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14 June 2007

Inequality is a middle-class issue

Peter Wilby says income disparity should worry Gordon Brown

By Peter Wilby

I have long suspected that we are not being told the whole truth about inequality. Growing income differentials in the US and UK, it is said, are caused by the impact of technological change in a global market, which puts a higher premium on employees’ skills. The way to a more equal society, therefore, is for the laggards to get themselves educated, preferably in economically useful subjects. If three-year-olds from disadvantaged homes are lagging a year behind their more affluent peers, as the University of London’s Institute of Education has just reported, the answer must be more early intervention in family life.

This account is roughly the one favoured by new Labour and, although Brownites seem more inclined than Blairites to utter the word “equality”, their policy proposals are almost identical. My suspicion that the standard narrative is, at best, only half true is supported by a new paper from economists at the Massachusetts Institute of Technology (Inequality and Institutions in 20th-Century America by Frank Levy and Peter Temin, Department of Economics Working Paper 07-17).

The paper doesn’t mention Marx, but it shows the old boy was broadly right. “As capital accumulates,” he wrote, “the situation of the worker, be his payment high or low, must grow worse.” Since 1980, US productivity has increased by 67 per cent. Median weekly earnings are up only 19 per cent (inflation discounted). In other words, the bosses – shareholders and top executives – have been grabbing more, allowing the richest 1 per cent to double their share of US national income. This is an exact reversal of what happened in the three decades preceding 1980. Median incomes then kept pace with labour productivity while top incomes lagged behind.

Even those bare facts sow some doubts about the conventional wisdom. Millions in the US have acquired word-processing and computer skills since the 1970s and the proportion of Americans who take degrees has long been high by international standards. So why should the difference in incomes have been greater in America than in most European countries?

The MIT paper offers some clues. Whether you consider BAs or high school graduates, median earnings growth since 1980 has still lagged behind productivity gains, and the disparity in incomes within these groups has increased. For example, in 1967, a young Wall Street lawyer’s earnings were 14 per cent higher than the median for everyone else of similar age and education. By 2005, they were 120 per cent higher. So, even if you acquire more education and skills, the winner-takes-all rules of the global market will work against you if you come second, third, or lower. The point can best be illustrated in professional football. I doubt the skill levels of Rochdale or Torquay players are significantly lower than they were 30 years ago, or the skills of the top players higher, but the disparity in incomes is far greater.

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Sport is a legitimate example of a global market. Since language and local knowledge are of little importance, a player’s skills are as valuable in England’s Premier League as in Côte d’Ivoire. That is not true of all industries which now have high top salaries. The MIT paper argues that, before 1980, top American salaries were restrained by stronger unions, higher minimum wages, higher taxes, more regulation, and other norms of the “corporate state” that is now so derided. The same applied to the UK. In those days, the social climate didn’t favour high pay for bosses. Giving your chief executive a £1m bonus was bad for business. As top people’s pay goes out of control – leaving behind even most of the middle classes – that climate could return.

As I argued in this column on 21 May, inequality is becoming a middle-class issue. For example, the scandal of non-domiciled tax status – which allows the super-rich to live in Britain without contributing a penny to the Exchequer – increasingly exercises the Mail and Telegraph, because their readers in the south-east experience direct effects in competition for houses, private school places, childcare and domestic help. The MIT paper quotes examples of how even Americans, who are normally relaxed about inequality, are getting tired of seeing a sharp-suited elite become fabulously rich at everyone else’s expense. Perhaps Gordon Brown should hang on to that “old Labour” label a little longer.

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