How much people are paid and how that pay is determined have become too politicised, with a worrying increase in political grandstanding and direct intervention. New research from the Institute of Economic Affairs reveals that vast swathes of government action in pay policy are unnecessary and often based on poor economic analysis. The interventions themselves fail to deal with perceived problems – whether that be inequality, pay gaps or poverty.

Concern about low pay has already led to the introduction of the National Living Wage (NLW) – even though there is scant evidence that it is an effective tool to alleviate poverty. Meanwhile, momentum is building to impose limits on executive pay and require companies to do more to close the gender pay gap, on the faulty pretexts that the former is a market failure and the latter arises because of discrimination.

Key policy recommendations:

High pay: whilst not in itself a problem, there is a case for simplifying the tax system and removing loopholes for all high earners, rather than targeted interventions on executives of major companies.

Gender pay gap: the government should scrap the planned publication of crude league tables as there is little evidence that the gender pay gap results from discrimination. Their imposition raises business costs and creates perverse incentives to not hire women for certain roles.

Minimum wages: the planned move to the NLW should be abandoned and the National Minimum Wage simplified. Scotland should be given devolved authority over its own minimum wage and for the rest of the UK, the Low Pay Commission should have its authority restored to take in to consideration the impact of the level on the labour market. To tackle poverty, the government should instead review policies which raise the cost of food, energy, childcare and housing.

Faulty reasoning and bad policies on pay:

Gender pay gap

•    Between the ages of 20-39 women’s median earnings are now higher than men’s. There is no evidence to suggest that any differences between male and female pay can be attributed to employer discrimination.

•    Variations in pay represent different patterns of employment, different skills and different lifestyle choices and priorities that differ between men and women and are beyond the control of government.

•    Forcing firms to publish pay gaps will fail in informing policy as the pay gap means little without analysis of the characteristics and tendencies of different groups.

•   Such a public interrogation could also encourage firms to manipulate the data or even make them hesitant about hiring women unless it is for a high-paying role to save face.

High Pay

•    Despite what we hear about executives’ worth, evidence shows the impact of CEOs on company share prices has been growing over time. The now globalised market for top executives means their pay naturally increases with competition as in other sectors.

•    International evidence suggests that imposing a system of corporate governance fails to reduce the pay of executives. Germany has seen increases in top level pay despite implementing a system involving stakeholder representation in a two-tier board system. The latter requirement has cost 26% of shareholder value. 

•    Government interference with corporate structures could also discourage large multinationals from basing themselves in the UK.

•    Due to the growing antipathy towards executive pay, even local and national government are now finding it difficult to increase public sector pay across the board.

Minimum wages

•    The NLW does nothing for those out of work or many of those working part-time or in poverty.

•    The Office for Budget Responsibility has forecast 60,000 job losses and a reduction of 4 million hours’ work per week following the introduction of the NLW, which suggests that wage floors have a significant negative effect on employment levels.

•    Any gains received in higher pay must be weighed against losses of jobs, hours and benefits such as pensions, premium pay on weekends/overtime and other perks.

•    Decreased demand for labour will inevitably hit the young and unskilled the hardest.

•   The politicisation of the minimum wage is likely to be particularly problematic in economic downturns, given the precedent created for the Chancellor to set the level directly.

Commenting on the report, author Ryan Bourne, Head of Public Policy at the Institute of Economic Affairs, said:

“Price controls in wage-setting have severe negative consequences. Regulations that try to influence wages in order to meet an arbitrary target will create perverse incentives in hiring and compensation decisions.

“Sadly, rather than accepting that employers and employees come to agreements about pay according to specific job, pay policy is being driven by popular misconceptions, such as that pay levels are determined by discrimination, or that pay should compensate workers for their living costs. Where political views on pay are concerned, we have seen a regression to the meme.”

Notes to editors:

For media enquiries please contact Nerissa Chesterfield, Communications Officer: nchesterfield@iea.org.uk or 0207 799 8920 or 07791 390 268.

The full report, And how much do you earn? Public pressure for government regulation of pay, by Ryan Bourne and Professor Len Shackleton, can be downloaded here.

This report is part of the Paragon Initiative – the IEA’s biggest-ever research programme.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.