…UK wage inequality is approaching levels not seen since the end of the first world war. A cap on bosses’ pay is vital if Britain is to become a fairer place…
Do you know how well you are rewarded and how you compare with your colleagues? Here’s a simple way to work it out. First, calculate how much you are paid an hour, without subtracting tax and national insurance.
At £5.93 an hour, the minimum wage for those aged 21 and over, you are almost perfectly representative of the poorest fifth of employees. Moving up the income ladder, if you receive just over £7 an hour, you are in the next bracket, the “modest” fifth. At £10 an hour, you are now, more or less, the median worker – while £14 an hour takes you into the more “affluent” fifth of employees.
At close to £21 an hour, which translates to an annual salary of just over £40,000, you are bang in the middle of the best rewarded fifth of all employees. You earn getting on to twice the national average. In short, you are, in relative terms, rich.
But here’s the thing. If you are in that top income bracket, you may not feel rich. In fact, although you are heading towards double the median income, you might well feel part of the “squeezed middle”.
This vague term – deliberately vague, perhaps, when used by Ed Miliband, determined as he is to reach out to as many potential voters as possible – seems, at times, to capture all of us who are neither poor nor rich.
However, the exact details of what we are paid – in particular the gap between the best and worst paid, which is wider in Britain than in much of the developed world – is an urgent political topic. Earlier this year, Will Hutton, executive vice-chairman of the Work Foundation and an Observer columnist, was appointed by the government to head a review into creating fairer public sector pay – and to determine to what extent a multiple between top and bottom public sector pay, say 20 to 1, could help shape norms of private sector pay. This week, Hutton will rehearse his first thoughts in the review’s interim report.2
Vince Cable, the business secretary, has also launched a review of British business which includes an analysis of executive pay. In addition, the think-tank Compass, in collaboration with the Joseph Rowntree Charitable Trust, has set up its own “high pay commission” after failing to convince the coalition that it should set up one of its own.
A recent poll by Compass and the Joseph Rowntree trust showed that only 1% of people think that top executives should be paid as much as they are. Another striking figure revealed that 64% believe that a chief executive should take home an annual salary of less than £500,000. This contrasts sharply with the actual pay figures. Research by Income Data Services found that the average FTSE 100 chief executive was paid £4.9m, a figure that had risen more than 50% in a year. This equates to 200 times the average wage.
The previous year – between June 2008 and 2009 – the earnings of the FTSE 100 chief executives had fallen 1%, in the wake of the financial crash. Examining this year’s figures, it seems that restraint at the top was short-lived, and it’s back to business as usual.
This week, it is widely expected that Hutton will support the concept of a pay multiple. It will be hard, given the terms of his review, not to imagine that he will also advocate the principle being extended to the private sector.
Why do pay differentials matter? Plenty of recent research – best detailed in Richard Wilkinson and Kate Pickett’s book – The spirit level – suggests that a wide range of statistical indicators, from mental health to social mobility, are better in more equal societies. These societies tend to have narrower income distributions.
One consequence of wide pay differentials is a more atomised society. We do not mix as much as we used to in the 1950s. Now we tend to stick much more with our “own”; we read the newspapers written for people like us, we buy food sold for people like us, our children go to schools for children like them.
Across much of western Europe the income inequality ratio is lower than in Britain. It is lower in Australia, New Zealand and Canada too. Japan’s ratio is half Britain’s.
What’s more, in Britain high-paid work is concentrated in particular families. So while in a prosperous home you might find two high incomes, in a poorer home one low income might be supplemented by a convoluted mix of benefits – a pattern found far less often abroad.
For much of the 20th century, the income gap in Britain narrowed steadily as we gradually became a more equal society. In 1918 the richest 1% of earners was rewarded with 19% of all income, receiving about 19 times more than the average earner. By 1935 the top 1%’s share of income had fallen to 14%; by 1950, 12%; by 1960, 9%; by 1970, 7%; and by 1980, 6% (and only 4% after taxes).
This was all achieved without stipulating a ratio from top to bottom – but it was much lower than 20:1. And, in fact this process towards a more equal society seemed inexorable, an almost natural consequence of an advanced democracy. During these years – the three decades or so after the end of the Second World War – this trend was part of the political consensus.
However, in the late 1970s a few of us got greedy; the rest of us failed to stop the greedy, and they spread their ideas around (if not their money). By 1983 the income share of the best-off percentile was back up to 7%; by 1992 it was 10%; by 1997, 12%; by 2001, 13%; by 2005, 16%.
