What do we need to do to deal with income inequality?There are two answers to this question. The first is that we do nothing. The labour market works in so far as it ensures we have the right number of people doing the right jobs for the right pay. After all, we would want to ensure that the medical consultant treating us was as qualified and experienced as possible; or the barrister representing us in Court was as competent as possible.While acknowledging that the labour market is not perfect, it is a market. The more supply there is the lower the cost falls. That is why some professions such as medicine and law create barriers to entry and promotion, to preserve earnings of those at the top. When I worked in investment banking it was hard to get properly qualified, motivated people with the right explicit and implicit knowledge to be successful investment bankers. It is not an easy job and the demand is greater than the supply. Thus earnings will remain high. A good trader can make millions every year for her employer. Few professions can make that claim. Thus, there is reward for those who have the appropriate implicit and explicit knowledge.The second reason for not doing anything about income inequality is a return to “Tournament theory”. To reach the top of many professions take years of education, training and sacrifice. Very few people would undertake this hard work and sacrifice unless they thought there was a pot of gold at the end of the rainbow. The legal partnership, the medical consultant role, the Chief Executive position and so on.If we go back to Helen, how many people would be willing to work sixty hours a week for fifty-one weeks of the year, have no time for friends, family or relationships. To have their work performance measured by the hour in a highly transparent way without the high rewards that go with that sacrifice?The other answer to “resolve” income inequality is one that politicians dislike. It is because we need to start the intervention in early childhood, or even better, in terms of parenting. The politicians do not like this answer because it can take decades for this approach to work. But we know that all the attempts by those in political power have failed:
“Social mobility of young people 'being held back by government policy'
"Cuts to education, benefits and pensions likely to lead to deeper inequalities in the future, says leading social policy think tank.”
I again quote from David Brooks “The Social Animal” “As Nobel Prize-winning economist James J. Heckman had found 50 per-cent of lifetime-earnings inequality is determined by factors present in the life of a person by age eighteen. Many of these differences have to do with unconscious skills – that is, attitudes, perceptions and norms. The gaps in them open up fast.” These types of finding are anathema to many politicians and liberal thinkers. It indicates that there is one way to bring up our children that gives them a much better chance of doing well, at least economically, in the great race of life.What does not work?Increasing taxation on the high paid will not resolve issues of inequality. As Manual Castells has argued in his great work on society and networks “The Information Age: Economy, Society and Culture”, place makes very little difference to flows of capital. The flows of capital will simply transfer to where transactions costs are lowest (accepting a common level of property rights and a robust legal system). In any case the argument above indicates that the foundations for income inequality are laid in childhood. Income inequality is not resolved by way of a taxation system, no matter how progressive.The “politics of envy” do not work either. Attacking and trying to belittle those who are high earners does not decrease income equality. Also, as noted above the top 1% of earners in the UK pay 27% of all income tax. Without that contribution, or even reducing that contribution would result in the rest of us having to pay much higher levels of income tax or face very deep cuts in social expenditure, the very thing that could make the most difference, over the long term, to income inequality. Returning again to James J Heckman“Life cycle skill formation is dynamic in nature. Skill begets skill: motivation begets motivation. If a child is not motivated and stimulated to learn and engage early on in life, the more likely it is that when the child becomes an adult, it will fail in social and economic life”The lesson for reward and performance professionalsThe above arguments are very bad news for reward and performance professionals. There is nothing we can do to reduce income inequality. The foundations of inequality are laid in childhood and reinforced by Tournament theory. There is a perverse argument that we should support income inequality to ensure we have people with the right experience and knowledge, to achieve appropriate levels of performance. That is, it could be argued, the paradox of Compensation Committees, they have to pay on an increasing upward curve, competitive levels of reward otherwise they risk losing their better performing management.
What we can do is work with our talent management colleagues, with politicians and the education sector to emphasise the importance not just of formal education, but on our children having the appropriate levels of social and non-cognitive skills such as self-control and discipline before they enter the labour market; a herculean task indeed. Only then, when we open up the high paid segments, can our profession hope to advance the worthy cause of reducing income inequality.
