THE RICH GET RICHER - /New Economy t J

53

The rich JOHN SUTHERIAND

1 m . Readerin labour get richer Leedstzurinexskhod,

LeedsMetmpolitam Earnings inequality is increasing

because the rich are doing so well

hat inequalities have increased is now part of an empirically substantiated T conventional wisdom. Johnson and

Webb (1993), using data from the Family Ex- penditure Survey and employing standard statistical measures of inequality, were able to conclude categorically that “the UK in- come distribution widened during the 1980s”.

Gregg and Machiin (1994) in their inter- country examination of income and earn- ings inequalities, con- cluded that “inequal- ity only started to rise in the UK from the late 1970s onwards, but the rate of growth in the 1980s appears to have been faster than that of other coun- tries”.

Although inequal- ity remained less pro-

used, the data accessed and employed, the populations examined and the time periods investigated.

A principal cause of earnings inequality in Britain between 1980 and 1993 was the dispro- portionately large increase in the earnings of the ’working rich’. It may be gratifying to see the earnings of the ‘working poor’ recognised

1974 I978 1982 1986 1990 1994

Source New Earning Survey

as ’low’ both in abso- lute and relative terms, and become a legitimate policy is- sue - for example in recent work by the Commission on So- cial Justice and the Joseph Rowntree Foundation. But too little attention has been given of late to the earnings of those at the top of the wage scale.

Widening gap nounced in the UK than in the US, Canada or Australia, Gregg and Machin continued, “the 1980s certainly saw the UK leapfrogging some European countries”.

Measuring inequality, however, is prob- lematic. It depends on the statistical measures

Imagine earnings in Britain represented on a scale of one to 100, where one is the highest earnings and 100 is the lowest. Thus, some- one who finds themselves at the ’tenth per- centile’ is near the top of the range and someone at the ’90th percentile’ is near the

0 1995 THE DRYDEN PRESS

54 NEW ECONOMY

bottom. The Chart (on the previous page) plots the ratio of the earnings of people at the 10th percentile to earnings of people at the 90th, as reported in the annual New Earn- ings Survey.

This shows the extent to which earnings inequalities changed over the period 1974-94 for four groups of full-time employees (whose earnings during the survey period were not affected by absence -like holidays or sickness). The groups were male manual, male non manual, female manual and female non manual.

Prior to 1980, the pattern appears to have been of decreasing earnings inequalities, especially for non man- ual workers. Post 1980, however, in- equality increased for all groups.

Inequality gmm since I980 Rams ofthe 90th to the IOth percentiles

Year range Mean SD Range Min Max ~~

Male manuals 74-79 2.08 0.02 0.05 2.05 2.10 80-94 2.40 0.13 0.37 2.16 2.53 74-94 2.31 2.18 2.48 2.05 2.53 Male nonmanual 74-79 2.65 0.05 0.13 2.57 2.72 80-94 3.11 0.28 0.77 2.68 3.45 74-94 2.98 0.32 0.88 2.57 3.45 Female manual 74-79 2.03 0.05 0.11 1.96 2.07 80-94 2.22 0.13 0.37 2.04 2.41 74-94 2.16 0.14 0.45 1.96 2.41 Female non-manual 74-79 2.50 0.11 0.26 2.31 2.65 80-94 2.65 0.16 0.48 2.35 2.86 74-94 2.60 0.17 0.55 2.31 2.86

Source: New Earnings Sumey

The differences in experience of the four groups over different time periods are further illustrated in the Table (above), which reports statistics for each group for 1974-94 and two sub periods, 1974-79 and 1980-94. Without ex- ception, the ratios are smallest for the earlier period and largest in the later period.

Similarly, the mean values of the ratios in- crease between the sub periods, as do the standard deviations of the means and the ranges. In other words, there was far more earnings inequality after 1980 than before.

Diverging lines This examination of earnings inequality makes use of a ra- tio which has the money value of the tenth percentile as the numerator and the money value of the ninetieth

earnings of thehgher paid and the lower paid for the period 1980-93, it is possible to explain the growing inequalities in terms of relative movements in the ’upper’ and/or ‘lower’ parts of the earnings distribution.

The Table on the next page shows the per- centage change in real earnings for someone near the bottom of the income scale and for someone near the top.

The contrast is immediately apparent. For the four groups of employees, the percentage

~

“ I t may be gratifying to see the earnings of the

’working poor’ recognised as ’low’, but too little attention has

been given to the earnings of those a t the top of the wage scale”

as the denominator. Arith- metically, of course, the

increase of the person near the top was greater than the per- centage increase of the per- son near the bottom. For ex- ample, whereas the percent- age change for male manuals in the 90th percentile was only 6.1 per cent, for the same group of employees in the 10th percentile it was 21.3 per cent (an average annual in- crease of 1.5 per cent).

value of this ratio may change as a result of a change in the numerator, or in the denomina- tor or in both.

So, by seelung to compare changes in real

Loolung at the group recording the great- est increase (non manual females), we see that for those in the lower bracket, eamings in- creased by more than one-third, but for those

55 ~~

THE RICH GET RICHER

1980 (in 1994 prices) 90th loth

1994 %change 90th 10th 90th loth

Manual males 156.50 341.60 Non manual males 175.10 468.70 Manual females 99.40 202.50 Non manual females 112.10 266.60

in the upper bracket, earnings grew by almost

166.00 414.20 6.1 21.3 200.00 688.50 14.2 46.9 114.00 272.00 14.7 34.3 152.00 430.30 35.6 61.4

ever, to tackle the prin- cipal cause of the measured increase in earnings inequality - namely, the appar- ently disproportionate increases in earnings of those at the higher end of the earnings scale.

Rather than consti- tuting a 'problem' in

two-thirds. That is to say, for each group of workers,

although the real value of both the numerator and the denominator of the ratio increased

their own right, these earnings increases may be symptomatic of other labour market prob- lems. They may, for example, be the direct consequence of skill shortages. Or they may

between 1980 and 1993, the value of the former exceeded that of the latter.

So we can attribute the growing earnings inequali- ties to the disproportionately greater increases experi- enced by those in the upper end of the earnings distribu- tion. Everybody's earnings increased, but some more than others.

"we can attribute the growing earnings inequalities to the disproportionately greater increases

experienced by those in the upper end of the

earnings distribution. Eve ybody's earnings increased, but some more than othemN

Would a minimum wage help?

be the result of people in work getting paid better as compa- nies downsize their workfor- ces.

The 'problem' must be cor- rectly diagnosed before there is any possibility of imple- menting an appropriate pol- icy response.

This complex problem warrants more detailed analysis than it has received hitherto. Such analysis would probably conclude by advo- cating a policy package incor-

Too frequently it is argued that implement- ing a minimum wage policy would redress the problem of increasing earnings inequali- ties.

Although it would not remove the 'tail' of the earnings distribution, a minimum wage policy would actually ratchet up the earnings of those in the tail. It would do nothing, how-

porating training programmes to overcome skills shortages and proposals to redistribute employment, in addition to implementing a minimum wage policy.

Increasing earnings inequality may well constitute a legitimate policy problem. But it may also be a statistical manifestation of more substantive labour market problems