Posts Tagged 'income levels'

The Establishment of a High Pay Commission

By Aine Walsh, Communications Worker with EAPN Ireland

Recent studies (Wilkinson and Pickett, 2009) have highlighted the negative effects of unequal societies on both our health and psychological welfare: the wider the gap between high and low earners the greater the prevalence of social unrest and disenchantment in a society.  The net result of that unrest and disenchantment is profound and disturbing: mental illness, the rate of imprisonment, levels of obesity and murder rates are all five times higher in the most unequal societies when compared to the least unequal. As Irish levels of income inequality are incrementally increasing it is important that we take a comprehensive look into this issue, with a view to suggesting workable solutions.

One hundred years ago, business guru JP Morgan stated that the difference between high and low pay should be no greater than 10%. He argued that such a differential is enough to create motivation for advancement.

A 2009 Behaviour and Attitudes Poll commissioned by TASC found that 85% of adults believe the government should take steps to reduce income inequality.[1] Income inequality in Ireland is in fact increasing, for example the richest group faced lower prices in June 2009 than July 2007, whilst the poorest and median group faced higher prices, as deflation is commodity specific.[2]

A recent survey in the UK highlighted the lack of informed knowledge that many people have surrounding this area; firstly, 79% of the population place themselves as middle income earners, thus indicating that the average income is a figure which most people are not aware of, with many high and low income earners placing themselves misguidedly in this bracket. Secondly, this falsehood was also shared by the wealthy (those earning over £100,000) who believed the average UK wage to be double the actual figure.[3] The creation of a High Pay Commission could help alleviate these misconceptions and address the dearth of information.

One solution that has generated considerable international debate is the mooted introduction of a High Pay Commission, which would be tasked with carrying out an in-depth analysis of income inequality in the Irish private and public sector. The rationale for creating a High Pay Commission is twofold; to increase public knowledge about inequality and to propose workable remedies to income inequality and its effects.

In effect the idea is to put a ceiling on what people can earn; a maximum wage. The concept of such a body is not entirely without precedent. Indeed the Irish government established a similar, albeit on a smaller scale, initiative to investigate and provide recommendations on how to reduce the levels of high remuneration prevalent in the Public Sector. Various actors in the UK have also been debating the possibility of a High Pay Commission and the proposal did attract some attention at the outset of the last general election campaign (Lawson 2010). Ultimately a High Pay Commission would propose a comprehensive set of joined-up regulations to tackle excessive pay.

How the Commission would work

The task before a High Pay Commission would be to investigate possible reductions in the top earners only in order to create more income equality.  The establishment of a High Pay Commission would also address the dearth of information on income inequality and its negative effects on our society. Without better information on high pay we can’t tell its effects on, for example, Ireland’s competitiveness. The High Pay Commission could also look into the possibility of tax reforms which would create further redistribution of wealth from those on a high income to the lower earners.

It is important firstly to ensure that the composition and structure of any Commission itself is sound in order to ensure viability and effectiveness. The UK organisation Compass, which is the force and catalyst behind a demand for the establishment of a High Pay Commission in the UK, has outlined the basic structure that such a body might adopt. This includes the creation of balanced Commission, led by a Director, under the instruction of a Chair and a small number of Commissioners, backed up by an expert panel of independent advisers. The High Pay commission should also be furnished with a detailed and accurate account of the economy and our economic outlook, which should be contributed to by the Department of Finance but also other expert bodies and academics in order to receive a balanced and broad perspective. The Commissioners should be broadly representative of civil society, including from the financial and business sector, organised labour, a relevant academic or economist, a journalist and a community and voluntary sector representative. The task of the High Pay Commission would be to examine existing data, commission new research, conduct hearings and test the resulting recommendations with interested parties. Their overall aim would be how best to reduce excessive risk and rewards in the medium to long-term.

TASC has argued that there are two available methods to reducing the wage gap; firstly through progressive taxation on income and wealth as is used in Sweden, the second is to have smaller differentials in income and wealth before taxes which means there is less need for redistribution, as is availed of in Japan.[4] This report also notes that preventing excessively high incomes and wealth at the top is just as important as raising incomes at the bottom.

International practice

An example of how such a structure of more equal pay could be introduced into the Irish system is demonstrated by Sweden, a similarly small economy which has successfully introduced a more equal and non-market orientated wage structure.[5] In Sweden this has resulted from an egalitarian wage structure, promoted by the Trade Unions over the past fifty years. This is a good example of the positive welfare effects of more equal distribution as chosen by workers. Government social transfers account for a much higher percentage of GDP in Sweden and Denmark than countries such as the US and Ireland. Nordic countries also tax the benefits paid out more extensively than other countries, a policy which hurts the poor very little as the tax rate tends to increase with household income.[6]

The Australian government’s Productivity Commission published a report in January 2010 entitled “Executive Remuneration in Australia; Inquiry report”. The aim of this was to examine the trends in remuneration in Australia and internationally, the types of remuneration being paid, to whom, and the relationship between remuneration and corporate performance.[7] This report also sought to; assess the effectiveness of the current framework for the oversight and transparency of remuneration, consider any mechanisms for aligning better the interests of boards and executives with shareholders and the wider community, examining the effectiveness of international responses to this issue in light of the financial crisis, and finally, providing recommendations on how the existing Australian framework governing remuneration could be strengthened.

