Wednesday, 20 November 2013

Income Inequality - A Swiss Proposal

Inequality has been rising rapidly in Britain for the past 30 years. The gap between rich and poor has widened and the share of income going to the top 1% has doubled (from 6% to 14%). If the growth in inequality continues at its current rate, we are heading towards Victorian extremes in the next 20 years. This brings undesirable outcomes for everyone - from the absence of social mobility to a division in society so large that rich and poor appear to inhabit different planets. And yet the public is largely ignorant of the extent of this growth in inequality. When asked to assess how wealth is distributed in the UK, many people believe the spread is much more even than it really is. We all like to think we live in a fairer society than is the reality.

But the signs are there for all to see. Owners of the multi-million pound homes in central London – often the international super-rich – may seem to live in a different world than those hit by the bedroom tax that penalises people in social housing with a “spare room”. However, both are part of the same social fabric. Our cohesion as a society is torn apart by the rampant growth in the gap between top and bottom. It fosters a lack of understanding between those at extreme ends of the spectrum, allowing a political debate over the so-called “strivers and skivers,” to gain traction.

The trend towards more unequal societies has been driven partly by globalisation. A more interlinked world economy has kept down wages at the bottom of the income scale by forcing working people to compete with low-wage economies internationally. At the same time, a growing share of the rewards has been channelled to those at the top. This has seen inequality rising across the OECD in the past 20 years. The UK has the fourth highest level of inequality in the OECD after Mexico, the US and Israel. It is going up quickest in some countries that have traditionally been the most equal such as the nordic countries and Germany. But here it is rising from a low base and has yet to catch up with levels seen in the UK and US.

Here’s an idea for how to end corporate greed and reverse the trend of growing income inequality worldwide: impose a new rule that would limit the pay of top executives to just 12 times that of the lowest-paid employees at the same firm. In other words, prevent CEOs from earning more in one month than the lowliest shop-floor worker earns in a year.

This proposal might sound like something cooked up by Occupy Wall Street or another radical protest movement, but in fact it comes from the heartland of a nation not usually known for its disdain of money-making: Switzerland. On Nov. 24, the Swiss will vote in a referendum on whether to enshrine the 1:12 pay ratio — in their national constitution, no less.

The initiative is backed by an assortment of mainstream political groups, including the Social Democratic Party and the Greens, who argue that CEO pay in Switzerland has gotten out of control and needs to be reined in. They quote a raft of figures to show that the ratio of top to bottom earners in Swiss firms has grown from about 1 to 6 in 1984, to 1 to 43 today. And that’s just the average. In some companies, especially banks, the gap is much wider, with top executives such as Brady Dougan, the American CEO of Credit Suisse, and Andrea Orcel, head of investment banking at UBS, earning hundreds of times as much as their juniors.

The campaign’s backers consider salary inequality to be a social injustice. A video cartoon made by the Social Democrats features a Swiss nurse who is astounded by the way top manager salaries have grown to “astronomical” proportions, even as hers has barely increased. Regula Rytz, a co-head of the Greens, says that a constitutional amendment is necessary because neither the government nor business has “a recipe against the self-service mentality in corporate suites.”

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