I’ve been ruminating about…income inequality
A recent OECD report entitled Divided We Stand, has noted that the gap between New Zealand’s highest and lowest paid has widened more than in any other developed country during the past twenty years. New Zealand, which for decades was one of the most egalitarian of all societies in the world, is now in the bottom half of the OECD countries for income equality.
It’s important to note that the OECD report only uses data relating to income levels – not wealth. As economist Gareth Morgan points out, if the figures took into account non-cash returns (wealth from assets and property) then the differential between the wealthiest and poorest worker would be far greater.
One of the most highly publicized examples of the rapid jump in incomes at the top end of employment is the banking industry. The CEO’s of our four trading banks were paid an average of just under $4m each in salary, bonuses and benefits this past year. While this is small fry compared to New Zealander Sir Ralph Norris – who receives more than NZ$20m for heading up the ASB’s owner (CBA), it is still a sobering number. This is all somewhat ironic given the contribution of the banks to the recent financial crisis, with their loose and easy offer of cheap money.
Other high profile CEO’s are Telecom’s Paul Reynolds ($5.2m in 2011), Fonterra’s Andrew Ferrier ($5.1m in 2010 – a $1.5m increase on the previous year). This is compared to the average fulltime work remuneration for Kiwis of just over $52,000pa (June, 2011 figures). Let’s put that in perspective. Our highest paid CEO’s are now paid one hundred times that of the average fulltime worker in NZ.
However, it’s the escalation of remuneration rates that’s of most concern. The last three years have been some of the toughest we’ve had for twenty years. Many employees have either not received a pay increase or had one that didn’t even keep pace with inflation. Meanwhile, those at the top end are raking it in at a fast and furious pace. In NZ we now have 26 chief executives earning in excess of $1,000,000. Eleven years ago there were none – and the highest earning wasn’t within a bull’s roar of $1m.
It’s even evident in the trades. I recently had to pay a plumber $110 per hour to do a job at home. Yes, it was the holiday season – so there was a premium. But as he explained to me, his normal rate was $80 per hour – plus a fixed call-out fee. Three years ago I was paying $50-60 per hour for the same service.
However, this exponential rate of pay increase is not just a private sector issue. It has also had a flow-on effect to the public arena.
Tim Hazeldine, an economics professor at the University of Auckland, uses his own institution to demonstrate what has happened. He notes that the vice-chancellor (the “CEO” of the university) now earns 40% more in real terms (that’s after accounting for inflation) than his predecessor did ten years ago. Meanwhile, the teaching staff earn 10% more than a decade ago. I wonder what the pay increases for cleaning staff at the U of A have been over the same period?
All this points to what the Australian entrepreneur Dick Smith has labelled the greed of “extreme capitalism”. Smith slams CEO’s such as Coles’ Ian McLeod, who are sucking whatever they can without regard for their own workers, and without “re-investing” such income in philanthropic causes. Of course, there are several examples of business leaders who exercise restraint and a genuine commitment to the “common good”, but overall, I’d have to agree that they are the exception rather than the rule.
So how has this growing inequality come about? Respected economic commentator Brian Gaynor posits one factor: “Listed companies are major contributors to income inequality because there has been a significant transformation from owner capitalism to manager capitalism over the past few decades.” In other words, corporations are now mainly run by “hired guns”, rather than owners. They tend to have different priorities.
According to Gaynor, these managers are granting themselves huge pay increases and the dominant shareholders in these corporations are generally institutions (such as managed and hedge funds) who have no real interest in monitoring such pay rates, stock options, bonuses and directors’ fees, because they are only short-term shareholders – buying and selling at will, in order to make gains.
Gaynor suggests that this problem originated in the US, where income inequality is the greatest. However, because of the globalized job market, it has set a precedent for the rest of the world, ratcheting-up salaries in countries like Australia, and then on to New Zealand, which takes its lead from across the Tasman. And the flow-on effect engulfs the public sector as well – as consultant reports recommend executive remuneration commensurate with what could be earned in the marketplace. The recent high profile case of the CEO of Christchurch City Council is an example of this process at work.
Who cares?
When it comes to income disparity, many people shrug their shoulders and mumble, “who cares?”. Some even consider that such a growing gap is good for our country; that it just proves that opportunities and incentives for motivated and hard working folk to upskill and improve their financial situation are there for the taking and are having the desired effect. If you get the right qualifications, work hard and go for it, why shouldn’t you be rewarded handsomely?