The US has also undertaken steps in pursuit of a more equal and stable society. For instance Barack Obama has introduced individual salary caps of around $345,000 per year for those working in institutions which have received government support.[8]

A motion brought before the UK Parliament in November last year succinctly highlights why the creation of a High Pay Commission is essential;[9]

That this House believes that the Government should establish a High Pay Commission to examine the effects of high pay on the economy and society; acknowledges that over the last 30 years median earners have seen incomes increase at less than the average while the super-rich including UK chief executive officers have seen their pay increase to 76 times that of the average worker; notes three main concerns over the effect of high pay in Britain: the link between excessive pay and the financial crash, the questionable link between economic performance and high pay and the social effects of inequality due to the increase of wealth concentrated at the top of society; and calls for a public inquiry to bring all of the facts, evidence and arguments into the public domain.”

Conclusion

A myriad of possibilities for reform therefore exist, simply waiting to be explored and tested by an investigative body such as a High Pay Commission. Although the form, structure and reliability of the High Pay Commission is important, what is most essential is that some form of review is undertaken into this issue and presented to the public and our representatives in government.

Overall, an Irish High Pay Commission should aim to; encourage the retainment, recruitment and motivation of high calibre people whilst remunerating them more appropriately; increase the public’s knowledge on inequality through the publication of a regular report; investigate and relay best practices from other jurisdictions; investigate the feasibility of creating a more Nordic style system of redistribution in Ireland; the creation of legislation on this issue; and list recommendations for the reduction of excessive remuneration.

It is therefore to be concluded that a High Pay Commission is necessary. It is recommended that such an investigative body be created; charged with reviewing our high pay culture, the effect this has on society and what steps can be taken to create more positive changes. This is an issue which is adversely impacting upon the lives of every Irish citizen and thus requires the utmost attention.


[1] McDonough, T., “Hierarchy of Earnings, Attributes and Privilege Analysis”, TASC, 2009, p.2, available at  http://www.tascnet.ie/upload/file/9644%20HEAP%20BOOKLET(1).pdf, accessed July 2010.

[2] Jennings, A., Lyons, S and R.S.J. Tol, “Price Inflation and Income Distribution”, ESRI Working Papers No. 308, August 2009, p. 3, available at http://www.esri.ie/UserFiles/publications/20090804111315/WP308.pdf accessed June 2010.

[3] Aoronovitch, D., “Spare a Thought for the Undeserving Poor”, Times Online, August 2009, available at http://www.timesonline.co.uk/tol/comment/columnists/david_aaronovitch/article6799645.ece , accessed June 2010.

[4] McDonough, T., “Hierarchy of Earnings, Attributes and Privilege Analysis”, TASC, 2009, p.2, available at  http://www.tascnet.ie/upload/file/9644%20HEAP%20BOOKLET(1).pdf, accessed July 2010.

[7] Australian Government Productivity Commission, “Executive Remuneration in Australia; Inquiry Report”, available at http://www.pc.gov.au/__data/assets/pdf_file/0008/93590/executive-remuneration-report.pdf , accessed July 2010.

[8] Compass, “Never Again”, Direction for the Democratic Left Limited, p.9, available at http://clients.squareeye.com/uploads/compass/documents/Compass_NeverAgain_lowres_webready_V2_1.pdf , accessed July 2010.

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Defending the Minimum Wage

Aiden Lloyd is the temporary Coordinator of the Irish Network of the European Anti-Poverty Network and a member of the board of the Society of Cooperative Development Studies Ireland (CDSI). He was previously the national community development & equality coordinator with Pobal, an organisation that manages social inclusion and equality programmes on behalf of Government and the European Union. He has been involved in a range of community development, local development and regeneration initiatives in Ireland and Europe.

The vulnerability of weaker sections of society becomes obvious in times of recession. Already it is clear that those who can least afford further income reductions will be asked once again to ‘share the pain’ in December. It is clear however, that sharing – in the eyes of the Government – is a fundamentally unequal process. In a recent interview on Fox News, the Taoiseach Brian Cowen asserted that our 12.5% corporation tax rate is ‘non-negotiable’. It is interesting that such a fundamental aspect of our economy is not even up for discussion in a time when everything is supposedly on the table. Sadly, the incomes of the poorest people in our society have yet to make it into the ‘non-negotiatiable’ column.

Calls for a reduction in income may be carefully masked, as were the reductions in social welfare payments at the last budget (justified on the basis of a fall in the cost of living) but they can also be overt. The call for a reduction in the Minimum Wage is totally transparent and is based not on a convincing economic narrative, but rather on political expediency from well-resourced and vocal sectional interests.

