Here’s a brain-teaser for you. Without looking, guess which OECD country has the highest level of income inequality.
Now guess again.
It’s Italy, followed by Chile, Portugal and Germany. The US, which would have been my guess, is down at number eight.
But I’m cheating, of course. Those are the figures before the redistributive effects of taxes and public spending. When you look at the figures after tax, the inequality league table looks more like you might expect it to.
Gini Coefficients for OECD countries, before and after taxes and transfers
Source: OECD Stats (No pre-tax/transfer figures available for Ireland)
This graph shows that, while Germany and Italy have higher levels of income inequality than the US, they redistribute more income through taxes and public spending, therefore they end up with more equal income levels. The red bits show the extent of that redistribution, which varies considerably between OECD countries.
This factoid raises some interesting questions.
Firstly, executive pay is clearly not the only cause of income inequality, or even the main one. US executives are paid much more than their counterparts in Italy and Germany, yet Italian and German income inequality levels are higher.
Source: Martin Conyon, Lancaster University, UK & The Wharton School, University of Pennsylvania
We tend to focus on the pay of quoted company and public sector bosses because it’s visible. However, there are other people who earn shedloads of money whose financial affairs are somewhat less transparent. CEO pay is only part of the story.
There are a number of suggestions for curbing executive pay, from the government’s almost certainly ineffective shareholder empowerment, to some completely bonkers and unworkable ones from the left. But even if these measures worked, they would only affect the salaries and bonuses of the people we can see. Others would quietly carry on coining it.
All of which makes me wonder whether there is any point trying to legislate or put in place any other measures to curb pay levels. Most of the suggested remedies would add extra layers of bureaucracy to firms while doing little to reduce the overall level of high pay. My friends who consult in reward and corporate governance would get loads of new work but I can’t see how anyone else would benefit.
If we are worried about executive pay because it makes society more unequal, we already have a tried, tested and much cheaper way of dealing with it. Do what we used to do, and what some of our European neighbours still do, and increase taxes on the wealthy. These days we would need a wider range of taxes, especially given the complex nature of some people’s earnings. A land value tax, for example, would be one way of getting at the wealth of people whose financial affairs are opaque.
Income inequality is rising in most countries. Legislation and regulation will add unnecessary complexity to the running of quoted companies without doing much to curb high pay. As the examples of some European countries show, taxation and public spending can be used to significantly mitigate the effects of income inequality. Germany’s economy does not seem to have suffered from its redistributive policies. Trying to regulate high pay is fraught with difficulty. The answer to the problem has been staring us in the face all along.