While this sounds perfectly logical, there are two important counter-balancing issues. The first is that our society is not a level playing field of equal opportunities. The second is that more equal societies are considered to be more peaceful and harmonious.
For the sake of brevity, I’ll focus on the second of these issues – though you’ll find a brief “afterthought” at the end of this article regarding the issue of equal opportunities.
Why we should all want a more equal society (and world)
Does income and wealth inequality really matter? Or are arguments for the reduction of such disparities just an envy-driven attempt to clip the wings of the rich? Or perhaps another expression of the classic Antipodean “tall poppy syndrome”?
While there will always be an element of this by some, the core argument against too great a gap between “rich and poor” is a valid social concern. Income and wealth inequality matters because it ultimately affects the stability and harmony of a society. OECD secretary-general Angel Gurria sounds a word of warning by stating: “The social contract is starting to unravel in many countries. The benefits of economic growth DO NOT trickle down automatically, this study dispels that assumption. Greater inequality DOES NOT foster social mobility”.
What does Gurria mean by “social contract” and why should matters such as social mobility matter? Well, here’s the rub: a government only has a mandate to rule to the degree that its citizens allow it to exercise authority. The social contract refers to the relationship between people and the government regarding reciprocal rights and responsibilities.
The cohesion and harmony of a society in large measure depends on how convinced most of its citizens are that they (and others) are getting a “fair deal”; that the rules and agreements are “working”. When people feel they are being taken advantage of, not listened to etc., they begin to question the validity of the systems and means of running society. For example, if it’s perceived that there is little capacity to “improve oneself” socially and economically (poor social mobility) they will become discontent or protest.
Sometimes this frustration occurs through peaceful protest, but often it leads to illegal activity. Much crime is at least partly a result of a sense of frustration, envy, sense of entitlement or perceived injustice. At the extreme end of the breakdown in social contract, societies can reach a tipping point and erupt into civil disobedience (e.g. Burma in Sept 2007) – or violence (as we’ve seen recently with Egypt, Libya, Syria etc.).
A more equal and equitable society is a safer, fairer and more contented society. We all want that. Too greater economic inequality sows the seeds for unrest and division.
So the point around income inequality is not whether hard work, initiative and skills should be rewarded. Of course it should. No one is disputing that a bank executive should be paid more than a bank cleaner. The issue is – how much more? Is it fair and right that a bank CEO be paid over a 100 times more than his or her lowest paid employee? Is he/she really “worth” that much more? And if there are extreme differences in pay rates, what does this communicate to those working in poorly paid roles?
How?
So if it’s important to have a better, more equitable share of income and wealth, how should this be achieved, and to what extent? These are, of course, major issues of debate – and way more complex than I can cope with! However, here are a few thoughts:
Those who most passionately believe in the capacity of “the market” to manage rates of remuneration and redistribution argue vociferously for minimal regulation. Less government interference in the market is best.
But this approach is, in my opinion, way too optimistic about both human nature and the capacity of a free market to act morally.
We only need to look at what has happened in our market economies over the past couple of decades to see what so-called “freedom” has produced: increased greed, manipulation of the system and plain old corruption and fraud in abundance; the making of truckloads of dollars in ways that don’t contribute any productive value to our economy; the loaning of cheap and easy “credit” to encourage people, businesses and governments to live way beyond their means; those who commit white collar crime and unethical practices often getting away with minimal or no consequences…..the list goes on.
The point is, we all need regulation in order to protect ourselves from the worst excesses of our self-serving natures. And to assist in giving some measure of protection to those most vulnerable in our society. Sure, government should be careful not to over-regulate. And sometimes they regulate the wrong things. However, as I saw in the car industry, “self-regulation” doesn’t work too well. Some degree of outside control and intervention is needed.
One important element of a government’s role to promote equity is the tax and benefit system. The OECD report suggests that since the mid-nineties these systems have become less effective at redistributing income and wealth. In fact, benefit levels have fallen in nearly all OECD countries (including NZ) over the past fifteen years, while tax rates for high earners have been cut. Both factors have increased the gap in income levels.
In NZ, economists such as Gareth Morgan argue that our tax system is not fair. Any system that only taxes income and consumption, and doesn’t tax wealth, is naturally going to favour those who are either clever enough to avoid paying their share of tax and/or are able to grow their wealth through non-taxable means. Morgan argues for a radical overhaul of our whole redistribution system (see, for example, his book The Big Kahuna).
