Is income inequality bad?
Exploring the positive and negative effects of income inequality and how to combat its worse excesses.
For the past 40 years the world has seen a steady widening of the wage gap between those at the top and those at the bottom. Not only causing discontent within organisations but also stunting the economy as a whole. European CEO explores how, while some inequality in income is beneficial, businesses can curb it’s worse excesses.
Everywhere people are paid differently for their work. This can depend on a number of factors; education, skill level as well as the types of work they do.
Let’s take the wealth of Europe and distribute that wealth evenly amongst the population, low skill jobs on the left, high skill jobs on the right. This might look pretty good but it isn’t that simple. Some inequality in wages is not only unavoidable but is desirable.
First, inequality incentivises middle and low earners to pursue education and training, and second it ensures highly skilled jobs attract the best and brightest.
Here is the ideal distribution of wealth, the poorest have less but they are getting by, with a healthy middle class and the lucky people at the top earning great salaries.
However, over the past 40 years, while Europeans have seen a steady increase in income, there exists a disconnect between high earners and everyone else. The top 20 percent now own 63 percent of the total income.
Here is how wealth is actually distributed….
As we can see there is little distinction between the middle and lower class earners with the latter not even registering on the chart and the top one percent needing an extension!
This inequality is so extreme that, while people are incentivised to enter education, in many cases they lack the financial security to do so, severely restricting social mobility.
It is this level of inequality that is fuelling political and economic discontent. On a business level it not only demotivates the workforce, but also reduces consumer spending and thereby stunts demand.
So how can businesses redress this imbalance?
Same as before, with the highest earning employees on the right and lowest earning on the left.
In this system the top earners have little motivation to raise the wages of everyone else and why should they, they work hard for their money.
But by instituting pay ratios where the top 20 percent can earn, let’s say 30 times more than the average worker. Well, suddenly the top brass have a vested interest in raising workers wages and, as for everyone else, they now have a tangible interest in seeing the company succeed.
Another approach could be through education: by offering training programmes and internal promotions a company can encourage worker retention by increasing social mobility.
Similarly by offering a ‘safety net’ to employees a business can manage income inequality. Through the adoption of schemes such as adequate sick pay and subsidised professional childcare, companies give earners across the spectrum increased opportunities to protect their income.
It is the companies that stay ahead of this curve and change on their own that will be the ones that have the most motivated workforce, be the most productive and have the most positive impact on the economy.