More equal than others

A new reports highlights the gap between those earning the most and those earning the least

Inequality is hot stuff. Some blame it for the financial bubble that caused the great downturn.

The argument goes that high earners accumulated wealth, which was recycled to low earners in cheap loans they couldn't repay.

Unjust income spread is blamed for other unhappy outcomes. When the gaps are wide between high and low earners, or between rich and poor, they're blamed for social tension, crime or poor health.

If low earners don't have spending power, it can obviously hamper economic growth.

And yet, it's also argued that inequality is necessary for the proper functioning of the economy. Without it, there wouldn't be much incentive to work hard, to train or to take risks.

The issue of inequality has become a refrain of the campaign for Scottish independence that the country is far too unfair as part of the UK, and that the powers of independence would provide the opportunity to change that.

Mid-table Scots

Two economists at Stirling University have injected a large, refreshing dose of evidence into that part of the debate.

What they found - and they were only looking at income, rather than wealth - may not be what you might expect, at least if you listen to the rhetoric about this. By international standards, it seems Scotland isn't particularly unfair. It's around the median point of inequality of income.

Out of 35 countries in the OECD grouping, it's ranked 18th - a bit less equal than New Zealand and Korea, a bit more equal than Poland and France.

Chile and Mexico stand out as the most unequal; Iceland and Slovenia as the least.

London weighting

The UK is ranked seventh most unequal. And what this Stirling report makes clear is that the bit of the UK that pushes it so far up the table is London.

Scotland's income distribution figures look very like those of the rest of the UK, excluding London.

But if you take London on its own, the top 1% of earners make 43 times more than the bottom 1%. In Scotland, the top 25,000 earners make 20 times more.

Looked at another way, the top 1% of Scots earners earned 6.3% of total pre-tax income in 1997 and that rose to 9.4% in 2009. In London, it rose from 8% to 14% of the total.

So inequality isn't just between rich and poor, or between high earners and low - in Britain, it's also between the south-east and the rest.

Technology and trade

There are two big forces at play here. One is change that's taking place in the labour market anyway, driven by globalising forces and by technology. The other is the effort made by government to counteract that.

The force of these external forces was felt most strongly in Scotland in the 1980s. Other countries out-competed Scotland, so it lost its old, inefficient industries.

In Scotland, the top 25,000 earners make 20 times more than the bottom

At the same time, mechanisation and computerisation was replacing workers in the middle ranks of earners.

What government did back then was to reduce the power of workers, through trade unions, to negotiate collectively and maintain wage levels. The consequence was a rapid increase in inequality running through to the 1990s.

By that time, a more flexible labour market was putting more people into part-time work, meaning lower weekly earnings. For some, such as the semi-retired, that's what suits them. For others through the current downturn, we know part-time work is a necessary substitute for their preference of full-time work.

Either way, it means that a Scotsman who is just within the top 10% of earners is likely to work twice as many hours as a man who is just within the bottom 10% of earners.

The effect of that on the inequality statistics has been to widen the gap between high and low earners. And it can be argued that has been exacerbated by the way in which executive pay is set - either by themselves to suit themselves, or through the salary-inflating effect of the development of a global market for top management talent.

Scandic squeeze

The Stirling economists have gone on to show the impact of government intervention, with the incoming Labour government. Tax credits for families and for pensioners had a significant effect. It doesn't seem to have reversed inequality by much, but it halted the widening process.

Other countries did not introduce those redistributive changes, in some cases because they already had extensive redistribution through the tax and benefit system, and they were under pressure to unwind them a bit.

That might explain why the Nordic countries became more unequal in the past 15 or so years, at a time when the UK was holding its position.

Iceland, Norway, Denmark and Finland are among the six most equal countries of the OECD 35, but the gap between them and the others has narrowed.

Holyrood levers

So where does that leave an independent Scotland? With levers to pull, but with constraints on those levers.

You could tax and borrow to redistribute, but that carries a high risk of choking off growth. And in an era of high deficits and debt, there are limits on the generosity of the state to those at the bottom of the economic heap.

There are elements of "pre-distribution", such as a boost to the minimum wage, or pressure to spread uptake of a "living wage".

But in an open economy, in businesses where goods and services are traded, the person competing for your job may be in India or Brazil. So such measures risk making Scottish workers uncompetitive.

That's why the other measures that government can take are around improvements in skill levels, to compete internationally on non-wage grounds. And on education and skills, Holyrood already has the levers of power - if not for the total budget, at least for the setting of priorities.