Top to Bottom:
Understanding Fairer Pay
Results from the research project
Howard Reed
Landman Economics
High Pay Centre
18th March 2013
Background
• Huge rise in earnings and income inequality
over the last 35 years
• Wage increases for those on middle incomes
have barely outpaced rising prices over last 10
years
• Tax credits that have increasingly been used to
top up low wages since 1999 are now being
cut
Research question
• What impact would a 10% cut in gross pay for
top earners have on net incomes for low
earners if the 10% cut were redistributed to
low earners?
• This is a “numbers exercise” rather than
something which could actually happen
overnight – would require a change to
business priorities and a rebalancing of
workplace power
Defining “top earners” using HMRC
statistics
Cut-off point
(£/year)
150,000
200,000
300,000
500,000
1,000,000
Taxpayers
above cut-off
(100s)
As % of all
taxpayers
Average
earnings
above cut-off
(£)
219
124
61
26
0.91%
0.52%
0.25%
0.11%
271,000
375,000
564,000
906,000
8
0.03%
1,710,000
Defining “low earners” using the
Family Resources Survey
Group
Average
weekly wage,
2010-11 FRS
Whole sample
Lowest paid 25% by hourly wage
£475
£155
Lowest paid 25% by weekly wage
Lowest paid 10% by hourly wage
Lowest paid 10% by weekly wage
£120
£97
£55
Impact of a 10% cut in wages for
high earners over £200,000:
How big an increase in wages for low
earners could be financed?
Group
Extra wage
Lowest paid 25% by hourly wage
Lowest paid 25% by weekly wage
43p per hour
£13.65 per week
Lowest paid 10% by hourly wage
£1.09 per hour
Lowest paid 10% by weekly wage
£34.08 per week
Impact on inequality and
public finances: example
Redistribution from those earning over £200,000
per year to lowest 25% of weekly earners
Statistic
Outcome
Total gross redistribution, high paid to low paid
Increase in net incomes for low paid
£4.69 bn
£3.01 bn
Average “marginal deduction rate” for low paid
Increased tax/reduced benefits for low paid
35.8%
£2.19 bn
Reduced taxes on high paid
£3.09 bn
Overall fiscal impact
-£0.90 bn
Impact of redistribution on
inequality
• Gini coefficient is a measure of inequality:
0 = all household incomes the same
1= one household gets all the income, the rest get nothing
• Current Gini coefficient on disposable income in UK =
about 0.34
• Redistribution from top earners (via a 10% pay cut)
to low earners would reduce Gini by about 0.004
• Not a big effect – but then, not a huge redistribution
(total wage bill is around £640 bn)
Impact of redistribution on public
finances
• Redistribution leaves a slight hole in the govt budget
because the tax and NICs lost from reducing the
gross pay of high earners is lower (on average) than
the extra tax/NICs paid and lower benefit spend from
increasing gross pay of low earners.
• The size of this “hole” ranges from £200m to £2bn
depending on particular parameters used
• Could be at least partly offset by:
– Increased VAT receipts from low earners spending more
– Increased labour market participation among people on
low incomes
Conclusions
• Redistribution from the very high paid to low
earners can make a substantial difference to
gross and net incomes for low earners
• Not a complete solution to rising inequality
itself
• But useful as part of a wider package of
measures