Top to Bottom: Understanding Fairer Pay

1. Top to Bottom: Understanding Fairer Pay Results from the research project Howard Reed Landman Economics High Pay Centre 18th March 2013

2. Background • Huge rise in earnings and income inequality over the last 35 years • Wage increases for those on middle incomes have barely outpaced rising prices over last 10 years • Tax credits that have increasingly been used to top up low wages since 1999 are now being cut

3. Research question • What impact would a 10% cut in gross pay for top earners have on net incomes for low earners if the 10% cut were redistributed to low earners? • This is a “numbers exercise” rather than something which could actually happen overnight – would require a change to business priorities and a rebalancing of workplace power

4. Defining “top earners” using HMRC statistics

5. Defining “low earners” using the Family Resources Survey

6. Impact of a 10% cut in wages for high earners over £200,000: How big an increase in wages for low earners could be financed?

7. Impact on inequality and public finances: example Redistribution from those earning over £200,000 per year to lowest 25% of weekly earners

8. Impact of redistribution on inequality • Gini coefficient is a measure of inequality: 0 = all household incomes the same 1= one household gets all the income, the rest get nothing • Current Gini coefficient on disposable income in UK = about 0.34 • Redistribution from top earners (via a 10% pay cut) to low earners would reduce Gini by about 0.004 • Not a big effect – but then, not a huge redistribution (total wage bill is around £640 bn)

9. Impact of redistribution on public finances • Redistribution leaves a slight hole in the govt budget because the tax and NICs lost from reducing the gross pay of high earners is lower (on average) than the extra tax/NICs paid and lower benefit spend from increasing gross pay of low earners. • The size of this “hole” ranges from £200m to £2bn depending on particular parameters used • Could be at least partly offset by: • Increased VAT receipts from low earners spending more • Increased labour market participation among people on low incomes

10. Conclusions • Redistribution from the very high paid to low earners can make a substantial difference to gross and net incomes for low earners • Not a complete solution to rising inequality itself • But useful as part of a wider package of measures