How big should income differentials be?

I’ve been reading a fascinating book called “The Spirit Level” by Richard Wilkinson & Kate Pickett. This work argues that societies with greater income inequalities suffer a whole range of worse economic and social outcomes than more equal countries.

The most obvious sign of income inequality is in the area of pay. Obviously the Chief Executive of a company should be paid more than his staff. But how much more? Compared to the lowest paid of his employees, should it be twice, five times, 10 times?

“The Spirit Level” quotes a study which shows that ratios of CEO compensation to the pay of production workers in manufacturing might be 16:1 in Japan, 21:1 in Sweden, 31:1 in the UK and 44:1 in the USA. What sort of ratio is fair and sensible? Is it really 30 or 40 times average pay?

Britain’s new Prime Minister David Cameron has argued that no senior manager in the public sector should earn more than 20 times more than the lowest- paid person in their organisation. Shouldn’t the same should be true of the private sector? The John Lewis Partnership – for which my half-brother works – has a 40:1 limit.

Such a question assumes new force at times of economic recession like now. If we all have to suffer some economic pain, where should the pain fall? Would it not be fair for income differentials to contract at such a time?

Instead we find – at least here in the UK – that the opposite is happening. New research by pay monitoring group Income Data Services shows that top company directors have had pay increases averaging 7% and bonus increases averaging 22.5%. Do you know anyone who has enjoyed such increases in remuneration in the last year?

What is to be done about such massive and rapidly growing inequality in our society? Surprisingly the new Coalition Government has appointed two Left-leading individuals to conduct reviews which are relevant. Labour MP Frank Field is doing a review of poverty, while Will Hutton – head of The Work Foundation – is going to do a study of public sector pay.


  • Philip

    I am quite interested in knowing how many of the ‘respected business leaders’ that the Tories trotted out to attack Labour’s proposed rise in NICs have signed up to agree a x20 multiple?


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