Efficiency wages for MPs?

In all the fuss about Maria Miller's resignation, a simple point has been ignored - that the issue here is a mainstream economic one. It's the principal-agent problem. How can principals (voters) ensure that their agents (MPs) behave in ways they want (keeping their hands out the till)?

Broadly speaking, there are three ways to achieve this.

One is simply to hire better people. However, given that most people would vote for a dead pig if it wore the right coloured rosette, this requires radical change.

A second possibility is to exercise greater direct oversight. In the Miller context, this requires simpler and tighter control of expenses. But as Ben Worthy says, we are a long way from this.

This leaves a third possibility - to give them greater incentives. One obvious possibility here is to use efficiency wages - that is, to pay MPs so much that the threat of losing their job will hurt more. This will incentivize them to be honest. As Mark Thompson tweeted: "The longer we will not countenance a pay rise for MPs the more gaming the system will tempt them." And from a different political perspective Jackart said: "The expenses scandal happened because we are too cheap and chippy to pay MPs properly, so we get the worthless fucks we deserve."

Now, efficiency wages are a big and important idea. One reason why the relative pay of low-skilled workers has fallen since the 80s is that managers have imposed direct oversight upon workers, thus reducing the need to pay an efficiency wage. And bankers and bosses are paid so much not because they are especially talented but because where direct oversight is impossible, they must be incentivized not to sell off the firms' assets cheaply.

So, should we pay MPs efficiency wages? I'm not sure. For one thing, efficiency wages are only an incentive if you lose your job when your caught fiddling; for this reason they might have to be combined with powers to recall MPs. And for another, there's a danger of incentive crowding out. If we pay MPs more, we might attract folk who are motivated only by money to the detriment of those motivated by public service; if you think MPs are only in it for themsleves now, it could be worse if they are better paid.

However, I doubt if these are the real reasons why the public would be opposed to Mark and Jackart's thinking. I suspect instead that the opposition to efficiency wages rests upon their counter-intuitiveness, in two ways:

 - Efficiency wages break the link between productivity and pay. Their very point is that they entail paying people more than their marginal product. This conflicts with the intuition that people should be paid according to their skills.

 - Efficiency wages are unjust. We are, in effect, bribing people to be honest - which is, in a sense, a reward for dishonesty.

My point here is a simple but depressing one. If we are serious in wanting to avoid another Miller "scandal", we need to think about how to apply agency theory to MPs. And this might entail some tricky trade-offs. Such thinking is, though, scarce. MPs want to pretend that they are basically honest people of good judgement, and voters are content with the occasional scandal because it gives them a chance to engage in bouts of narcissistic self-righteous moralizing. As for actuallly solving the problem, well, who cares?

Comments

[peter]

the problem with these is that they eventually become just the normal expected level of pay. As you say if there isn't a credible threat of unemployment then they are never going to have an effect. We also don't employ MPs for their skills so the variance can be huge between those that are useful and your dead pigs.

I would like to see MPs pay linked to an unemployment adjusted national average wage.

thus in a for every unemployed person a rich person was removed from the calculated average. this would give a base pay level from which we could calculate their pay.

the advantage of this is that it gives a pay premium for reducing unemployment or increasing the pay of the poorest while changes for the very rich would have no benefit

simplified with nice round figures:
with 10% unemployment
you would calculate the national average pay based on the middle 80%

if that gave you a figure of £15,000 then you could calculate a multiplier like 4 as our MP pay level.
our MPs would earn £60,000

if they wanted a pay rise then they would just have to improve employment or pay

it's simple, it would be hard to fiddle (if you don't let them re-define unemployment) and it would work by also taking out some of the sting of pay increases. they get more money because they have in some way earned it.

