Why play days lead to bigger pay days

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The Independent Online
WHY PEOPLE get paid different amounts for their jobs is a source of continual puzzlement, alarm and, inevitably, envy. Yet there have been few satisfactory explanations of pay differentials - why they exist in the first place and why they change over time.

To say that is not just to wonder at the amount that top industrialists or pop stars are paid in comparison with what nurses or car workers receive. Enormous disparities exist, not just between jobs of varying difficulty and status, but between jobs that would seem to be broadly similar. This happens in all industrial societies, but has attracted most attention in Britain and in the United States.

Take education and the law. An Oxford professor is paid roughly pounds 35,000 a year, and his or her Harvard equivalent dollars 95,000 (pounds 64,000). Yet a senior partner in a firm of City solicitors would expect to get at least pounds 250,000, while the average for partners in the top 10 New York law firms in 1992 was dollars 957,000 (pounds 650,000). These kinds of differentials, and levels of executive salaries more generally, are causing a furore in the US.

So it is hardly surprising that a new book on the phenomenon, published last month in the US, should be making waves (The Cost of Talent: How Executives and Professionals are Paid and How It Affects America, Derek Bok, Free Press, dollars 22.95).

Dr Bok was until recently president of Harvard University, which trains many of the highest earners in the US. The nub of his argument is that the way the pay of top American executives is calculated is 'a sham and an embarrassment'; that many professionals, such as doctors and lawyers, have manipulated the market and are accordingly overpaid; and that some other professions are underpaid: for example, nursing and teaching. The result is that good people are drawn into the 'wrong' professions and the country's talent is misapplied.

This argument will be familiar to many in Britain, although there are differences of emphasis here. People are less worried about overly high pay in industry, but more worried about the system of service contracts for most senior private-sector executives, which, through generous guaranteed pay- offs, favours those who do their jobs badly over those who perform well.

We also do not have America's very high average earnings for the medical profession - one of the results of having a monopoly buyer, in the shape of the NHS. But, as in the US, we worry about low pay in education and in many of the much-needed 'caring' jobs. And in both Britain and the US (and in several other industrial countries) differentials seem to be widening.

What, if anything, should be done? Dr Bok argues for a more steeply graduated income tax. That is something which many people here, according to opinion polls, would accept as a sensible policy. The problem is that while it might reduce the income of the rich, it would not have much impact on the relatively poor.

Andrew Hacker, reviewing Dr Bok's work in The New York Review of Books, points out that if all the income above dollars 200,000 a year of high-earning US citizens was taken away from them in taxes and redistributed to families with incomes of less than dollars 35,000, each family would get a cheque for dollars 2,173 - helpful, but hardly enough to change their lives. And before long no one would ever earn more than dollars 200,000 anyway, because there would be no point in them doing so.

Looking at Britain, it is interesting that the income-tax cuts of the Eighties have actually helped to increase income tax receipts from the high earners - the share of total income tax revenues paid by the top 10 per cent of earners has grown.

So if we want to do something about widening differentials we need to look at the underlying reasons for them, rather than trying to manipulate them though the tax system. Perhaps the best British book on the subject was written back in 1977 by Sir Henry Phelps Brown, the most distinguished labour economist of his generation (The Inequality of Pay, OUP, pounds 7.95).

Professor Phelps Brown looked at economists' explanations for differentials - supply and demand in the labour market - and sociologists' explanations - differentiation of the labour force by class, status and power. He compared pay differentials in Western market economies with those in the then-Communist societies, with some remarkable results. For example, in 1969-70 the pay gap between a doctor and an agricultural worker in the UK was almost exactly the same as that between the two jobs in Yugoslavia.

Professor Phelps Brown concluded that supply and demand did ultimately determine pay differentials, though other factors were influential: class and education, for instance, could certainly affect the supply for jobs requiring high skills. If one wanted to reduce inequality, therefore, one should aim to remove restrictions on the supply of trained people, particularly by encouraging them to stay on in education.

On this front we are, at last, making progress in Britain: the proportion of people going into higher education has doubled in the past 10 years. That is probably not enough, but at least it is heading in the right direction.

Professor Phelps Brown also pointed to another cause of inequality, though, which will be much harder for public policy to tackle: the way children are taught, occupied and disciplined in the first five years of life. It is, he argued, at this very early age that we learn the life skills and attitudes that make us successful in adult life - and thereby candidates for top posts in employment. And if the relative pay of our most demanding jobs is to be kept within reasonable limits, the country must increase the pool of people capable of doing those jobs.

We can all recognise the qualities that make people successful: a mixture of skills, self-discipline, confidence, drive and charm. These, Professor Phelps Brown argued, can be established or destroyed by parents even before their children reach school age.

This is a tough message. If it is right, then people who worry about rising differentials should not attack the high salaries received by business executives. Nor should they worry that a pop star such as Madonna should earn dollars 40 million a year. Nor should they believe that the widening differentials of the Eighties were principally the result of political action by Ronald Reagan and Margaret Thatcher. Rather they were, at least in part, the result of a failure by some parents of the Sixties and Seventies to teach their toddlers the behaviour that would help to make them successful adults.