Reducing the wealth gap: What works and what doesn’t

Something is wrong when our economy is struggling, CEO salaries are increasing dramatically and the purchasing power of many workers is shrinking. The trends are easy to show but hard to change. While specific indicators differ, the ratio of an average executive salary to an average worker’s salary was about 30:1 in the 70s; now it is over 200:1 in Canada and 300:1 in the U.S. You will read different numbers in different reports, but the clear trend is our focus for ethical reflection. Looking at the various types of responses helps us understand what it will take to change this trend.

Public policies

The second bill in the new parliament will increase taxes on incomes over $200,000 and decrease taxes for the middle class. Using tax policy to reduce the wealth gap can be effective. In this case, however, it is predicted that top income earners will find ways to avoid taxes, which we seem to accept as inevitable. More tax changes are proposed to improve tax fairness. Time will tell whether greater tax fairness can increase public confidence that everyone is sharing in economic gains and losses.

Requiring disclosure of executive salaries, another policy tool, was designed to use public pressure as a restraint. Disclosure is good and it can help in specific cases, but over time most people stop protesting what they can’t change.

A corporate policy tool is pay for performance. It ties executive pay raises to profits, often in the form of stock options. However, as a recent study shows, an unintended consequence is that CEOs then focus more on short-term profit than the long-term health of the company, which affects workers long after the CEO has cashed out.

Voluntary measures

Can a growing focus on corporate social responsibility be a tool to reduce the wealth gap? CEO-to-average-worker salary ratios are among the criteria used to rank and reward companies. Most rankings compare companies within a sector or region; when most of the ratios are high, therefore, the rankings may not prod much change in this aspect of corporate practice. Community programs are sponsored by companies to improve their image for sharing wealth. While it is better to have socially responsible companies than ones that are not, this tool alone is not adequate to reduce the growing wealth gap in Canadian society.

In recent years Bill Gates, Warren Buffet, Mark Zuckerberg and other very wealthy corporate leaders have earned headlines for giving away large portions of their wealth. Analysts call this “philanthrocapitalism.” Generosity is better than greed, but there are serious problems with over-reliance on unpredictable funding that is under the control of persons with specific interests and may be used to avoid taxes.

Balance of power in the workplace

Meanwhile, from another corner of the current debate, proposals to reduce poverty are moving beyond more food banks, welfare and transfer payments. Many recommend rebalancing power within the workplace as a necessary component for the prevention of poverty.

It is noteworthy that three well-documented and highly regarded economic studies converge on this theme. In 2009 Richard Wilkinson and Kate Pickett-York published The Spirit Level: Why More Equal Societies Almost Always Do Better. They warn against relying on government income transfers to reduce poverty. They propose more cooperatives, workers owning shares and participating in management and other changes to rebalance the power within workplaces as essential elements for poverty reduction strategies.

Then, in 2013, a scholarly tome by French economist Thomas Piketty, Capital in the 21st Century, became a global must-read book. Using the research methods of economists, he showed that extreme concentration of wealth causes economic instability. He argued that reducing the wealth gap is in the best interest of the business world itself. That helped to shift the focus from charity for poor people to the way we do business in the modern world.

In 2015, a UK economist Anthony Atkinson took this analysis further in Inequality: What Can Be Done? Using careful analysis of the impact of various measures, he makes 15 proposals across all sectors, arguing that no one measure will succeed by itself. In addition to typical minimum wage policies, he proposes a “code of practice for pay above the minimum,” to be developed by a Social and Economic Council that includes all stakeholders. While his suite of creative proposals is not likely to be adopted as a package, some, such as that one, are useful for our Canadian discussions about wealth-sharing.

What have we learned? No one measure will be effective. Government policies alone nor corporate social responsibility alone will be effective. Structural changes within the workplace will also be necessary to achieve the goal of an economy that provides for everyone. The direction of these changes is in line with Biblical teaching about a moral economy that serves the common good and provides enough for all people.

Encouragingly, there seems to be a convergence of thinking about what needs to change. We may be at a critical point where substantive change in how we do business becomes feasible, if only because it is preferable to any other option.

Author

  • Kathy Vandergrift, a public policy analyst, brings experience in government, social justice work and a Master’s Degree in Public Ethics to her reflections.

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