Ratio of earnings of top 10 per cent earners vis-à-vis
bottom 10 per cent earners, 1990-2006
The huge growth in executive in recent years has not only exacerbated income inequality but appears to have done little or nothing to improve company performance. Despite strong economic growth that produced millions of new jobs since the early 1990s, income inequality grew dramatically in most regions of the world and is expected to increase due to the current global financial crisis, according to a new study published on Thursday by the research arm of the International Labour Organization (ILO). CEO pay at the 15 largest US companies earned 520 times more than the average worker. This is up from 360 times in 2003.
The new report, entitled World of Work Report 2008: Income inequalities in the age of financial globalization, produced by the ILO’s International Institute for Labour Studies also notes that a major share of the cost of the financial and economic crisis will be borne by hundreds of millions of people who haven’t shared in the benefits of recent growth.
Performance-related and share-based compensation packages pushed up executive pay in the US by almost 10 per cent a year between 2003 and 2007, adjusted for inflation, compared with 0.7 per cent for employees.
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“This report shows conclusively that the gap between richer and poorer households widened since the 1990s”,said Raymond Torres, Director of the Institute responsible for the report. “This reflects the impact of financial globalization and a weaker ability of domestic policies to enhance the income position of the middle class and low-income groups. The present global financial crisis is bound to make matters worse unless long-term structural reforms are adopted.”
The report notes that while a certain degree of income inequality is useful in rewarding effort, talent and innovation, huge differences can be counter-productive and damaging for most economies, adding that “rising income inequality represents a danger to the social fabric as well as economic efficiency when it becomes excessive”.
The report marks the most comprehensive study to date of global income inequalities by the Institute, and examined wages and growth in more than 70 developed and developing countries. It calls for longer term action to put the global economy on a more balanced track, including promotion of the ILO’s Decent Work Agenda to link economic, labour and social policies to boost employment and improve incomes and income distribution.
The report says that as global employment rose by 30 per cent between the early 1990s and 2007, the income gap between richer and poorer households widened significantly at the same time. What’s more, compared with earlier expansionary periods, workers obtained a smaller share of the fruits of economic growth as the share of wages in national income declined in the vast majority of countries for which data was available.
“The ongoing global economic slowdown is affecting low-income groups disproportionately”,the report says.“This development comes after a long expansionary phase where income inequality was already on the rise in the majority of countries.”
Among its other conclusions, the report says:
- Employment growth has also occurred alongside a redistribution of income away from labour. In 51 out of 73 countries for which data are available, the share of wages in total income declined over the past two decades. The largest decline in the share of wages in GDP took place in Latin America and the Caribbean (-13 percentage points), followed by Asia and the Pacific (-10 percentage points) and the Advanced Economies (-9 percentage points).
- In countries with unregulated financial innovation, workers and their families became increasingly indebted in order to fund housing investment and consumption. With stagnant wages, this was key to sustain domestic demand. However the crisis has underlined the limits to this growth model.
- Between 1990 and 2005, approximately two thirds of the countries experienced an increase in income inequality. The incomes of richer households have increased relative to those of the middle class and poorer households.
- Likewise, during the same period, the income gap between the top and bottom 10 per cent of wage earners increased in 70 per cent of the countries for which data are available.
- The gap in income inequality is also widening – at an increasing pace – between top executives and the average employee.For example, in the United States in 2007, the chief executive officers (CEOs) of the 15 largest companies earned 520 times more than the average worker. This is up from 360 times more in 2003. Similar patterns, though from lower levels of executive pay, have been registered in Australia, Germany, Hong Kong (China), the Netherlands and South Africa.
Noting that prospects are for a continuing increase in income inequality in the course of the present economic situation, the report also added that excessive income inequalities could be associated with higher crime rates, lower life-expectancy, and in the case of the poor countries malnutrition and an increased likelihood of children being taken out of school in order to work.
“Already now, there are widespread perceptions in many countries that globalization does not work to the advantage of the majority of the population”, the report says. “The policy challenge is therefore to ensure adequate incentives to work, learn and invest, while also avoiding socially-harmful and economically-inefficient income inequalities.”