The Inner Level

by Richard Wilkinson

  No doubt initiated by the financial crash of 2008, and spurred on by the Occupy movement, the cause of greater equality has also been taken up – in word though not yet in deed – by world leaders. President Obama called inequality ‘the defining challenge of our time’.429 The Pope described it as ‘the root of social ills’.430 The then UN Secretary-General, Ban Ki-moon, and the Managing Director of the International Monetary Fund, Christine Lagarde, have made equally strong statements.431, 432 Opinion polls in most countries show that a very large majority of the population – sometimes as high as 80 per cent – think that income differences are too large, even though most people underestimate how large they actually are. In an American research project, people were shown unlabelled diagrams illustrating the distributions of wealth in Sweden and in the United States. Around 90 per cent of the respondents preferred the fairer Swedish distribution to the American one. Interestingly, that proportion hardly varied between Republican and Democratic voters, between rich and poor, or between men and women.433

  Despite the weight of public opinion, only a few signs of remedial action are detectable. The Living Wage movement has led many large UK public- and private-sector institutions to raise minimum pay rates for their staff.434 In Britain, close to 25 local authorities, almost all controlled by the Labour Party, have set up Fairness Commissions to recommend policies for reducing income differences locally.435 At the international level, the OECD has taken action on tax avoidance by securing agreements with tax havens to share information on bank accounts with tax authorities.436 However, since the financial crash, there has so far been no general tendency for income differences in OECD countries to narrow.

  Evidently, major reductions in inequality can be induced by political pressure, though as soon as the pressure weakens the former inequalities reassert themselves – as Figure 9.1 shows they did after 1980. As the labour movement has weakened and social democratic parties have moved to the right, much of the social progress achieved since the 1920s has been undone. Newspapers report that more UK households now employ domestic help and servants than at any time since the nineteenth century,437, 438 soup kitchens and foodbanks have re-emerged, and those receiving inflated top incomes are founding new dynasties whose subsequent generations will enjoy inherited wealth and leisure.

  These reversals indicate a failure of previous generations to make institutional changes that would have embedded progress more deeply in society. Reductions in inequality relied too much on income redistribution through taxes and social security benefits, which, with a swing of the ideological pendulum, could be undone at the stroke of a pen. Lasting progress towards greater equality will depend on building structural changes, such as greater economic democracy, which can provide firmer foundations.

  ECONOMIC DEMOCRACY

  The main source of widening income differences over the last generation has been the tendency for the incomes (before taxes) of the wealthiest to increase much more rapidly than everyone else’s. Figure 9.4 shows the widening of income differences in the biggest 350 American companies from the mid-1960s to 2015. Differentials between the pay of the CEOs and of ‘production workers’ in the same companies averaged around 20:1 or 30:1 in the 1970s, but by the first decade of this century these differentials had increased tenfold, to between 200:1 and 400:1.439 By contrast, incomes among the least well-off half of the population have stagnated over the last generation. As we have seen, this widening of the income gap has been reflected in a perception of widening differences in personal worth and ability, as well as in an increase of hubris and sense of entitlement among those at the top.

  These huge income differentials occur almost entirely in the private sector. In the public sector – whether in local government, health services, universities, the police or the military – differentials are very significantly smaller, typically no more than 20:1 and sometimes as low as 10:1. The widening contrast between public- and private-sector income differentials in the last decades of the twentieth century was starkly reflected in the pay rises which the CEOs of public utilities and mutual companies gained when they were privatized from the 1980s onwards. It is now widely accepted that executive pay in the private sector has little or no relationship with, let alone being justified by, company performance.440 A study of 429 of the largest companies in the USA found that the returns to shareholders over a ten-year period were substantially lower among companies in which the CEO got more than the median total pay, compared to those in which they got less. This is shown in Figure 9.5.

  Figure 9.4: Changing ratio of CEO pay to average pay of production workers in largest 350 US companies.439

  There is also evidence that small groups of employees are more productive when the members of each group are paid the same. An experiment involving 378 manufacturing employees in India compared the performance of groups with and without pay differences between group members. It found that groups with pay differences between their members had substantially lower productivity and higher absences compared to groups without pay differences.442 With all that we now know about the effects of inequality, it seems likely that this finding reflects differences in co-operation, trust and bonding between group members.

  Figure 9.5: Company performance in the 429 largest US companies is better where CEOs are paid less.441

  Because it is easily reversed, the redistribution of income through taxes and social security benefits is particularly vulnerable when so many people regard taxes as a kind of legalized theft of income which they feel they earned and have a right to. But the idea that we have each earned our income through our own unaided efforts would only be true if we all produced what we needed in isolation, as self-sufficient peasant farmers came close to doing, instead of through processes that actually depend on the contributions of many others. People’s incomes reflect their ability to extract a larger or smaller share of what is produced jointly. Not even the difficulty of people’s work bears much relation to their rewards.443 Few wealthy individuals or CEOs would have become rich if they lived in an impoverished society, without infrastructure – transport, communications, power and water supplies – as well as skilled and well-educated employees. And as economists have always made clear, employers only employ people if they think the value of their work is greater than the amount they are paid.