Changing the redistribution of income and wealth is not the full answer to income inequality, but it is one of the keys. I agree with Morgan that a major revamp of our tax and benefit system is overdue. Our welfare system tends to disempower the poor and discourage initiative and personal responsibility. And as noted, the taxation system is inconsistent and unfair.
However, I have serious doubts there is the political will or courage to undertake radical surgery. Nevertheless, the Labour Party’s pre-election proposal of a capital gains tax was encouraging. (And in case you’re wondering, I didn’t vote for them!) But what is really needed is a cross-party accord – so that raising such possibilities don’t automatically lead to electoral suicide.
Political change will only happen when those who have most to lose are convinced that such changes are ultimately for the benefit of us all. The vision of a more cohesive and harmonious society is attractive – and worth fighting for. However, the basis for this is a prevailing commitment to the common good – over and above that of our own personal interests.
Increasing disparity in income and wealth is not inevitable. It can be reversed. But it will require both attitudinal and structural changes.
For those of us who follow Jesus and are driven by the biblical principles of economic justice, redistribution and generosity, we can do our part to work towards a fairer, more equitable society. This can happen through the businesses we choose to support, the way we relate to our employers/employees, and the choices we make with our income and investments. It can also occur by our advocacy and support for policies that recognize the ethical, social and political dangers of extreme economic inequality.
AFTERTHOUGHT: No level playing field of opportunities
A common argument presented is that our public education system treats all students equally and that opportunities to improve oneself economically are evenly available to everyone.
In regard to education, there’s certainly a kernel of truth to this thinking, but it only tells half the story. When young Levi or Melissa come to school, by far the most significant element in their capacity to take advantage of this “equal learning opportunity” relates to factors outside the classroom. Put simply: will the people, environments and experiences Levi and Melissa have, support their learning, or will they be more obstacles than helps? For many children come to school already deeply handicapped by matters outside of the education system’s control.
These “barriers to learning” are numerous. They include negative or abusive home environments, untreated health issues, undetected learning difficulties, poor housing, inadequate diet, condoned truancy, and bullying.
What, for example, if Levi is traumatised by a drunk and abusive father? How will this affect his learning? Or say Melissa’s parents are non-English speaking immigrants. What support will she get at home in her quest to learn to read?
Now most of us are familiar with the stories of “successful” people, who rose above such obstacles. And it is true that there are folk who through resilience, hard work and good fortune, achieve beyond what the stats would predict. “I was raised by a solo mother in a state house and look where I am today…” Sound familiar? It’s great when this happens. However, they are very much the exception than the rule.
The reality is that we don’t have a level playing field. Even if our schools and classrooms provided absolutely equal opportunities for all children (which they don’t), these wider life-issues vary so greatly that the education and employment options of some are much more abundant than for others.
There’s another reason why I don’t believe we have a level playing field. It’s this: all industries are not created equal. When we take into account the level of skill, the number of years of tertiary study, the difficulty, challenge and responsibility of the job, and the time and energy it demands, certain jobs get paid a lot more than equivalent work.
The truth is that how much you can earn is significantly dependent on the industry you find yourself in. Some reward poorly, some averagely, some handsomely, and others spectacularly.
What or who dictates this inequality? Certainly the law of supply and demand contributes. If you happen to have skills and experience that few others have, then you’re likely to be paid a premium for your work. There is great leverage in market forces. And some economists would say that globalization has accelerated this.
However, I also suspect that perception is sometimes substituted for reality. If a particular industry can persuade its clientele that the service it provides is so valuable its workers just have to be compensated at a certain level, then that’s what people will eventually accept. For example, pre-1 January, 2000, a whole bunch of computer experts were being paid megabucks because we were all led to believe that our world would end up in chaos if our technology wasn’t millennium-compliant. It was just too awful to take the risk, so we paid up.
In the system we live in, those who don’t work in fields driven by market forces are at a distinct disadvantage. Social workers, nurses and teachers have less bargaining chips than IT workers and engineers. These service professions generally work for the “public good” and contribute more to social outcomes than economic ones. A software writer’s fee can be written into the cost of the job and passed on to a customer. The cost of the teacher must be paid by someone, but it ain’t going to be the parents of the children he/she teaches (unless it’s a private school!).
How we develop greater equity across job sectors is challenging territory. Is it even possible, given the fact that the market largely dictates remuneration rates – both in the private and public sectors? These are questions worth pondering.
However, my main point here is simply to demonstrate that we don’t have a level playing field of opportunity. While it more level than most countries, nonetheless where we start in life and what area of employment we end up in, will significantly affect our economic opportunities.
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