Mind the pay gap: Why inequality is bad for us all

Mind the pay gap: Why inequality is bad for us all
Published: 
February 2015

Low pay is no longer just a problem for the poor – it can have a damaging effect on business and the economy too, according to a leading economist.

Effectively we are telling [people] their jobs are not important because they don’t get paid much.

When American health insurer Aetna announced it was giving its lowest-paid workers a rise, its CEO Mark Bertolini urged other companies to follow its lead.

Bertolini’s decision stemmed from his concerns about rising inequality, after reading a book on the subject by French economist Thomas Picketty.

As the gap between rich and poor has widened, income inequality has been the subject of growing debate and was top of the agenda at the recent World Economic Forum in Davos.

It is a topic that has particular significance in Australia, which prides itself on being an egalitarian society but where pay divisions have been widening since the 1970s.

In the past 40 years, wages have risen by 15 per cent for the bottom tenth of the population and by 59 per cent for the top tenth. Australia’s top 20 CEOs now earn 150 times more than the average person.

According to Professor John Mangan, an economist with UQ Business School and a specialist in labour economics, low pay is no longer just a problem for the poor but for business and the economy too.

“Low pay is the biggest problem facing the economy at present,” he says. “We haven’t see this degree of income inequality ever before in Australia. It’s new territory for us and it concerns me greatly as to what will happen.

“The problem has been creeping up for a long time, but was disguised by the rise in dual-income households, which meant it wasn’t essential to have to manage on one wage.

“What is particularly worrying is the decline in full-time jobs and the growth in unstable, casual employment. Between 26 and 31% of workers are now in ‘non-standard employment’. While some are skilled professionals earning good money, or some find it fits with their lifestyle, they are a very small minority.

“For most of these people, casual jobs are the only jobs they can get. They are not in position to barter. Even in situations where casual workers appear to earn a higher rate than others, it doesn’t compensate for the lack of holiday pay, sick pay or other benefits.”

To understand the changing pay landscape we need to look back to the 1970s, when there was less pay disparity but wage structures were criticised for failing to incentivise workers. The argument then was that market-driven pay would give people the rewards they deserved.

Since the move to a market-based economy, pay has diverged, with skilled managers and professionals able to command ever higher rates, while semi-skilled or unskilled workers have been left behind.

Around 3 million people in Australia now have their pay determined by decisions on the minimum wage. They include many key workers providing the basic services on which society depends – such as bus drivers, cleaners, carers, security workers, farm labourers and local authority staff.

According to Professor Mangan, the problem is that while the market-driven pay system rewards skills, it does not reflect the value of jobs to society. Therefore a newly-qualified marketing graduate may earn three times more than a carer or cleaner who makes an equal, if not greater, contribution to the social good.

This creates a number of problems for business and the wider economy. “Inequality can have a major impact on morale and team loyalty,” says Professor Mangan. “It’s very difficult to be motivated if you know your boss is earning at least ten times what you do.

“As a result, people are putting in less effort than required. Effectively we are telling them their jobs are not important because they don’t get paid much. There is also the risk of corruption, and as many low-paid workers are in responsible roles, that could be very dangerous.”

Inequality could also be having a wider effect on society and spending habits, he adds: “Despite the egalitarian basis of Australian society, people now appear more willing to compete against each other in the labour market and more concerned about their own interests rather than society in general.

“Inequality may also be affecting our spending habits, with low-paid workers spending more on coffee and fast food and less on holidays, consumer items and family outings.

“At the other extreme, the rich are investing heavily in property and assets, pushing up prices so they become even further out of the reach for ordinary workers, and running the risk of creating a bubble that will have longer-term consequences.”

So what can be can be done to reduce the pay gap and put society back on a more equal footing? Trades unions and business groups disagree over the remedy. Professor Mangan believes it’s a difficult problem as intervention runs contrary to the principles of a free market upon which our economy is based.

Rather than a sharp hike in the minimum wage, he suggests a range of other measures. “At the top end of the scale, companies need to rein in the pay of top executives. Activist shareholders can play a major role in this by demanding the company demonstrates social responsibility by distributing its profits more fairly.

“At the other end of the scale, the Fair Work Commission needs to be given greater powers of enforcement and, rather than focusing solely on the concept of a minimum wage, we also need to reintroduce the idea of a fair wage.

“We live in a market-driven economy and to go against that philosophy could be seen as an attack on freedom. However people need to realise that in the long term, such a great disparity of income is not good for business or society.

“The pay gap is now so vast that while people may be sharing the same geographical area, they may as well be living in a different society. To me, that situation is clearly unsustainable.”