  The rise in inequality, driven primarily by the ‘bonus culture’ and the rapid rise of top incomes, marks the lack of any effective democratic constraint on the self-interest of the powerful – a lack of constraint from any source, whether through taxation, trade union power or the political influence of the rest of what was once called the ‘socialist movement’. To reverse this process, effective new constraints will have to be devised and incorporated permanently into the economic system; democracy will have to be extended into the economic sphere in ways which are consistent with, but modify, the effects of the market. That all modern economic activity is now, de facto, interdependent, co-operative activity, needs to be reflected both in the division of income from it, and in how the institutions we work in are controlled.

  About half the member countries of the European Union presently have some kind of legislative provision for employee representation on company boards or remuneration committees.444, 445 A 2013 survey carried out in the UK (which is, like the USA, still without a legal requirement for any employee representation) found that 76 per cent of the population were in favour of employee representation on company boards.446 Employee surveys in the USA also show that a large majority want more participation in decision making.447 When Theresa May took office as Conservative Prime Minister in Britain in 2016, she expressed a desire to take at least the first step in this direction. But very soon afterwards she abandoned the idea. In Germany, the ‘Right of Co-determination’ was established in 1951 in coal mining and steel production. In 1976 it was extended to all companies with more than 2,000 employees. In publicly quoted (but not family owned) companies with between 500 and 2,000 employees, one-
third of the members of the board must be employee representatives. Though legislation differs in strength from country to country, and is often too weak to make much difference, studies suggest that companies which have employee representatives on their boards tend to have smaller income differences within them.448 It also looks as if countries with stronger legislation of this kind have experienced smaller rises in inequality since 1980 than countries without such legislation. A large study of the effect of employee representation in Germany on company performance found that employee representation increases company efficiency and market value.449 Employee representatives brought information and understanding to the board, enabling improved decision making and higher company values. Companies in sectors that need more intense co-ordination, integration of activities and information sharing, including ‘trade, transportation, computers, pharmaceuticals, and other manufacturing’, were found to benefit most from employee representation. (However, where employees were represented by an outside trade union official who was not an employee of the company, these benefits of improved flows of information were not found.) In addition to providing more information upwards, there were also benefits to workers and unions of better communication about strategy and profits across corporate hierarchies.

  As well as more robust legislative provision for employee representation on company boards, we also need policies to grow the sector of the economy made up of more thoroughly democratic institutions, such as employee co-operatives and employee-owned companies. Income differences in co-operatives tend to be very much smaller than elsewhere. In the Basque region of Spain, the Mondragon group of co-operatives, founded sixty years ago and now employing nearly 80,000 people, sees top to bottom pay differences in its companies of around 5:1, and very rarely more than 6:1 – though there is a tendency for senior staff to be poached by other higher-paying corporations in Spain.

  As well as reducing income differences, co-operatives and employee-owned companies also lead to a redistribution of wealth from external shareholders to employees and, simultaneously, reduce unearned income. By broadening the distribution of wealth, these companies contribute to a resolution of the problem at the centre of economist Thomas Piketty’s book Capital.450 His argument, that returns on capital increase inequality because they increase faster than other earnings, depends on wealth remaining concentrated in the hands of a few well-off people. Economic democracy may be the best way of spreading both the ownership and earnings of wealth more widely.

  In addition, it is clear that co-operatives and employee-owned companies change working relationships and improve the experience of work: as Robert Oakeshott says in his book Jobs and Fairness, an employee buyout can change a company from a piece of property into a community.451 While people in many residential areas don’t know their neighbours and there is little or no active community life, it is at work that we now have most to do with each other and ought to be able to rebuild a sense of community. The main reason why most of us do not think of our place of employment as especially communal is because it is there that income differences are first created and where we are most divided by hierarchical systems of ‘line management’, from superior to subordinate. By reforming the nature of work hierarchies and reducing the scale of divisive income differences, more democratic economic institutions such as employee-owned companies and co-operatives can help develop social cohesion and reciprocity at work, and strengthen community life more widely.452, 453

  Another crucial advantage of more democratic and egalitarian models of business is that they tend to have higher productivity. Most evaluations of forms of economic democracy have looked at companies which have made only very partial moves towards employee representation. But there have been a number of large and well-controlled studies – comparing before-and-after data on performance for several hundred matched pairs of companies – including ones looking at the effects of profit sharing and employee share ownership.454 What they show is that there are only reliable improvements in productivity when these provisions are combined with participative management.455, 456 In the words of one report:

