It's widely believed that well-educated people in responsible positions should be paid more. But pay inequality, as the major cause of general inequality, generates significant social costs. It is vital to understand these costs and to scrutinise justifications for inequality.
Let's consider costs first. Pay inequality often means low-income people cannot afford necessities like housing, education and healthcare. It can prevent them from developing their talents, and means their children are also worse off. It reduces spending power, and thus economic prosperity, in their communities. This is clearly unjust.
It's also inefficient. Money allocated to low-income earners usually makes more of a difference and thus produces more wellbeing and happiness. It stimulates economies because it's more likely to be spent. Conversely, poor pay for the lower-paid can adversely affect whole economies — witness the American sub-prime mortgage crisis.
Furthermore, pay inequality combines with and reinforces social and political inequality. The wealthy, with more education, more influence, and more media and lobbying power, use this to advance their economic interests. This in turn increases their political and social power. The cycle of inequality expands.
Income produces positional, as well as material, benefits. This allows us to surpass the Joneses and feel superior. But the Joneses in turn may feel like failures and turn to drink, gambling, violence or crime.
A highly unequal society is a divided one. The poor resent the rich for their wealth, while the rich disparage the poor to rationalise their privilege. There's more crime, communities feel unsafe and cooperation is harder.
Finally, unequal societies must rely on permanently high economic growth to lift the poor out of poverty. However, such growth generates environmental costs from the ever-increasing consumption by the affluent.
What, then, are pay inequality's justifications?
Economic libertarians argue that people entering into legal and voluntary agreements are entitled to keep any income or wealth they gain. They say depriving them of it through taxation or wage regulation compromises this principle. This ignores advantages people may start with — talent, education, connections and family wealth. It also ignores imperatives to save the planet and meet basic needs.
It's argued that people should be compensated for getting educated. Because education is more unpleasant than work? Hardly. Because education costs money and earnings are foregone? Calculated over a lifetime, incomes of the well-educated compensate them many times over for such costs. They often get substantial parental help with them anyway.
Some contend that people should be compensated for the stress of responsibility. However, studies show that lower paid workers have more stress and illness. Probably because their jobs are more boring, dirty, dangerous, arduous, low-status and powerless. Perhaps we should compensate them, rather than compensating managers and professionals for interesting, varied, high-status work.
Finally, it's argued that the best outcomes are achieved by leaving income levels 'to the market'. Supply comes to equal demand, incentives promote hard work and productivity, and the economic cake keeps expanding.
In this regard, there are two models Australia can follow: the market-driven American model, and Europe's 'social economy'.
Neoliberals portray Europe as an economic failure. They point to its high unemployment, slow growth, lower living standards, high taxes, bloated welfare systems and sclerotic bureaucracy.
But Europe has much more evenly distributed income and wealth than the US. It also has less poverty, higher life expectancy, lower infant mortality, better healthcare, a stronger social safety net, fewer homicides, less imprisonment, a far smaller ecological footprint, shorter working hours, longer holidays and more family-friendly working conditions.
Between 1950 and 2000 Europe's productivity grew about 70 per cent faster than America's. It is now almost on par (and higher in six countries). European unemployment is currently only 1 per cent higher than America's (which is artificially lowered by an enormous prison population: 2.2 million).
Europe's incomes are still only 72 per cent of America's, but three-quarters of this is attributable to shorter hours (a legitimate trade-off). Also, the US average masks huge income differences with stagnant incomes at lower levels.
So Europe is thriving, and many see this century as Europe's era, with success flowing from an educated, secure, fairly paid workforce.
Arguments for income inequality may just be rationalising a system in which well-paid people set pay levels favouring their white-collar chums. If so, it must be challenged.
Robert Salter is a writer and researcher, particularly on the subject of investment in the disadvantaged. He has many years experience in the community sector, teaching at university and TAFE, and campaigning with overseas aid and environmental organisations. He wrote a PhD thesis on an Indian political movement in the 1970s.