(Not) keeping up with the Joneses?
The TUC’s recent economic report Britain’s Livelihood Crisis, found that the gap in income between the richest and poorest members of society has been increasing in recent decades, even before the recession and in spite of the modestly redistributive policies and minimum wage legislation of the 1997-2010 Labour Government. The report pointed out that the wages of the best-paying jobs has increased much faster than the wages of some of the middle and lowest paying jobs over the past 30 years, whilst some low jobs have actually seen a decline in wages (in real terms). Research by The Economist also came to similar conclusions.
So, if our society is becoming more unequal, the question is, How much does this really matter? Is the income gap between the richest (the top 10%), the middle (median income) and the least well off (the bottom 10%) really a cause for public concern and a justification for government intervention? Isn’t it more important that as our nation gets wealthier (ie GDP increases) incomes rise across the board, even if they rise faster for some groups than others? In other words, as long as the incomes of the poor are going up, does it matter if incomes at the top are rising more rapidly? And what about consumption? Is it more important that those at the bottom see real rises in income, so they can afford to purchase more goods and services?
The most commonly used statistic for measuring income inequality is the Gini Coefficient, which measures a country's distribution of income from 0 (total equality, with each person sharing the same amount of wealth) to 1 (total inequality, with one person controlling all of the nation's wealth). There is a wide variety in the Gini Coefficient across countries, for example, Japan (0.25), Sweden (0.25), India (0.33), the US (0.47) and Brazil (0.58).
So, does this mean that India is a more desirable society than the US? Income inequality is just one factor we need to consider; we need to look at the overall income of a country, not just how it is carved up. A society (and the poorest members of it) could be more equal, but overall poorer, than a more affluent, but more unequal society.
We need to examine relative incomes (income inequality), absolute (or real) incomes and crucially, opportunity. Up to a point, income inequality is a motivating factor. Who among us hasn’t been motivated to work harder in order to get a promotion, a pay rise, a better job or even to start a business? In this respect, inequality rewards hard work, skills acquisition, innovation and risk taking. For example, if the pay gap between a store manager and a salesperson was only small, why put in the effort, undertake the training and accept the greater responsibility and stress that a manager’s job would entail on a day-to-day basis? If there is no motivation or reward for skills, talent and effort, this will dull ambition and productivity. And surely any Liverpool fan will tell you that Luis Suarez should be paid more than David Ngog?
So, what’s more important – that people get a larger amount (but a smaller proportion) of a bigger pot or that people get a more equal share of a smaller pot? This is where it’s important to examine opportunity. A desire to achieve what others have achieved (whether in sport, entertainment or in less glamorous, but well paying professions) or to succeed in life is important, but if there are real barriers that stand in people’s way which prevent them from achieving their goals, then inequality could de-motivate people, and we may see both a constraint on economic potential and a lack of social cohesion. Providing an opportunity for those from lower-income backgrounds to succeed is arguably more important than the spread of wages across different jobs and professions.
There is probably no “ideal” degree of income equality. Perhaps the key finding from the TUC analysis is that social mobility has declined over the past 30 years, alongside the rise in income inequality (although no causal relationship has been found). What’s most important is that the education system provides young people with the skills, ambition and routeways to succeed, that those in the workforce are provided with the training and chances to progress, and that ambition, effort and risk taking continue to be rewarded with higher pay offs.
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