  We can say with certainty that when ownership and participative management are combined, substantial gains result. Ownership alone and participation alone, however, have at best, spotty or short-lived results … the impact of participation in the absence of [share] ownership is short-lived … Ownership seems to provide the cultural glue to keep participation going.457

  When it comes to fully employee-owned firms, an Employee Ownership Share Index (compiled by Field Fisher Waterhouse) shows that from its initiation in 1992 to 2012 it rose 648 per cent, more than two-and-a-half times the gains made by the FTSE All Share Index, which rose by 245 per cent. A recent review of over one hundred studies confirms not only the better performance of employee-owned companies, but also that they reduce inequality among employees.458 Not all wholly employee-owned companies are, however, owned by all their employees; some are owned by a minority of senior managers. But a review of the evidence concluded that ‘broad ownership [i.e. spread across a larger proportion of employees] boosts productivity by 4% over what would otherwise have been expected’.459 Other reviews have reached similar conclusions – including one commissioned by the British government.456, 460, 461

  The evidence from sources such as these suggests that employee-owned companies not only raise productivity but also outperform others in terms of innovation, ability to withstand recession, sickness absence, employee satisfaction and, of course, equality. An interesting corollary to this is that while more democratic companies increase productivity and reduce income differences, among non-democratic companies the evidence suggests bigger income differences among employees, from the CEO downwards, are associated with lower productivity.462 The only fly in the democratic ointment is that the advantages appear to diminish (but not to be reversed) in larger companies where genuinely participative management becomes unwieldy and requires more formal representative structures which they may lack.

  By contrast, the involvement of outside shareholders in decision making can often prove an obstacle to company performance. Not only do shareholders lack detailed knowledge of the operations of the companies in whose shares they deal, but the fluctuations in share prices which draw their attention have little or no effect on the companies whose shares are traded. Shareholders are often less equipped or inclined to scrutinize the board’s reports and recommendations, even when it is in the interests of the company to do so, and annual meetings frequently degenerate into exercises in rubber-stamping.

  One of the most important reasons to develop the co-operative and employee-owned business sector is the connection between greater equality and sustainability. It was Murray Bookchin, an American pioneer of the environmental movement, who said that corporations ‘can no more be “persuaded” to limit growth than a human being can be “persuaded” to stop breathing’.463 This focus on growth comes both from the need to maximize returns to external shareholders and from the way businesses work to concentrate wealth and power at the top. In the absence of structural change there is little sign that either the self-aggrandizement of those at the top or the power of the profit motive is in any way self-limiting.464

  Co-operatives, on the other hand, are more likely to act as communities and less likely to make expansion their highest priority. For the same reasons, they also seem more likely to perform well in ethical and environmental terms. A study of employees in twenty-two companies with contrasting levels of organizational democracy – in Austria, Italy and Germany – concluded that greater democracy not only improves the ‘socio-moral’ climate within the company, but also increases employees’ ‘civic virtues’, ‘pro-social perspective-taking’ and tendencies towards mutual aid.465, 466 But to ensure that more democratically constituted companies act in the public interest, there is no reason why their boards should not include representatives of the community and consumers, alongside employee representatives.

  WHY
NOW?

  Unless required to do so by law, most companies make little or no gesture towards employee democracy, despite the overwhelming majority of employees who want systems that allow them more active participation and give them a louder voice in the decision-making process.447 As a result, employees are more likely to feel disaffected, partly because they know that their role is to serve the interests of external shareholders and profit, and partly because of the annoyance caused by line management systems set up to ensure that they do.

  These issues are far from trivial. The lack of a sense of control over work is now known to have a major influence on health – mainly because it increases stress.467, 468 And, in the context of the increasing complexity of modern production, maximizing people’s control over their work makes greater workplace democracy more urgent.469 Broader issues of institutional injustice, lack of accountability and whether people feel they are treated fairly are also now known to damage health – including accelerating the decline of mental functioning with age.470-472 Even among schoolchildren, feeling unfairly treated is a powerful stressor: a study covering children in twenty-one countries found that in nineteen of them children suffered more headaches when they felt unfairly treated by their teachers.

  The evidence that employee turnover is consistently lower in more democratic companies suggests that people prefer working in them. This impression is confirmed by the tendency for these companies to be over-represented in lists of the best employers to work for. The frequent – often unspoken – animosity and friction that many employees feel towards their bosses is likely to be less common in co-operatives and employee-owned companies, particularly so where senior managers are accountable to employees who may also have a direct or indirect role in their appointment.