Executive pay is in the news again as the High Pay Commission warns of its corrosive impact on the UK economy. Those who defend such high pay levels argue that international competition is driving up the going rate for senior executives and that, if companies don’t pay the going rate, all the talented business leaders will go abroad.
This, of course, is exactly the same argument that is used to justify keeping wages low and removing employment protection – international competition demands it. If workers are paid too much and employment protection is too high, the companies bearing these costs will be undercut by firms in Asia or Latin America with lower wages and less regulation.
As anyone in Comp & Ben will tell you, when you are establishing the market rate for a job, the first thing you need to do is get your comparator group right. Notice here that, for senior executives, the comparator group is rich Americans while, for shop floor workers, the comparator group is poor Asians and South Americans.
Both comparisons are spurious. As Chris Dillow says, there is no evidence that British executives are in demand in the USA. The claim that curbing high pay in the UK, either by legislation or taxation, would lead to a mass exodus, has no evidence to support it. Even the periodic sabre rattling by the banks is, for the most part, just for show.
The same is true at the other end of the pay scale. Wages are so low in many Asian countries that suggesting we should even try to compete on labour costs is ridiculous. As for employment protection, according to the OECD, many Asian and Latin American countries have as much of it as we do.
Yet there is still a grain of truth in the arguments about international competition. There has been an impact on low paid work, though this is not something that reduced wages or reduced employment protection could solve. Outsourcing, in its various forms, has moved a number of lower paid jobs to other countries. As Gavin Kelly says, the high-tech and creative industries that have grown up in the US and, to an extent, in Britain are less job-rich. More technology companies do not necessarily mean that many more jobs. Even the few that they do create require high skill levels. Last week Chris Dillow linked to this paper by Andrew Glyn, which argues that the massive labour reserves of India and China will inevitably have an effect on labour costs in the West, with the impact being felt first, and most acutely, by those with lower skills.
At the other end of the scale, those with the power in companies choose to compare themselves with their American counterparts. Whether they are really in the same market or not doesn’t matter because, if you can persuade your remuneration committee that you are, then they will instruct the pay consultants accordingly and your comparator group will show that you are underpaid. Here is where the ‘people like us’ factor comes into play. Executives on remuneration committees collude with this sense of entitlement because to challenge it would implicitly threaten their own entitlements. The same is true of the institutions that control many companies’ shares.
So there is, then, a pull at both ends of the pay spectrum. For those at the top, towards the high salaries of America and, for those at the bottom, towards the low pay of Asia. Inevitably, this increases the level of inequality.
The problem is not confined to the UK. The OECD notes that levels of inequality have increased in most of its member countries since the 1980s. The highest levels of increase have been in some of the most egalitarian countries like Finland and Sweden. If inequality is growing even in Scandinavia, it is almost certainly driven by global trends.
The OECD identifies globalisation and technological progress as the main forces increasing the levels of inequality. As developed economies have advanced, they have created more high skilled and high paying jobs while reducing the amount of low-skilled work available locally. The OECD’s conclusion is that, while a return to more redistributive tax and benefit policies might temporarily slow the rate at which income inequality is increasing, it will not be enough on its own. Better training and more investment in human capital, it argues, is the only sustainable long-term solution. In other words, many of the low-skilled jobs have gone forever and, unless more people learn to do the more skilled work, inequality will continue to rise.
This was pretty much what Daniel Knowles was saying when he upset so may people with this article last week. To use his language, there are indeed few jobs left for the dim and slowing the increase in inequality means making people less dim, as well as getting those at the top to pay more tax.
This, of course, is much easier said than done. Even if it were possible to educate people to the level where most of them could do skilled work, the will and the resources would have to be there too. In a globalised market, firms can outsource unskilled work and import skilled labour. Getting them to pay taxes to create a skilled local workforce might be a difficult sell.
All of which makes me wonder whether increasing inequality is something we will be stuck with for some time yet. Perhaps historians will come to see the material egalitarianism of the postwar years as something of a blip. Whether, as the High Pay Commission warns, we will see a return to Victorian levels of inequality remains to be seen. I hope not. The strains that might cause among a population brought up with egalitarian expectations could have some very unpleasant consequences.