Author: Geoff Riley Last updated: Sunday 23 September, 2012
There is a wide gulf in pay and earnings rates between different occupations in the UK labour market. Even in local labour markets there will be variations in pay levels – for example, in London bus drivers working for different companies can see differences in pay of up to £6,000 a year?
In 2010, chief executives of FTSE-100 companies were paid on average 145 times the average salary. Back in 1999 the multiple was 69. On current trends it will be 214 by 2020, or around £8m a year.
In the 30 years to 1979, the share of income going to the top 0.1 per cent of earners dropped from 3.5 per cent to 1.3 per cent. Today, the top 0.1 per cent takes home as big a share as it did in the 1940s.
No one factor explains the gulf in pay that persists between occupations:
Economists often refer to the existence of “sticky wages.” In a fully flexible labour market, a decrease in the demand for labour should cause a fall in wages and a contraction in employment - just like any demand curve shifting down.
However, sticky wages refers to a situation in which the real wage level doesn't fall immediately, partly because many employees have wages specified in employment contracts that cannot be re-negotiated immediately, and because workers (perhaps protected by their trade unions) are resistant to cuts in nominal wages.
If the wage level cannot fall when demand falls, it leads to a much bigger drop in employment and, more importantly, involuntary unemployment because of a failure of the labour market to clear.
The evidence for sticky wages is a good counter-argument to neo-classical models of the labour market that suggest that real wage levels respond flexibly to any changes in labour demand and supply conditions.
Will wages become less sticky during the recession? There are signs that workers, fearful for their jobs at such a difficult time, have become more willing to consider and perhaps accept pay freezes or wage cuts traded off against improved job security.
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