcher (Dendrobium Margaret Thatcher), who visited in 1985. The highlight of my stay, though, was imbibing a few Singapore Slings in the Writers Bar at Raffles, the hotel where the cocktail was invented and where Rudyard Kipling, Ernest Hemingway and Somerset Maugham downed many with their pals.

During my trip, the newspapers were discussing an index that placed Singapore at the top of the "no corruption" league, along with New Zealand and Denmark. Somalia was at the bottom. The Danes always come out top in the happiness league tables, too. People in Singapore are also very happy, according to the happi­ness data - and I'm not surprised, having seen their high living standards.

On entry to Singapore, we were given documents saying that it is not wise to try to smuggle drugs into the country, as the penalty for doing so is death. You should bring your doctor's prescriptions with you if there could be any doubt. I threw my bottle of aspirin and my toothpaste away, just to avoid any trouble.

The grass is greener

The strong impression one is left with after visiting Beijing, Hong Kong and Singapore is that the complacent west has been left behind. In these Asian cities, there are new skyscrapers of every shape and size all around, and an obvious excitement at the rapidly improving standard of living. Capitalism rules. The fantastic new airport buildings in all three places contrasted starkly with the appalling Delta Air Lines terminal at JFK in New York; it was a painfully long hour we had to spend there on our return, waiting to catch the Boston shuttle.

It is hard to see why businesses would invest in austerity-ridden Britain when they could go to countries that are so economically dynamic. The latest data releases show that Singapore is growing at 10.3 per cent, China at 9.6 per cent and Hong Kong at 6.5 per cent. Taiwan, too, boasts a double-digit growth rate. Standards of living rise fast with such growth.

The latest Markit/CIPS purchasing managers' index (PMI) for UK manufacturing was positive, but the PMI for construction showed the sector slowing fast, which is worrying given its significant contribution to the estimated GDP growth for the third quarter of this year. Employment in the sector is falling at a "marked rate", with future expectations also remaining relatively weak. David Noble, chief executive of the Chartered Institute of Purchasing and Supply, said: "The high hopes of earlier in the year seem to have given way to dire predictions on what the future may hold."

This is bad news for the Chancellor, George Osborne, who needs the private sector to jump in and create jobs for his policies to work. That is looking increasingly unlikely, as a new report from the Chartered Institute of Personnel and Development makes clear, given the opportunities that firms have to create them abroad. For example, low tax rates in Singapore make it an attractive place to trade foreign exchange. The place was full of Brits.

On the other hand, some Brits seem to be doing very nicely. A survey of the salaries of FTSE-100 chief executives showed that their pay rose by 55 per cent on average last year. That looked rather high to me, given that many workers have suffered pay freezes or even pay cuts, that many in part-time jobs would like to work more hours, and that overtime has been cut as well as bonuses.

Recall that, on 18 October, just before the Spending Review was announced, 35 leaders of big multinational firms wrote a letter to the Daily Telegraph urging the Chancellor to go ahead with his austerity programme in a single parliament. Their motivation becomes clearer. Interestingly, there is a large literature suggesting that executive compensation only weakly correlates with a company's performance. It is going to be hard to persuade the workers of the need to exercise wage restraint if their bosses are giving themselves such large increases.

Yet it seems things are very different outside the largest companies. In a rebuttal to that letter from chief executives, a report by the Federation of Small Businesses showed that there is widespread pessimism about the country's economic prospects among small firms. In the three months to September, according to the report, 38 per cent of small companies suffered a fall in revenue. The federation's chairman, John Walker, argued that "small businesses are now at a tipping point and are looking to the government for a growth strategy".

Alone in a crowd

Then came the Institute of Directors (IoD) annual Directors Rewards survey, carried out by Croner Reward, which analyses the pay and bonuses of more than 1,500 directors from large unlisted companies and SMEs (small and medium-sized enterprises).

This survey found that 46 per cent of directors have had either a pay freeze or a pay reduction in cash terms in 2010. The average pay rise for the 54 per cent who received one was 2.5 per cent (a cut in real terms, taking inflation into account). Pay reductions for the majority of directors are not being offset by better bonuses, which generally remain small relative to the big private-sector bonuses that are regularly reported in the media.

Commenting on the survey results, Miles Templeman, director general of the Institute of Directors, said: "This survey kills the idea that company directors are beginning to enjoy big pay rises at the very moment a pay freeze takes effect in the public sector. For the second consecutive year, most directors are seeing their basic pay and bonuses go down. Clearly the impact of the recession on director remuneration is still being felt."

There has been an increase in the number of self-employed workers during the recession, from 3.81 million in June-August 2008 to 3.97 million in June-August 2010. Over the same period, the number of private-sector employees fell from 23.7 million to 23.1 million. It appears very unlikely that the self-employed, and especially the newly created ones, have enjoyed much of an increase in their earnings in the middle of the economic slump.Despite the coalition's claims, it looks as if not even the bosses are "all in this together".

David Blanchflower is a labour economist and a professor at Dartmouth College, New Hampshire, and the University of Stirling.