Why we need a High Pay Commission

George Gabriel
22 August 2009

In our emerging hourglass economy a High Pay Commission would simply be the other side of the coin to New Labour's 1997 initiative that led to the creation of a minimum wage - unfinished work, a discussion that must be had on whether the type of high earnings we see in the financial sector, among others, are justified. Such a discussion offers New Labour an opportunity to resurrect the best of its principles, its commitment to levelling up against social inequality and create the bold policies to match it.

Given all parties (let alone the public) recognise the role of risk promoting pay structures in causing the crisis, it is both ridiculous and grimly predictable that a call to investigate high pay should cause such controversy. Tom Harris MP fears it to be populist grandstanding in the "politics of envy" as we go after the bankers then scratch our heads and wonder whoever will be next.

Why? Because an open discussion will inevitably consider broader questions of social equality, ideas such as maximum wage ratios in response to the obscenity noted by the petitioners, that "an employee working a 40 hour week earning the minimum wage would have to work for around 226 years to receive the same remuneration as a FTSE 100 CEO does in just one year." Such a fear is clear in Osborne's response, "It is one thing ensuring city pay structures don't jeopardise the banking system - and quite another trying to reintroduce a prices and incomes policy across the economy".

Osborne would like to split the debate into a serious one about how to get the market back on track, with an "alternative" debate for those idealists unconcerned with the gritty pragmatism of the market. Yet the economic crisis concerns citizens not because "a deregulated market failed to properly account for risk" but because this failure caused public loss, and because that is unjust. Market stability and performance would undoubtedly be enhanced through avoiding bonus structures that promote short-term risk taking, but these results are only important relative to our conception of the good society. It is this vision that demands that the poor should not pay for the mistakes of the rich, this vision that was so deeply offended by the bailout of the banks. Though the market has internal dynamics which must be understood and used, it is not self-justifying. We should never let our means dictate our ends.

The hugely popular minimum wage was brought in after extensive investigation and against the claim that by setting a minimum wage government intervention in the free market would increase the cost of labour and thus raise unemployment as employers take less people on. The objection was taken seriously and found wanting, it turned out that labour demand at extremely low levels of pay was generally inflexible - many jobs that would have been vulnerable having already been outsourced with East Asia's integration into the world economy and the subsequent undercutting of labour prices internationally. As a result the floor on our hourglass was raised along with the life chances of millions of Britons and the spectre of social justice in this country. 

The true fear is that New Labour will re-find its roots, its moral voice that has been sold over the past twelve years through weakness, greed and a lack of imagination. The minimum wage was introduced to lower inequality and poverty after concerns that it would be self-defeating were assuaged. It was Third Way "levelling up", where equality is considered a social bad that must be eradicated as long as doing so does not harm the prosperity of others. It was Rawls's difference principle by which individuals pursuing their own prosperity is fine, so long as it promotes the welfare of the worst off too. It was the best of New Labour principles.

A maximum earnings ratio, linking the incomes of the least well paid to that of the highest paid in an organisation, would represent the kind of audacious experimentalism the left has lacked this last decade. Record volumes of compensatory cash transfers to the poor have manifestly failed to build sustainable social solidarity and the left is left fighting a rearguard defence of public service spending. By shrinking the domain in which high pay is required to contribute to the welfare of the worst off to individual firms a ratio would force workers and bosses to cooperate in the workplace, not just in their resented income tax receipts. Were Labour to really embrace its own values and seriously consider maximum wage ratios, it might resurrect its roots, radicalise, and re-emerge as an electoral challenger.

No wonder the idea's inclusion with the proposal was a red rag to the rightwing bull. While their free market dogmatism is to be avoided, they are right to insist that the rules of the market must be considered if such reform is to avoid defeat at its own hands by furthering unemployment and poverty. We must consider whether fixing the distance of the bottom of the glass from the top would raise the costs of labour and so decrease demand for it at the bottom end of earnings while stopping British business offering competitive wages in recruiting the best talent and hence causing us to fall behind in the global market place.

The sad truth is that without better information on high pay we can't tell how important it is to "British competitiveness". The financial crisis may lead us to deride claims of "talent" yet though it tells us about the implications for market performance of bonus structures, it does little to tell us about the role of high pay itself. This however is a case for experimentalism, not a prohibition on discussion. Likewise we need to explore the implications of wage rises at the bottom for unemployment, though London Citizens's successes in forcing big city companies to pay a living wage is testimony to the secret inflexibility of demand for low paid labour.

On the face of it there is no clear evidence against freezing the earnings ratio between businesses' executive directors and their cleaners. Introduction of a living wage would allow further wage based competition among companies fishing for talent, but by increasing the costs of such a recruitment strategy it would discourage what at times appears an inflationary culture rather than market consequence. Once established an earnings ratio could then be experimented with, and progressively used to premise individual pursuit of higher earnings on the furtherance of the common good. Tax credits could then be used to competitively incentivize businesses to reduce the ratio. It could be a policy to match the best of New Labour's principles.

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