Why is it that top bankers are paid hundreds of times more than people caring for the elderly and children? We are repeatedly told that is just how life goes in modern Britain: the unavoidable consequences of living in a free market society. In economics lingo, people are paid according to their marginal product – the extra revenue they produce. People earn millions of pounds making deals on the financial markets because they generate jobs and wealth for the rest of us – so the story goes.
However, look closer and this hard economic logic is flimsy. The sums just do not add up.
Are bankers really hundreds of times more productive in generating the things we need and value? Are they really paid their marginal products, rather than engaging in rent seeking activities that cause remuneration to spiral up? At the same time, social care is woefully underfunded, and most carers are on the minimum wage. The problems inequality is causing means we should narrow, not widen, the wage chasm between society’s lowest and highest earners. Increases in salaries are long overdue for those providing essential public services and doing valuable work.
The hope in the 1980s was that the increasing resources attracted by small, wealthy elites would “trickle down” to benefit everyone else. Growing gaps between the rich and poor were acceptable, and even encouraged through lower taxes for high earners, as they would spur more investment and hiring, igniting the economy into action. But for all the talk of trickle-down economics, the rich have accrued a greater share of the economic spoils; the poor have increasingly lost out.
The relentless rise of pay inequality has stopped since the financial crisis, and has been helped by the creation of a national living wage. But the main story of British earnings over the last three decades has been one of ever yawning gaps between the lowest and highest earners.
In our book Social Mobility and Its Enemies we document the damage the widening divide in the workplace is doing to people’s prospects of climbing the social ladder. Failure to address these challenges will only store up greater problems for future generations.
Britain’s booming gig economy has created a sizeable number of jobs lacking security, progression or rights. Work practices at the Übers, Sports Directs and Deliveroos of the world are reminiscent of the conditions in Victorian times. In 2017, an estimated 1.3 million people were “employed” in the gig economy.
In the global economy companies enjoy monopoly power and can shift profits across borders. Amazon may have recently announced it is raising minimum salaries in the US and UK. But others, like Alphabet (Google), Apple and Facebook, spend proportionately less on their workforce because their stock market valuations and profits are enormous. Why do they not share more of their huge profits with their workforce?
In decades past people on the wrong side of income gaps could console themselves that their wages had at least risen in real terms. Now, to add insult to injury, real wages have fallen, meaning most people are materially worse off than they were 15 years ago. We are facing a future of falling absolute social mobility. It is little wonder that Britain suffers from poor productivity when millions of underpaid workers have little prospect of progressing up the career ladder.
So it is time for a big rethink, not just because pay gaps are unfair, but they do not make economic sense. This is not only about the national minimum wage, but the salaries expected for those contributing an essential public good. We are not calling to slash bankers’ wages, but why is it off the political agenda for them and other rent grabbers to pay more taxes? We need a debate on how to recognise what is valuable work; we need to look after our carers.
Lee Elliot Major (pictured left) is chief executive of the Sutton Trust (suttontrust.com). Stephen Machin (right) is professor of economics at the London School of Economics and director of the Centre for Economic Performance (cep.lse.ac.uk). Their book Social Mobility And Its Enemies is published by Penguin