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Wage inequality on the rise

Posted on April 08, 2016 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Although inequality of income has taken up a lot of analytical space for many years much less attention has been given to trends in wage inequality. Last week I focussed on the share of labour in total income in the Republic of Ireland. This week I look at trends in wage inequality.  Two facts stand out: wage inequality in the Republic of Ireland is among the highest in the OECD world (Chart 1) and, secondly, wage inequality has grown in the last decade (chart 2). Finally, I consider longer-term trends in wage inequality going back to the 1960s drawing on research by various Irish economists in recent years.

The reasons for growth in inequality are complex reflecting shifting demand for different skills and occupations, shifts in labour supply due to demography, migration and labour force participation as well as changes in cultural norms and legal provisions. Fifty years ago it was normal for professional soccer players in the UK to be paid the average industrial wage. Today, the average annual industrial wage might cover a few days pay for a top earner in sports or, indeed, in the worlds of banking and high wealth.  There has been a huge growth in inequality at the very top of the income and wealth scale in countries such as the United States as well documented by economists such as Thomas Piketty and others.  Part of this story is about a rising share of total income going to capital. The other part of the story is a rising level in wage inequality with an increasing relative share for top earners especially since the 1980s in the US and UK as shown by Anthony Atkinson in his book Inequality

 

 The ‘bonus culture’ spread in the private sector and spilled over into the public sector in the English-speaking world. Ireland was not immune from these trends. The claim was advanced that certain highly paid individuals had so rare a set of talents that they were worth such and such a level of earnings and that even in public sector organisations (and that could include banks which were temporarily nationalised during the bailouts of 2009-2011) ‘competitive remuneration’ had to be paid to retain key staff including those with highly marketable and in-demand skills such as CEOs, financial experts and in some cases economists!. In the latter case employment in public administration, especially during the Celtic Tiger period, was seen as much less attractive in terms of salary and associated benefits than was the case in some parts of the private sector.

Unfortunately, comprehensive data on wage inequality in the Republic of Ireland are patchy for years before 2003.  The introduction of the Survey of Income and Living Conditions (SILC) in 2003 has made it easier to compare trends in income (and wage) inequality from year to year since then. Prior to that economists and statisticians were reliant on the Living in Ireland Survey which was less frequent.  Going back to the 1960s various industrial censuses were used to examine relative earnings.  In an article published in 2012, Voitchovsky, Maitre and Nolan measured the evolution of wage inequality from the mid-1990s to 2007 – just before the economic crash of 2008. They measure inequality by computing the ratio of the top decile to the bottom decile for average hourly earnings of employees. The higher ratio the more unequal is wages.

There is a sharp contrast in wage trends between the first phase of the Celtic Tiger from 1994 to 2000 when inequality was falling and the second phase of the Celtic Tiger when inequality increased (as shown in Charts 2 and 3).  In data presented by Voitchovsky, Maitre and Nolan the wages of the bottom decile took a sharp increase in 2000 when the national minimum wage was introduced. (surprisingly, perhaps, the share of the low paid sharply increased in 2011 in spite of the restoration of the national minimum wage although most low paid workers are above the minimum).  The nature of the boom in the latter half of the ‘Tiger’ was clearly different to that of the first half as growth in particular sectors and among particular groups drove earnings in the upper end of the distribution.

Going back further in time it is possible to approximate trends in wage inequality using data cited by John Blackwell and Brian Nolan in a report published jointly by the Irish Congress of Trade Unions and Combat Poverty Agency in 1990 ( Low Pay the Irish Experience ). As a measure of inequality, they used the ratio of earnings of the bottom decile to median earnings in industry. Estimated values for the 1960s was around 61% (the only available data at the time was for men over the age of 18!). The corresponding estimated value was 54% in 1979 and 57% in 1987. Blackwell and Nolan commented in 1990:

Since 1960, the pay structure has if anything become more unequal, that is with those at the bottom faring worse in terms of pay than those on average earnings. This relative stability has occurred despite the role of centralised pay bargaining over the period..[with]…attempts to change the wage structure by introducing a certain flat-rate element into wage increases…..

While caution is warranted in comparing somewhat different measures it does appear that wage inequality has fluctuated over the decades since the 1960s with an increase in inequality in the 1970s and 1980s followed by a fall in the 1990s and then an increase, again in the latter half of the Celtic Tiger. In the very recent past, wage inequality has increased between 2008-2013 (refer to Chart 2).

Does inequality of wages matter given that Governments can straighten things out somewhat by means of direct taxes? I suggest that inequality does matter because extreme differences in earnings accentuate a sense of unfairness and exclusion among many as well as expose many households to poverty and social exclusion. It also reinforces wider trends in regards to the distribution of income and wealth.  Taxes are an important means of redistributing gross income but cannot do everything. In any case, very wealthy individuals can avoid if not evade tax in multitude of ways as we have been reminded again last week.

In addition to moral reasons high levels of inequality can generate poorer economic performance as well as social cohesion. While it is not possible to draw firm and universal conclusions it is evident from research by OECD and other bodies that inequality of income or wealth is not required to achieve higher levels of income and productivity.  The Scandinavian countries, for example, provide a counter example to the claim advanced by some apologists for inequality that redistribution measures are bad for economic performance.

One final observation relates to the notion of ‘low pay’, ‘average earnings’ and ‘high pay’.  These terms are used liberally in public discourse as well as that all too familiar phrase ‘middle Ireland’.  My colleague Dr Micheál Collins has examined the distribution of income and earnings in various NERI research papers over the last 3 years. In a paper published last year ( Earnings and Low Pay in the Republic of Ireland: A Profile and Some Policy Issues ) he showed that the median (average) earnings of individual employees in 2013 in the Republic of Ireland was €27,619. 10% of individual earners earned over €65,000 per annum while the bottom 25% earned less than €10,000 per annum (see Table 4 in the paper cited). A worker in an early childhood care centre might earn €6,000 a year if she earned the typical €10 per hour over say 15 hours a week for 38 weeks a year.  Such workers do not benefit from income tax reductions spoken of by many as benefiting ‘middle Ireland’ or even ‘low paid workers’. Among those particularly vulnerable to in-work poverty are one-parent families with children where just over 50% are at risk of poverty (Table 12).

Commentators should be more precise when referring to ‘low pay’ or ‘low income’ in public discourse.

 

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