Today, with the return of big City bonuses, I very much suspect it will be back up to 18%. We should have a national day of mourning when we return to a level of inequality last experienced at about the time of armistice day in November 1918.
New Labour did not do as much as it might, perhaps, in checking the trend. In 1997 the hourly pay rates for each fifth of earners were all lower than they are now, but so were the gaps between our earnings. And income cannot, of course, be divorced from other factors. The cost of housing rose even faster than average earnings, for instance, and it can be argued that the poorest ended up with even less choice over where they lived at the end of New Labour’s time in office.
Though Alistair Darling’s final budget could be deemed progressive, with the introduction of a new top rate of tax for those earning more than £150,000, during New Labour’s reign, as a whole, the income ratio of the richest to the poorest earners rose from to 3.6 to 3.9.3 Hence the poor became relatively poorer despite receiving on average an extra £2 an hour for their labour.
In Tory chancellor George Osborne’s first budget, the effects of the unevenly distributed £6bn of local authority cuts and the punitive £81bn cuts of the comprehensive spending review were all designed to be regressive. I say designed because you don’t introduce a regressive policy by accident. So the gap will have grown again since narrowing slightly at the start of this year.
In the 1970s, the earnings ratio between the richest and poorest fifth of UK earners used to be nearly 3 to 1. It approaches 4 to 1 today. In recent decades, the greater part of the increase in inequality occurred during Margaret Thatcher’s premiership, but Tony Blair added a little extra dollop of unfairness on top, and Gordon Brown – his own sliver.
When we consider families as a whole, and not just the family’s central breadwinner, the inequality ratio is found to be even greater. The richest fifth of families by income in 1997 each received 6.9 times the income of the poorest fifth in 1997. By the time of the election the Liberal Democrats were loudly complaining that the ratio had risen to 7.2 to 1. In other words, from 1997 to 2009, we moved a quarter of the way to becoming as unequal in income distribution as people experience in the United States.
Will Hutton’s predicted proposal of suggesting a maximum full-time pay ratio of 20:1 may help this situation, but we need to take the principle seriously and apply it to the private as well as to the public sector with whatever necessary adjustments need to be made. Otherwise high-earning public sector employees will simply carry on comparing their salaries with those earned by private-sector employees.
On the minimum wage, someone working 38 hours a week now earns £11,700 a year. Twenty times that is an annual salary of £234,000 (or £118 an hour). Ask the British people their views, and you find that the overwhelming majority consider this more than ample. It is approaching twice what the prime minister is paid, for instance.
However, there are a handful of public-sector workers receiving more than £100 an hour. I predict a rapid adoption of the £7.85-an-hour London living wage in their organisations to raise the permissible take-home pay at the top to £310,000 a year (or £157 an hour).
I may be a cynic, but I would prefer that approach to not seeing wages rise at the bottom. However, I think almost everyone would be better off if wage rises at the bottom were coupled with wage reductions at the top.
Hutton’s proposals could begin to change how we think. It is assumed that constraint at the top results in a contraction of the whole income distribution – one reason is that top earners, so research suggests, do not like those just beneath them in earning power getting too close to them. Couple that with wider adoption of the living wage and you have more rises at the bottom, stagnation in the middle, and maybe even a few cuts at the peaks.
This, though, can only happen if the effects are spread across all occupations, not just the public sector. Why should an excellent brain surgeon receive “only” 0.5% of a top banker’s income? At the peak of excess a top banking boss can receive £40m a year in remuneration. 0.5% of that income is a salary of £200,000 a year, which is just about in the possible range of top surgeons’ salaries. You can have 200 excellent brain surgeons, and quite a few more average ones, all for the cost of a single man in a suit running a large bank in Britain.
If the chief executive’s pay fell, the surgeon could soon be earning a far higher proportion of that top banker’s income without anyone having to spend a penny. And all the rest of us would be richer, as we would not be being charged so much by our banks to allow them to pay those exorbitant salaries and bonuses.
The good news is we can change – and any public sector reform should be accompanied by private sector change. I would suggest that, just as many parts of the public sector have begun not to work with private sector companies that do not pay the living wage, a new clause is simply added to those ethical contracts. This clause would demand that for any new public sector work where the private sector is contracted in, no one should be paid more than 20 times that living wage. And why? Because helping to support such profligacy is a waste of public money.4