The first thing this blog made me think is that I need to read David Brooks “The Social Animal and second there is also much truth in “Tournament theory”. Your observation that “High pay is partly a function of a highly segregated labour market but mostly a function of the family and social environment in to which we were born” is correct. The majority of internships and jobs in these professions go to the children of people who are already in them. Their parents have already built the networks so children of those on average salaries with the right abilities and skills have a mountain to climb.
Some will make it but as you point out most senior positions in many occupations, companies and government go to “people like us”. Hence the cabinet being an extension of Eaton and there lies the biggest barrier to children of those in average jobs and on average incomes. Their parents struggle to ensure their children are educated, posses the right skills, knowledge and behaviors for the chosen profession. They may join the golf, club, Freemasons, Social Networks etc but it is still a major struggle as they were “not born into it”
Given this bias how do children from these groups break though that barrier is a relevant question? The theory of doing nothing is valid here in that those who are prepared to put the time and effort in and if they have learned “how to behave and have a value set that is resonant with that required to be successful in a high paid role”. Then many of the initial disadvantages will be overcome but this is for a small minority of those from households with average incomes. There are those who are prepared to make the sacrifices Helen has but many young people today from all social levels want a balanced life and would not want to make this sacrifice.
I agree with your arguments that increasing taxation on the high paid will not resolve the equality issue and the only way Castells theories and plans will work is if global taxation on the highly paid changed and was synchronized. Something that is highly unlikely to happen.
Although it is an aside to this blog topic you have touched on high pay and performance. We seem to have got ourselves into a mess on this in both private and public sectors with many senior executives being paid highly and with bonuses when the organisation has performed poorly or below expectation. No one should begrudge the Helen’s of this world their bonuses but pay and remuneration at all levels should reflect performance.
The notion of working together to build the appropriate skills young people need is admirable and indeed a herculean task. But this starts with parents, the education sector, employers and institutes with support from government. This may help to open up the high paid segments for some further down the social scale but it won’t help those whose parents see little value in education and do not support their children to achieve their potential. Unfortunately for these young people Hechman’s theory that “50 per-cent of lifetime-earnings inequality is determined by factors present in the life of a person by age eighteen” will in all probably be true keeping then in the lower earnings bracket.
Dear Reward Blogger. In answer to your question raised in paragraph 5 above, try talking to the hundreds of thousands of public sector workers (nurses, social workers) about working a 60 hour week, having no time for friends and family and being under constant scrutiny. I suspect Investment Bnking would look like a nice alternative to many of them based on your criteria!
Dear Paul
Thank you for your response. I am well aware of the stress on front line NHS staff as my wife is a psychiatric nurse. However, the comment “Investment Banking would look like a nice alternative to many of them based on your criteria!” misses one of the points in the blog. Nurses and investment bankers are in different labour market segments. There is little or no movement between segments. Although having said that, one of the most successful exotic derivative traders I knew was an ex-dentist (and his number two was a former professional musician). One may add that two of the highest paid occupational groups in the UK (according to the Guardian), dentists and GP’s, work in the health sector. These points just illustrate the complexity of the subject.
I doubt if many would argue that nurses and social workers are overpaid, but following the theme of supply and demand, they are paid in accordance with the demand for staff and the supply. It is true that any labour market segment that has a high proportion of workers paid by the state may have distortions due to the commendable need to follow best practice rather than the profit motive. I would argue that where acute shortages of nurses have occurred rates (either of base pay or special allowances) move upwards, attracting not only joiners from the UK but qualified staff from overseas, thus draining those countries of badly needed medical resources.
I note in an article on nursing times.net that nursing sickness absence is “one and a half times more than the absence rate seen in the private sector”. (The sickness rate among investment bankers is, in my experience, very low) That is not to decry the nursing profession, but to point out that there are numerous differences between labour market segments many of which relate to the culture issue, “the way we do things around here”.
That leads on to an interesting argument about why some labour market segments, such as professional footballers, film stars, TV presenters, CEO’s of big companies; are paid so much more than nurses, policemen, army personnel and so on. Perhaps this could be the theme for part three of “Through the eye of the needle”?
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