[Dave Timoney]

The problem with Peter's solution is the link to average (i.e. mean) wages. The mean has been rising faster than the median for years as a result of rapid growth at the top end. If we use a mean base, rising inequality will continue to widen the gap between MPs' pay and that of the "typical" (i.e. median) worker. See ...
http://fromarsetoelbow.blogspot.co.uk/2013/12/counting-peanuts-in-monkey-house.html

On Chris's point about efficiency wages, I am sceptical that a desire by shareholders to prevent executive looting explains executive looting. As the Bebchuk & Fried paper makes clear, this is more a reflection of increased management power due to diffused ownership.

If we follow the efficiency wages logic, we'd need to pay ministers millions, because they have the power to decide on multi-million pound contracts, while paying backbenchers peanuts, because they have minimal power. I can't see that working.

In reality, MPs are in the best position to police this themselves, simply because inter and intra-party rivalry provides an incentive (Miller's loss is Javid's gain, and her downfall owed more to John Mann than the Telegraph).

The problem in the past was that the clean didn't turn in the dirty, due to a misplaced esprit de corps. That was due to an unwillingness to face up to rising inequality - restraining their own pay rises out of embarrassment and making it up in allowances. If the expenses scandal leads to a discussion on inequality, i.e. the decoupling of mean and median wages, then it will have done some good.

[dave roderick]

they get to much pay allready they should be paid the same as we plebs £6 31 an hour ,and if they perform well ie do what they are paid to do and stop dictating and interfering in my life i might think of giving them a rise

[Peter Whale]

When MPs were classed as self employed, as they were, there was no problem for they received their renumeration and then dealt with their local tax office like every other taxpayer. Same tax law for all or is that too simple? Then you can give them whatever it takes to enable them to do their job and the can put aside what they need for their own pensions without being the burden they are.

[rogerh]

For a start - what do we want them to do? Seems to me Parliament behaves like a mini-monarchy, like the old king+court of years ago. The power structure has never really changed, that is what needs to change.

So what do I want? I want them to run the show reasonably efficiently and reasonably fairly, not allowing power groups to gain too much advantage but using/exploiting power groups to get things done. Such people should be disinterested, immune from backhanders or headlines and with a strong incentive to do an effective and honest job. We the public must be open too and accepting that compromise is necessary and interest groups will always scream and whine.

So, good pay and complete openness - allow reporters or Jo/Jill Public or a live and working camera into every committee - no access=no meeting, every document public and a grown-up attitude from the media please. A very very limited degree of secrecy for security matters - guarded by deeply sceptical people. I await Hell freezing over.

[Rich]

Is sending them to prison a type of efficiency wage? The threat of prison presumably hurts a lot.

[Tim Almond]

But there's little incentive against MPs playing the system when they are in a safe seat. Raising their pay will not change their behaviour, it will just make them richer.

It's why most of the expenses scandal MPs were in safe seats. They can take the risk on losing a few thousand votes temporarily.

We might think that an alternative independent candidate could stand, but people won't vote for that clean version of their politics for fear of letting the other side (Con or Lab) win the seat.

If you want cleaner MPs, you need to change the electoral system.

[Al]

Efficiency wages are definitely unjust.

[Keith]

The reason why there is so much annoyance with expenses for MPs is surely that the scope of the allowances is so wide. Almost no one else can claim for so much. All other citizens lost the right to deduct the cost of a mortgage against income tax years ago. So one group of people can make a tax free capital gain with public subsidy when other people cannot do so. Is this corruption? It certainly seems unfair. When you see the misery caused by the Bedroom Tax for tens of thousands it is outrageous. Saying our MPs are not as bad as others in the world cuts little ice under the circumstances.

Paying more money is not an answer as there is no relation between pay and performance. Kenyan MPs are paid a fortune but I doubt most people in Kenya think it is such a good idea! Following your plan would bring us to the Kenyan position of millionaire MPs.

The greater problem than pay is the lack of any real accountability. Governments keep adopting policies that are not in their manifesto like tuition fees or marketization of the NHS, despite them being unpopular and bad ideas. That is even worse than excess pay or perks.