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To solve earnings inequality, we need to reform our economic model

To solve earnings inequality, we need to reform our economic model

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The fact that chief executive pay at Britain’s largest companies grew six times faster than ordinary workers' pay last year may be be shocking, but should not come as a surprise.

Despite tough talk, shareholder activism has not exercised much restraint on the rising level of executive pay.

Excessive pay is indicative of two significant problems facing the UK economy. It isn’t productive enough. We don’t share prosperity widely enough. Both stem from a lack of value placed on people as the key asset for growth.

The reality for most people is that pay has barely recovered since the great crash. According to the High Pay Centre, while the median pay of FTSE 100 bosses increased by 11 per cent last year, for the rest of us the median figure was just 1.7%.

Research from the RSA in 2017, shows that nearly three-quarters of people thought we should do more as a country to improve the quality of jobs.

Over half of people living in poverty in the UK are now in working households. If we want to understand what is happening to wages, we need a much wider debate than what goes on in the boardroom. 

It is no coincidence that the growth in inequality has gone hand in hand with the decline in trade union membership. In today’s economy, fewer workers than ever are union members or covered by a collective agreement.

Union membership has fallen from nine million in 1979 to just over six million today. In the private sector, just 15 per cent of workers see their pay and working conditions negotiated through collective bargaining.

In the new emerging tech and digital sectors, the figure is even smaller. The decline in union membership has been accentuated by a hostile public policy agenda, the global crash and rapid change in the economy.

The trend of declining union influence is not restricted to the UK. OECD figures show the number of workers covered by a collective agreement fell from 45 per cent in 1985 to 33 per cent in 2017.

The largest falls have come in the Eastern bloc, following the demise of communism, and in liberalising economies, such as the UK, Australia and New Zealand.

This asymmetry of power matters not just for pay, but also the health of the economy. British productivity remains stubbornly below that of our main competitors.

If you look to our nearest neighbours, in Germany and Scandinavia, productivity is higher, wages are better and inequality is lower.

The commonality across these countries is that industrial relations are about long-term partnership. Unions, employers and government work together to get the best for growth and to ensure prosperity is a shared reward.

It is not as though British capitalism is covering itself in glory. The collapse of BHS and recent scandals like Carillion have highlighted the lack of checks or balances in the system.

The UK ranks 16th out of 20 OECD countries for the proportion of people with technical skills. This under-investment in skills can only make preparing for a new industrial age, or a world made rockier by Brexit, harder to achieve.

The adversarial free market model isn’t working. Prospect has been calling for a new consensus on how we create and share prosperity.

We are working with the likes of the High Pay Centre to provide a critique of how worker voice and inequality are part of the same problem facing the UK.

Our new bargain calls for a model that recognises that employee voice is a key determinant for sustainable growth.

We need to learn from our neighbours and nearest competitors with economic models in which collective bargaining is a partnership between employers and unions. We want a duty to bargain whereby larger employers are expected to negotiate and listen to their workforce.

This would create a new legal framework to the current regime of voluntary agreements. The TUC, among others, makes a strong case for sectoral bargaining, particularly in low wage sectors, but we also need company level agreements to encourage local engagement between workers, unions and managers.

Unions need to reinvent collective bargaining for a younger workforce and to demonstrate how agreements can work in a changing economy.

The rise of the platform economy requires new thinking about how regulation, productivity and decent work go together with technology constantly changing. The scale of the challenge requires new rules for the market and innovation in how unions organise.

We should be concerned about inequality in earnings, but to fix it we need much broader reform to our economic models. Unions are central to that challenge of providing a voice in that change. This is not a time for business as usual.

Andrew Pakes

Andrew Pakes


  • Entrepreneurs risk their own money and future, and if successful should be rewarded without cap.

    On the other hand, people who do not risk their own resources should have their compensation 'regulated'. Eg, many ftse 100 companies are run by those who either seize or are given vast wealth ( salary, bonus, pensions, shares) to do the job of a chief clerk. They come and go, and are replaceable.

    A looming issue, which does require broad socio-economic reform, is the implication of Artificial Intelligence, and consequently the responsibilities of The State and private sector to develop and implement a plan to educate, and provide fairly for, those who cannot be expected to find meaningful and effective work in a world where productivity is dominated by AI tools and processes. 

    Unions have a vital part to play and should welcome this potential situation - Nirvana.






    24 August 2018 10:53

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