Tuesday, 27 October 2009

Inequalities and the case for a Maximum Wage

This piece appeared on The Daily (Maybe) yesterday and in true Re-Tweet fashion I've posted it here too (as it was written by me).

Thirty years ago a newly elected Conservative government attempted to quash a ground breaking report by Douglas Black. The report, commissioned by the previous government, was a clear indictment of the impact of poverty (and relative poverty) on health. Just few hundred typed copies of the Black Report, as it come to be known, were ever published but the impact of the report was significant and has been a basis for public health thinking ever since.

Moving forward 30 years, The Equality Trust explain in graphic detail how it is not only poorer countries that have poor health outcomes, but also that countries which have higher inequalities have poorer health outcomes. These poor health outcomes are not just relating to physical health but stretch across the full spectrum from mental health to societal health (for example violence, community cohesion and social mobility).

The evidence is clear, an unequally society is a poor society. The evidence is also clear that Britain has become more unequal; this quote is from National Statistics: "Between 1981 and 1989 disposable income in real terms grew by 38 per cent for those at the 90th percentile. This was more than five times the rate of growth of 7 per cent for those at the 10th percentile.". A quick look at their graph of income since 1971 shows that the gap between rich and poor has grown continually except for a short period in the mid 1970's.

National Statistics also report that '1992 to 2006/07 was a period of relative stability' for income inequality. The minimum wage, introduced in 1999, has had an impact for some but it simply hasn't achieved the narrowing of relative poverty that is required. Two further mechanisms for household income are necessary, a citizens income and a maximum wage.

Maximum wage is simply capping the maximum earnings of an individual, either through the use of a tax bracket that returns 100% of the earnings to the state or through primary legislation to prevent employers paying over a particular ceiling. Practically speaking, a 100% tax bracket looks like the most effective method of implementing a policy as it should capture unearnt income and income from multiple sources (assuming that people don't dodge tax!).

While there are those in favour of a maximum wage, such as Andrew Simms from the New Economics Foundation, there are of course detractors on the right of the political spectrum. It is easy to see why it is the right wingers who are opposed, given that the majority of high earners are on the political right and the rest of the right are desparate to join them. The Adam Smith Institute claims that the country's most productive workers (doctors, business owners and bankers - it does actual put bankers in this category) would move abroad. They go on to suggest that the best was to reduce poverty is through the 'Trickle Down' of wealth.

Standard right wing thought but the evidence goes contrary to this.

Firstly the concept of 'Trickle Down'. It is surely time for this phrase to be consigned to the dustbin of patronising and obnoxious terms. Trickle down suggests that the elite should hold the nations wealth and provide a little cash to the underclasses to stop them starving. It suggests that people are not equal and shouldn't strive to be. It keeps the ruling class, er... ruling.

The concept of trickle down serves to widen the poverty gap within countries by enforcing and expanding the existing inequalities. Sure, it will address absolute poverty and may increase a nations overall wealth, but that is not what needs to be addressed.

Secondly, the claims that productive workers will flee the country are without evidence. Of course the Adam Smith concept of 'productive' is a little different to the concept held by the majority of people. Ask the man on the Clapham omnibus whether he considers nurses or bankers to be more productive!

Concerns about highly skilled workers fleeing the country are also misguided. In Cuba, doctors are paid around twice the national average wage, compared to around four times in the UK, however Cuba has one doctor for every 174 people and the UK has one for every 600. There would be a balance of greed versus good community that people would weigh up before emigrating for financial reasons. If society was cohesive and enjoyable, it is unlikely that most would want to leave for a country where the quality of life was poorer. There is far more to life than hard cash.

Assuming that the majority of the arguments currently against a maximum wage are false, there remain just two questions. Firstly would a maximum wage actually help to reduce inequalities and secondly what should the level of maximum wage be?

If the approach of a 100% tax bracket is used and the taxes are reinvested in citizen's income / health care / regeneration / redistributive schemes, then it is clear that inequalities will reduce. The longer term picture of a 100% tax bracket gives similar results to a maximum wage through primary legislation over time as companies stop advertising jobs with huge salaries. As total income, including unearnt income from profits, could not exceed the maximum, money would need to be spent somewhere in society over time (unless company's reserves get bigger and bigger - maximum profits legislation anyone?). The gap between the rich and poor will start to close.

And as for the maximum wage... let's start at £150k and reduce it by £5k a year to £100k. Anyone not able to survive on £150k or even £100k needs to think very carefully just what they are doing to society and the planet.


Rupert said...

The case for equality is overwhelming. And I think that the case for a maximum wage is very strong. However, it is also very far from being practical politics right now, and it is easy to mock and attack and could make the Green Party vulnerable to particularly unpleasant right-wing-media assault. Furthermore, you have not addressed the very grave difficulties in introducing it in any meaningful way, Stuart: such as the fact that a maximum wage, that made it impossible for high-earners to earn ANY more, would be something that high earners put enormous effort into bypassing via dividend payments, etc. etc
My proposed more modest alternative, which I think is practical politics and would actually work, is this:
• A maximum income differential in percentage terms between boss and lowest-paid employee in each company. And the differential should be narrowed in percentage terms each year. It should never be allowed to grow in absolute terms at all.
• Wage rises should be on a cash-amount basis, not a percentage basis. In other words, everyone in a given organisation would get the same wage rise, each year, in monetary terms. Over time, this would reduce the percentage difference between high adn low earning employees very considerably, and eventually might make it trivial.
The beauty of my proposals (you need both, because the second one only applies if there is an actual wage/salary _rise_, which in a recession there is not) is that they _encourage_ the higher wage earners (including top bosses) to raise the wages of the poorer workers in their company/organisation. And they actually narrow the rich-poor gap - they diminish relative poverty - in the process. In other words: they attack inequality, and bring equality nearer, in a way that doesn't render the better-off as angry resisters of the process.

Stuart Jeffery said...

Hi Rupert, your version is hardly radical though!

I think introduction via a £150k tax bracket is a practical solution to the maximum and I think I have shown that people will not flee the country on monetary grounds alone.

I would suggest that an assualt by the right wingers should be welcomed. As long as our principles and arguments are clear then we are on good ground.