Tuesday, 28 July 2015

Inequality: The gap between space travel and food banks

David Begg: It is quite interesting that the British Tory Party, which originally opposed the introduction of a minimum wage, has committed itself to bringing in ‘A living wage of £9.35/hr by 2020'. This is all part of George Osborne’s scheme to reinvent himself as a modern day one nation Disraeli. But if the idea of the Tories as ‘The Workers Party’ stretches credulity – he did also make massive welfare cuts after all, and is bent on emasculating the trade unions – perhaps it is a recognition that inequality is becoming a major issue.

In fact there is a growing awareness that inequality undermines economic performance. Even Christine Lagarde of the IMF has said ‘Recent IMF research tells us that less inequality is associated with greater macroeconomic stability and more sustainable growth’¹.


This awareness is being underpinned by an emerging academic literature, the most popular of which is Thomas Piketty’s (2013) Capital in the 21st Century.² When TASC invited Piketty to Ireland in 2014 we had 650 people attend his lecture in Croke Park.

Piketty’s core thesis is that if the rate of return on investment continues to exceed the rate of economic growth (A proxy for wages) then inequality will inexorably continue to a point of political and social unsustainability. This position is compounded by the prospect of demography ushering in an era of endemic low growth.

While Piketty has most of the popular interest, it is worth recalling that as early as 2009 Wilkinson and Pickett ³ were alerting us to the fact that countries that can minimise inequality can deliver much better economic performance and social outcomes. The Nordic countries are obvious examples.

Last month TASC had the privilege of hosting Prof. Sir Tony Atkinson at our Annual Conference. He has long been at the forefront of research on inequality. In his latest book: Inequality: What Can Be Done ⁴ he presents a comprehensive set of policies that could bring about a genuine shift in the distribution of income in developed countries.

The problem, as he defines it, is not just that the rich are getting richer, but we are failing to tackle poverty and the economy is rapidly changing to leave the majority behind. We can see this in the growth in precarious work – like zero hours contracts for example – and the hollowing out of the labour market in a way that destroys formerly good middle level jobs. This is a long term secular trend exacerbated by a change in the balance of power between capital and labour which can be traced to the entry of China to the global market place and the collapse of the Soviet Union. These events added 1.5 billion new workers to a pre-existing industrial workforce of 900 million.⁵

One of the most egregious examples of what this means in practice was the way former Cleary’s staff were treated.

Turning from the general to the specific, two of my colleagues in TASC, Dr Nat O’Connor and Cormac Staunton (2015), ⁶ have looked at the case of Ireland in a forensic way.

Low pay is particularly relevant in Ireland where the inadequacy of universal public services, and the high charges for services (such as GP visits, childcare and eldercare), along with the cost of living that is 20 per cent higher than the EU average, means that cash income is even more important in Ireland than it would be in other countries.

Low pay is a feature of rising inequality. While average incomes in Ireland have more than doubled since the 1970’s in real terms, the average for the top 10% has tripled and the average for the top 1% has gone up five-fold (See Chart 1).

 

Chart 1: Rising Average Incomes by Tax Units in Ireland (Source: Top Incomes Database: WTID⁶

During the period of economic growth from the early 1990s, the share of income earned by the top 10% in Ireland rose, meaning that the vast majority of people, the ‘bottom 90% of the population, lost a proportional share of the national income.

The top 10% in Ireland take a third (34%) of all income, up from 27% of national income in the 1970’s. They represent only 12% of the working age population, the ‘bottom 90% - has fallen to 66% of all income, down from 72% in the 1970’s. (See Chart 2, Green area).



Chart 2: Top 1% Income and Bottom 90% income in Ireland 1975-2010 (Source: WTID⁷).

At the same time, the top 1% doubled their share from 6% in 1975 to 12% by 2006 (Chart 2, Purple line).

Ireland is now the most unequal country in the OECD when it comes to market income inequality. This is shown by the Gini Coefficient (a measure of overall inequality) of income prior to taxes and transfers (Chart 3).



Chart 3: Market Income Inequality (Source: OECD).

 We see that social protection payments bring Ireland from being the most unequal country in the OECD (before taxes and transfers) to around the average when taxes and transfers are included (see Table 1).  Note it is the impact of social welfare, rather than taxes, which does most to reduce inequality.



Table 1: Gini Coefficients for Ireland

The important thing to note in what we are measuring is how hard our social protection system has to work given how unequal our market system is. As an IMF staff paper puts it: “More unequal countries tend to redistribute more⁷. " As inequality rises it gets harder to address inequality in this way the system becomes unsustainable.

To really tackle inequality it is important that we address market inequality. However, what the Tories are doing in Britain in forcing employers to pay higher wages while simultaneously reducing social welfare is the wrong way to go about it. We need to at least retain the level of welfare expenditure while increasing market income.

The concept of a living wage is something TASC is trying to develop along with the Vincentian Partnership, The Nevin Institute and others. In Ireland’s case it is calculated to be (€11.50 /hour.)

The government is to be commended for its action in establishing the Low Pay Commission and introducing legislation to underpin the collective bargaining system. It is to be hoped that this will make it possible to begin to tackle inequality more efficiently in Ireland.

But there is a European dimension to this as well. Since the onset of the 2008 financial crisis the idea of ‘Social Europe’ had been eviscerated. We are in the grip of a Hayekian nightmare which, if persisted with, could potentially destroy the European Integration Project. The dominance of the ECB and the narrowness of its remit is a catastrophic flaw in the institutional architecture of the EMU. At a minimum its mandate must be brought into line with the US FED i.e. to have regard to a much broader range of social and economic concerns beyond price stability alone.

Of course it can be legitimately pointed out that the broader remit of the FED has not prevented the US inequality being the worst in the world. However, the issue in Europe is that the policies of the ECB are actively undermining labour market institutions which in other circumstance might give better outcomes. To be specific, labour market ‘reforms’ and ‘flexibility’ are euphemisms for undermining collective bargaining systems and destroying working conditions built up over decades. They should be called out for what they are.

As Tony Atkinson puts it in his book ‘It does matter that some people can buy tickets for space travel when others are queuing for food banks’

David Begg is Diector of TASC. This is his speech that he gave at the Irish Premiere of "The Divide" at the MacGill Summer School, 23rd July 2015. 

References
1. Largarde, Christine (2012) speech to the annual meeting of the IMF and World Bank.
2. Piketty, Thomas (2013) Capital in the Twenty-First Century. United States. Harvard College.
3. Wilkinson, Richard and Pickett, Kate (2009) The Spirit Level: Why Equality is Better for Everyone. London. Penguin.
4. Atkinson, Sir Anthony B., (2015) Inequality: What Can Be Done? United States. Harvard College.
5. Mason, Paul (2010) Meltdown: The End of the Age of Greed.
6. O’Connor, Nat and Staunton, Cormac (2015) Cherishing All Equality: Economic Inequality in Ireland. Dublin. TASC
7. International Monetary Fund (IMF) http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
8. Collins, Miche├íl (2015) ‘A profile of those on the Minimum Wage’ NERI working paper 2015/No 27.

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