Income inequality is determined by the distribution of incomes throughout society – not just by the gap between the extremes. Two recently reported income related developments illustrate this point.
The first is the news that the Living Wage in London is to increase by 3% (just above inflation), and in the rest of the UK by 3.5%. Boris Johnson and Ed Miliband support the scheme, but only some employers pay the Living Wage. Launching the scheme, the Archbishop of York John Sentamu promised: “The living wage is the fuse that will light this gunpowder that will explode this great demon of income inequality” (it was the 5th of November).
Meanwhile, FTSE 100 executives have seen their basic salaries rising in line with inflation, and bonuses falling. Their only comfort is an increase in the value of long-term share-based incentive plans, leading to a 27% increase in overall annual earnings. Given that many of these schemes were set up in the economic trough of the recession, it doesn’t take an investment banker to figure out that the only way was up. In addition George Osborne has lent a helping hand by cutting the top rate of income tax from 50% to 45%, giving back at least £40k to those ‘earning’ £1m or more per year.
This disconnect in policy affecting income inequality is mirrored in the campaigns that aim to reduce it within western societies. The living wage campaign focuses on the bottom end of the scale, and wage growth and tax avoidance at the top end is scrutinised by movements like the 1% and UK Uncut. These moderating forces can only help reduce income inequality, but if incomes are pushed towards the average at one end but away from it at the other, the net result is unchanged income inequality – a problem recognised by the New Economics Foundation. Evidence from social epidemiology, behavioural economics and psychology converges on the importance of one’s position in a hierarchy relative to others: relative rather than absolute poverty. Tinkering at the edges of the income distribution may not have the desired effect as long as a complete lack of social solidarity remains between rich and poor.
Even if more workers earn a living wage and the incomes of the 1% are cut, income inequality could remain at its high level due to stagnating wages in the middle (which is of course much closer to the bottom end than the top end). This trend was in evidence long before the recession, with wages around the average barely increasing despite strong growth in the economy. But because this trend is less obvious than in-work poverty or massive bonuses, it has received a lot less coverage and doesn’t have a vocal public campaign behind it. In the past, unions would have had more power to influence workers’ wages. In countries like Germany, collective bargaining gives workers a say on pay committees. Employee-owned companies like John Lewis give their partners an equal say, leading to a much more gradual pay structure within the partnership.
These are the proven means by which excessive income inequality can be reduced – what is missing is the political will. Income inequality, as measured by the Gini coefficient, is the best single statistic we have to explain the UK’s dire health and social outcomes. There must be an explicit political commitment to reduce the gini coefficient in the long run – anything less is merely good intentions.