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Mind the pay gap

Douglas Fraser | 07:36 UK time, Wednesday, 16 March 2011

Why do you get paid more or less than others around you?

Perhaps you're less experienced, you've got different responsibilities, you've got more bargaining clout, or you're less well educated and skilled.

Or perhaps you're doing the same work as the people around you, but you're female - though there's evidence also that being either taller, slimmer or better-looking has a significant and quantifiable impact as well.

There's no equality legislation in place to account for such injustice. Not yet anyway.

What about if you're older? It may not just be your income that suffers but your job that is lost if you struggle to keep up with change in the technology you're expected to use at work.

Robots and cash machines

The reasons for Britain's income inequality over recent decades has been set out in a new academic paper by Stephen Machin, director of the Centre for Economic Performance and a member of the Low Pay Commission.

His findings may not contain any startling surprises.

There's clearly a return on education that rapidly widened pay differentials in the 1980s, and continued to do so over the next two decades, though at a slower rate.

The decline of union membership since the 1980s had an impact, particularly for the lower-skilled workers whose wages had been propped up by use of their collective clout.

From 1999, the introduction of a national minimum wage helped close that gap at lower levels.

But the strongest theme coming through the research is the impact of machines.

Where people were doing jobs that could be replaced by machine, then they often were. That went for those on car assembly lines, replaced by robots, and for bank tellers, replaced by cash machines.

Those that aren't easily replaced by computer - typically using thinking skills and in non-routine operations - find it easier to hold on to jobs and maintain earnings power.

And it's not only at the upper end of the skill spectrum. Cleaners and care workers are not readily computerised, so they're still necessary.

That story is an international one.

Machin concludes there's not much governments can do in the long term in the face of such economic trends and the power of technological innovation - other than endlessly improving the skills of the workforce through education and training.

That's a point worth underlining with survey evidence just out from the offshore oil and gas industry.

While the rest of the economy toils, across 110 firms, Robert Gordon University researchers found the biggest challenge they face is in getting the skilled workers they need.

If engineers are in short supply, and in an international market for their skills, their pay will go up, and there's a warning from the engineering training council that could jeopardise the very projects widely expected to rejuvenate the North Sea industry.

Pay fines

In the face of this, the attempt to narrow earnings gaps, at least in the public sector, has run into difficulties.

Will Hutton, of the Work Foundation, was expected to find a formula for narrowing inequality, when commissioned to look at the issue for the UK government. That's where he was heading in his interim report.

But in the final version (you'd be forgiven for confusion - there have been two Hutton reports in two weeks, one into public sector pay, the other into public sector pensions) what Will Hutton found was that it's not that simple.

Linking top pay with the lowest pay level is undermined when you have widely varying lower pay levels.

That would have justified paying the directors of research laboratories (with better paid young recruits) many times more than those who run complex parts of the NHS, with poorly-paid workers.

What he's suggested is something rather unusual that I discussed in The Ledger very recently.

Bonuses for top earners in the public sector could be replaced with higher salaries from which sums could be deducted for under-performance or failure to hit targets.

As I pointed out before, Nottingham University psychology research shows a fine on pay is a better motivator than a bonus, as people work harder to protect things they think they've already secured.

Silver strugglers

What, then, of the older worker? Other research published this morning in the Economics Journal shows people over 60 being pushed into early retirement by new technology.

A study by Avner Ahituv and Joseph Zeira, from Haifa and Jerusalem universities, has looked at the impact of rising technological know-how on raising wages and keeping people at work, and set against the 'erosion effect' of older people having less incentive to keeping up with the latest technological requirement, on the grounds that, well, they'll be off soon, so why bother?

It seems the erosion effect has won over the wage effect.

The study quantifies it: a 1% rise in the annual rate of technological change in a given sector of the economy increases the probability of a worker aged over 50 losing their job in that sector by 3%. The effect is stronger for those over 60.

For those of us heading fast towards Saga territory, it's easy to see it happening around us.

I sometimes get the sense that the BBC is kept on air only because of colleagues aged under 30 who know which buttons to press.


  • Comment number 1.

    Ok, I was involved in annual staff pay reviews. All very nicely contrived and weighted in owners / management favour. When we the collective we, pushed for across the board increase / bonus for all staff. We were always given a blunt reply that those at the top of the food chain work longer and harder than the rest and any across the board settlements would unfairly penalise the high earners, listen this was straight from the horses mouth aka HR Director! Personally had my fill of playing thier game, and now play an entirely different one! These very same captains of industry are their own worst enemies, my game is all about averting ones eyes to costly FUBAR decisions!

  • Comment number 2.

    Ah the beauty of capitalism and the laws of supply and demand. Clearly at the moment we do not have enough bankers, politicians, "top" civil servants and as for council chief execs. well they are on the WWF extinction list according to the pay they get.
    Don't make me laugh, when you get your greasy fingers onto the merry go round reserved for our lords and masters who do not have to spend there time mixing with us plebs you can kiss fiscal responsibility good bye. Normal economic laws do not apply in their dimension - beam me up Scotty, please!

  • Comment number 3.

    I believe this is very much a British problem. Pay differentials are not so high in other European countries. For example, a waiter earns enough to give his family a respectable life style on the continent. Shop workers earn decent salaries not linked to targets. Some years ago a Norwegian told me "everyone in Norway gets £2000 a month because that is what you need to live properly in Norway'. So this is all the result of government interference or government indifference. In Britain management, and directors in particular, are drawn from the privileged classes and see it as natural to protect, and enhance, that privilege. The privileged people who make it into government acquiesce with this. Simples! Fiddling around at the bottom with the minimum wage provides good cover but does not address the problem. I cannot see any government in this country tackling this any time soon. Look how the present government has bent over backwards to protect the bankers. Even the British public acquiesce, for example by paying ridiculously high prices to watch a football match so that the players can take home £150,000 a week.

  • Comment number 4.

    Once upon a time, a bonus was a reward for a job done to a standard higher than expected , nowadays the bonus appears to be a given whatever the performance was , providing the worker turns up occasionally. Basic salaries , particularly where performance or production can be measured, should be set at a level which requires a reasonable amount of effort to achieve a set target, thereafter a bonus should have to be earned. In most of the public sector, performance is difficult to measure because in the main there is no end product , no profit, and no loss because the taxpayer is there to top up if needed and inefficiency can be hidden or disguised by the empire builders running these services. They then cultivate a culture of non responsibility for any failure to protect their position, usually with the blessing of the nearest politician who eagerly concurs to move blame away from his remit.


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