Tuesday, 8 December 2015

Inequality - 5 Myths Debunked: Myth 2

Continuing the series…

Myth 2: High wages occur at the expense of low wages.

Reality: If high earners were on less, low earners wouldn't be on more.

People's income is linked to the job they have, and the pay of that job is linked to the set of skills required to command that salary. This is what motivates people to try to do well and improve their skills and knowledge. If everyone in the UK was suddenly given £1 million pounds the incentive to work would collapse, and unless there was a mass emigration exodus the country's goods and services industries would come to a virtual stand still.

The reason why people should not be indignant about a supposed 'unfairness' in people's vast wage differences is because labour value is dictated by supply and demand, not our personal whims. When shelf-stackers at Sainsbury's sign an employment contract they agree to terms commensurate with the skills they are offering - that is, the supply and demand for those skills. If they didn't sign the contract plenty of other people would. They would not earn more if the Chief Exec of Sainsbury's earned less, because the skills and labour of the shelf-stacker and the skills and labour of the Chief Exec are not conterminously affected by each other. The price of each of their labour is equal to the supply and demand of those skill sets in the labour market. Shelf-stackers who bemoan the Chief Exec's pay are suffering from envy, not injustice.

To understand the point, it's vital to understand the fundamentals attached to wages - they are not some arbitrary figure set by government, they are a signal of value, just as the price of petrol or apples are signals of value. Paying a price for something - labour, petrol, an apple, etc is a bit like voting in a democracy. When you fill your car up you are voting for quantities of fuel to be supplied in the market; when you buy 20 cigarettes you are voting for more tobacco to be produced to meet your future demand. The price of labour is just the same - how much you charge for it works under the same principle that determines how much you'd charge for 20 cigarettes or a tank of fuel.

As we saw above, it just isn't true that your pay is made less by those earning whopping amounts. As has often been observed in peer groups, low earners don't resent multi-millionaires quite like they resent those with similar skill sets earning a little bit more than them. In fact, people positively support millionaires by shopping in their supermarkets or watching them act in films at the cinema.

There is evolutionary sense in competing against those in your earning range compared with those at the top. Evolution is the struggle to pass on genes through the vehicle of the family unit - it is those competing in that similar struggle of whom we most need to be wary. If you're an out of work painter and decorator, you don't have to worry about Bill Gates or Brad Pitt putting in a rival tender for a small upcoming job.

Let me explain how even though the rich get exponentially richer, some of that wealth filtrates down to other less well-off people, including the poor. For simplicity, let’s put the top earners in the A category and bottom earners in the Z category. High earners A, B, C and D categories have spending patters that shift consumer demand slightly downwards to E, F, G and H goods and services. That is to say the high earners spend their wealth on expensive things made by other high but slightly lower earners. High earners choose the best architects, cars, health care, clothes, etc, which improves the wealth of the practitioners supplying those goods. Those practitioners in categories E, F, G and H make the people they patronise richer too (those in I, J, K and L), and so the filtration process goes, right down to W, X, Y and Z. This is what drives economic growth, and why even though the rich get richer, most other people's absolute well-being increases too.

That is a vast oversimplification of the whole economy, but not in any way that matters here, because the pattern is a confirmed one, explaining how prosperity is a contagious blessing that affects almost everyone for the better. That point, though, won’t be properly understood without paying attention to the essential corollary fact we touched on above – that wealth and prosperity is *not* simply measured in terms of capital – it is everything; employment levels, consumer goods, better services, more leisure time, less crime, more diverse restaurants and food shops, and so forth.