Is business responsible for income inequality?

Posted on May 25, 2014

inequality

What can business do to decrease the ever widening gap in wealth and incomes? A discussion with John Cridland, director-general of the Confederation of British Industry.

This article first appeared in the Huffington Post.

“Politicians should not set wages” Katja Hall deputy director-general of the CBI employers’ group was recently quoted as saying in response to the current political ping-pong about the minimum wage. Leaders of other business groups sang much the same song.

Income inequality and the role of business in helping to tackle it was the subject of my recent conversation with John Cridland, director-general of the same employers’ group. My question was ‘what, in practical terms, was big business doing about one of the biggest – and growing – social issues of our time?’ Surely our whole economic system is unsustainable if income inequality continues on its current path.

“At the bottom end of the wage spectrum, much has been done,” according to Cridland. “The UK has a thriving service economy which offers job opportunities for the 30% of youngsters who come out of the educational system with essentially no skills. Who picks these people up? Business. Our retail, hospitality and leisure industries form the most dynamic part of the British economy and offer entry level jobs to the many who have been failed by the education system. I’m fed up of everyone only talking about high skilled engineering jobs in manufacturing. For every such job there are 100 jobs in the service sector that can cater to the less skilled. We should celebrate those jobs rather than talk them down.”

“That’s why I also support internships – even if unpaid. They are the first rung on a ladder that can only be climbed by adding skills. Yes, these are low paid, or unpaid, jobs but it’s better than sitting at home doing nothing.”

I responded that this has been the standard line from business forever and a day. Surely the idea of trickle-down economics has now been truly discredited. Can’t we get past the old arguments and talk about what it will take to achieve substantive and meaningful change?

“Yes. Let’s start at the bottom of the spectrum. In the UK we have a minimum wage that, by and large, is respected except at the fringes. Now we can argue about the level of the minimum wage and whether it provides a living wage – and it’s important to have those discussions. I was part of the low wage commission and the introduction of the minimum wage is one of the things I am most proud of.”

It was a bit surreal, though welcome, to have the director-general of the CBI express admiration and pride in the minimum wage policy – a policy that was, at the time, strongly resisted by the CBI that declared itself opposed to the principle of a minimum wage describing it as government interference in areas where government does not belong. Given Ms Hall’s quoted comments, has the mentality really changed?

“Business is the only wealth creator we have. Government can’t mandate a certain level of equality of earnings between the boardroom and the shop floor. It would be counter-productive because it would clash with the wealth creation process.”

Listening to all this, I wondered whether, if a government mandated maximum income gap were forced on business we would, in 10 years’ time have a future director-general of the CBI pointing towards such a policy with pride much like I was hearing today about the minimum wage.

Cridland pointed out that during the recent great recession everyone predicted that unemployment would reach 3 million. But it didn’t happen. “Unemployment peaked at 2.5 million – 8.5% as opposed to the 12% we saw in America. Why? Because business and labour worked together to do what they could to preserve jobs through wage restraint and part-time work. Things have changed and there is now a much greater willingness to work together. The huge rise in apprenticeships is creating a well-trained group of workers that businesses do not want to lose in bad times. So they keep them while finding ways to make it affordable for everyone. But that’s all dependent on maintaining a flexible labour market.”

It was time to move on to pay levels at the top end of the spectrum. What’s going on there?

“Perception is reality and there is a widespread perception that the salaries of a few are unfair. The top has flown away so far that the inequality has gotten worse and the evidence supports that. I’m not here to defend specific salaries. But London has maintained its status as the top financial centre globally. We share that with New York but nowhere else comes close. And that does not just impact financial services. We have many non-financial businesses that maintain a base in the UK solely because of the strength of our financial services. We don’t want to undermine that success.”

I argued that the issue was not one industry or the other but the fact that senior managers’ compensation had become so exclusively tied to shareholder returns that it created a unifocal management culture that meant that all the other responsibilities that business has have been marginalised.

“I am a great believer in shareholder capitalism. I don’t believe management has equal duties to other groups, But we have broadened that duty significantly. The wider duty of directors is a relatively new construct of corporate law and it’s not yet mature. We’re on a journey and I hear a lot of CEOs who are thinking quite a lot about those other wider responsibilities. And I also agree that we need to break out of what has been too much short term thinking.”

I left the discussion making a plea – would the CBI be willing to mount a major project to address the issues of pay levels and income inequality? At this point, John brought out a small card of CBI pledges. The last one read “to ensure that the benefits of economic growth are more evenly spread.”

If the CBI and its member companies do indeed actively live up to that pledge without the need for government arm twisting, we can all hope for better times to come.

 

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