Initially, the argument to reduce Ireland’s minimum wage was articulated and promoted by IBEC on the basis that we needed to improve competitiveness. While there is certainly a need for the Irish economy to become more competitive and dynamic, it is disingenuous to present wage reduction as a panacea to the competitiveness problem. For instance, our Scandinavian neighbours manage to operate highly competitive economies while also maintaining relatively high and relatively equal income levels. Furthermore, the wage reduction argument ignores a multitude of other factors that negatively affect competitiveness including underdeveloped infrastructure, high rates, chronically poor broadband and a lack of focus on research and innovation.

More recently, ISME and the catering-hospitality sector have taken up the cudgel, calling for a reduction of one Euro in the Minimum Wage on the basis of saving jobs in sectors experiencing a significant downturn in business – mainly retail services, restaurants and hotels. Holding the line on basic income is central to anti-poverty work, so it is heartening that a robust evidence-based argument has been developed by TASC. Their report, Square Deal? The Real Cost of making a Meal in the Restaurant Sector demolished the ISME argument for wage reductions in a sector that is dominated by low pay. Many of these low pay employment sectors have been regulated for many years by Joint Labour Committees. These JLCs set wages and conditions in employment sectors where normal negotiation and regulation processes are difficult, so they act as a safeguard, especially in relation to protecting the rights and entitlements of low paid employees.

Earlier in the summer, Michael Taft drafted an interesting response to Dr. Garret Fitzgerald’s argument that wages in Ireland are unaffordable when compared to our European neighbours. Taft looked at three sectors; manufacturing, retail/wholesale, and public administration. In the case of manufacturing, Taft references evidence from EU Klems Database – which measures labour costs, productivity and capital compensation – which states that Ireland’s average labour costs rank 12th out of the EU-15, with an average of €20.76 as compared with the EU-15 average of €25.03. Similarly, Taft points out that the rise in manufacturing wage costs was not out of sync with other EU countires. In fact, from 2000-2007 wages in the sector increased by €5.20 – exactly in line with the EU-15 average.

More recently TASC made a presentation on the Minimum Wage to the Oireachtas Joint Committee on Enterprise, Trade and Employment. Some of the key points made are outlined below. These are very useful for anti-poverty organisations in developing their analysis, arguments and counter-arguments to defend the meagre income of the marginalised and low paid. A more comprehensive note is available on the TASC website.

  • The ’effect on individuals’ argument: The Minimum Wage was introduced to protect people who were living on the edge of poverty. That vulnerability remains, especially for migrants, women and young people who tend to be disproportionately represented in low paid employment. People on low pay spend a higher proportion of their income on food and a one Euro reduction would constitute an income reduction of 11.5%. Food prices in Ireland are already the second highest in Europe so this would severely impact on family poverty. The Vincention Partnership research, undertaken in 2009, demonstrates that a family of four requires an income of €578 per week. The Minimum Wage provides a weekly income of €337.
  • The economic argument: Poorer people spend most of their income on basic items like food, accommodation and clothing, therefore reducing their income will have an immediate and profound effect on demand at a time when we desperately need to stimulate demand. In addition, the tax take will be further reduced through a reduction in VAT receipts, thus further exacerbating the deficit in the public finances.
  • The competitiveness argument: Exporting firms in Ireland tend to be ultra productive because of key factors such as research, innovation and technology. These firms are thus more associated with the higher levels of pay required to secure highly skilled personnel. Minimum wage levels are not an important factor in their competitiveness.
  • The comparative labour cost argument: Ireland has many of the characteristics of a low wage economy and the hospitality sector is the largest employer of low-wage workers. When compared with other European countries, this sector has the third lowest labour cost in the EU 15 during with labour costs averaging €15.65 per hour against €12.84 in Ireland – only Greece and Portugal are lower than Ireland.

The Poor Can’t Pay – a coalition of NGOs, trade unions, and academics are also preparing a highly visible campaign against cuts to social welfare rates and the minimum wage in the next budget. As part of the 2010 campagin, the coalition has released a series of documents to support arguments for the retention of current rates. In the case of the minimum wage, you can download ’10 reasons not to cut the minimum wage’ on the Poor Can’t Pay website.

Ireland has a poor record in setting income standards for its most vulnerable citizens and in providing protection for migrant workers, who tend to be employed in relatively low pay sectors. The baseline has traditionally been set by social welfare rates, specifically means-tested allowances. The introduction of social employment schemes in the 1980s (another time of recession) brought rates of allowances that were firmly tagged to social welfare rates, so the income standard remained at a low level.

The introduction of the Minimum Wage, on foot of concerns that poverty could also be associated with employment, brought the income benchmark for those in employment to a higher level. There is now a concerted effort to bring the income benchmark back down towards the social welfare rate. While this is fairly typical of the type of onslaught that poorer people are subject to in times of recession, it is nevertheless heartening to see the formulation of a robust, evidence based defence of income rates for the lower paid emerging from the community and voluntary sector. For anti-poverty groups, the battle will focus on holding the line on income levels.

Visit www.eapn.ie for up to date information on poverty, social exclusion and inequality in Ireland and Europe.


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