Income Inequality Is Breaking Britain

New research released this month shows the growing chasm of income inequality that is tearing Britain's social fabric apart. It can't be fixed by half measures – we need a fundamentally new economic model.

Last week saw the release of two headline reports whose findings, though far from surprising for many on the Left, are nevertheless important in understanding and quantifying the contours of the contemporary UK economy – and developing a political-economic strategy to demand as we slowly emerge from this pandemic.

The High Pay Centre released the findings of its inaugural ‘pay ratio’ report, looking at the relationship and distance between the earnings of highest and lowest paid employees of FTSE 350 companies. Alongside this, research from LSE and King’s College London—released as a working paper from LSE’s International Inequalities Institute—showed that the economic case for cutting taxes for the rich (otherwise known as ‘trickle down’ economics) is incredibly weak.

Low taxes neither induce more time spent or effort expended at work, nor do they lead to improvements in economic performance, as measured by either falls in unemployment or increases in real GDP per capita. What they do achieve, however, is rising income inequality.

Income inequality has increasingly characterised the UK economy since the onset of neoliberalism – as the geographer Danny Dorling has shown in his work, prior to the election of Thatcher, the UK was the second most equal country in Europe behind Sweden. Today, it is the most unequal developed member of the OECD besides the untrammelled gerontocratic plutocracy that is the US.

The sheer scale of contemporary intra-firm levels of inequality is laid bare in the High Pay Centre’s report. At Ocado, by some distance the most egregious example, the CEO earns a staggering 2,600 times the median pay of their employees. Ocado, it should be noted, represents something of an outlier: yet the trend for significant pay disparities, even if not at the levels seen at Ocado, is a commonality across the FTSE350.

At JD Sports and Tesco, the CEOs earn more than 300 times their median employees; at Morrisons and WH Smith, more than 200 times; and at Serco—which has, as Solomon Hughes has discussed in Tribune, been amply rewarded for repeated failure—the CEO earns 190 times the pay of a median employee.

At the sectoral level, it is retail which has the largest disparities – of the top ten greatest pay disparities of surveyed companies, six are in this sector. As a whole—and excluding the Ocado outlier—the pay ratio for the retail sector is a staggering 140:1. Relying on corporate benevolence or noblesse oblige at the boardroom is clearly a nonsense: one of the intriguing findings of the LSE working paper on trickle down is that tax cuts for the rich prompt even greater efforts by the rich to secure further tax cuts.

What then is to be done? Amidst the inequities on show, an important finding in the retail sector is that workplaces with union representation had significantly higher—although still nowhere near high enough—pay. In retail companies where pay negotiations involved union consultation and/or collective bargaining agreements, lower quartile pay thresholds did not fall below £18,000; in companies without these arrangements, some lower quartile pay thresholds were below £15,000.

Yet, as the authors of the High Pay Centre report point out, while collective bargaining can raise the pay of those at the bottom of the pay-scale in a firm, it appears to have little impact on the pay of those at the top. Here, perhaps, there is a need to turn to the latent power of pensions – what are increasingly regarded as ‘workers’ capital’. As David Webber, author of The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, has provocatively noted: ‘The failure of virtually the entire left-of-center political spectrum… to even understand how these pensions function—is a profound strategic, tactical, and moral blunder.’

There is excellent work by figures such as Robin Blackburn, Christine Berry, Richard Minns, and Craig Berry in this area. The need to progress what some have referred to as ‘pension fund socialism‘ fits into a wider pincer strategy—the necessity of which is made clear by these recent reports—that the Left needs to progress: demanding better pay and working conditions in the present through union organising; protecting our collective pension provision through a more combative wielding of workers’ capital.

Pension funds, after all, own significant stakes of many large firms, and are capitalised by the contributions of working people: they could—and should—be wielding their power to veto the increasingly absurd salaries and pay-outs being awarded to company executives, and instead ensuring pensions work for, rather than against, their interests. Paying a CEO £1m instead of £6.5m—an example discussed in the High Pay Centre’s report—would result in a bonus of £5,000 for around 1,000 workers.

With Rishi Sunak—a man who has made mishap after mishap throughout this crisis—now demanding workers go on a spending spree to save the economy, weeks after unilaterally imposing pay restraint on the public sector, it is important the Left are able not just to rebut his bogus economics, but to formulate a strategic alternative with popular resonance which can both build worker power and put cash in people’s pockets. Wielding the power of their pensions at the boardroom, progressing union power at their workplaces, and demanding a wealth tax rather than austerity represents precisely the kind of policy mix workers need to be advocating.