How we solve Brexit might reduce inequality

It's an odd thought, but a potentially true one, that how we leave that delightfully social democratic ideal of the European Union will reduce inequality here in the UK. As we say, odd but potentially true.

For there's something dreadfully underappreciated about inequality. It's not so much about certain professions or jobs getting paid more than others. It's rather more about certain firms paying better than others in the same field. We are, rather than inequality between say, classes, seeing inequality increasing between firms. This is true of the US and the UK:

The reason, according to a new paper from Harvard University’s Richard Freeman, is that over time inequality is growing between different companies.

“The earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor,” in rising inequality, Mr. Freeman said.

This may sound obvious: Of course some firms do well and others don’t. But if inequality is growing sharply among workers with the same attributes, it casts doubt on theories that peg inequality to primarily demographic, educational or geographic factors. The link is tighter than one might expect. From 1992 to 2007 (the period in which the data in this study was available, and also the period over which much of the rise in inequality occurred), the average worker at a given percentile, and the average firm of a worker at that same percentile had almost equal earnings increases.

The likely reason is that the economy is becoming less competitive. It is competition that makes firms scramble for productivity and it is productivity which enables higher wages to be paid. If we're finding that productivity is increasing only in certain firms, rather than across firms in general, then we are seeing the effects of too little competition.

Which brings us to Brexit. One potential outcome, one which we desire of course, is that Britain reverts to proper, even if unilateral, free trade. This exposes all domestic manufacturers to competition from the top producers around the world - it being, of course, usually the top 10 or 15% of any economy that even tries to export. Under the pressure of such competition the urge to increase productivity will bear upon all firms and thus both make us all richer and also reduce the inequality of pay across firms.

 

Previous
Previous

The book you should be reading

Next
Next

In which I learn from Shelter that my flat is unacceptable