What comes after the gold rush?

Will Hutton

This article originally appeared in the Observer, 16 June 1996

We live in a world in which increasingly the winners take all. It has never been unusual for pop stars or sportsmen to attract fantastic earnings but the phenomenon now spans the spectrum - from bankers to software writers, lawyers to surgeons. Those deemed to bring success command ever more startling returns.

If this is becoming true in Britain, it is even more true in the US. Just 20 years ago, chief executives of top American corporations earned 35 times more than the average worker - now they earn 130 times more. It is estimated that the top one per cent of the US population has captured 40 per cent of all economic growth since 1973. The growth of income inequality in western labour markets is being driven not only by developments at the bottom, but by those at the top.

It is a new twist in the entire debate about inequality - and the argument over job insecurity. The usual framework is to cite the change in demand for skilled and unskilled labour, so the unskilled are worth less in a technologically-driven environment while the educated and skilled are worth more. Competition from low cost, developing countries exacerbates the trends, while tax cuts for the well-off - coupled with stagnation in welfare payments in real terms for low-income groups, have made the situation still worse. Add corporate downsizing, and the normal terms of the argument are set.

All are plainly significant, but a new best-selling book in the US - The Winner-Take-All Society, published here last week - claims that they rate behind the magnitude of forces which are creating super-rewards for the top performers. Nor, argue the authors, Professors Robert Frank and Philip Cook, is this growth in inequality economically healthy. The lure of achieving these top prizes is causing floods of workers to clamour for jobs in the professions where they exist - such as law and investment banking - and ensuring a dramatic fall-off in other sectors - the Civil Service, teaching and engineering - with knock-on consequences for growth. The authors estimate that a doubling of student numbers in engineering would increase US gross domestic product by 0.5 per cent, while a doubling of law students would cause it to decline by 0.3 percent - but that is precisely the direction in which the winner-take-all society is going.

As the numbers of disappointed winners grow, you might expect them to learn by their mistakes - but as Frank and Cook argue, people continually overestimate their chances of success. Miners rushing to a Klondike are not rational about their chances of finding gold; neither are the numbers flooding into investment banking or the law.

But winners' salaries are not falling as you might expect, given the laws of supply and demand. Indeed the super-earnings grow exponentially. Why? Frank and Cook blame the creation of a highly flexible labour market - for the super-successful. With faster dissemination of information, each industry knows which individuals bring success and to what degree, and with the weakening of moral and employment rules that used to bind top earners to their firms, such people are less loyal to their companies. Top lawyers, security traders or surgeons are in the same position as chat-show hosts - their success is ever more visible as is their capacity to take it with them. It is the new market in 'winners' that is generating super-salaries.

By itself this would matter little. The trouble is, say the authors, it is causing a ferocious misallocation of talent. In Britain, graduate applicants for the Civil Service are dropping, while the numbers anxious to secure City jobs or become the next Chris Evans rise. Inequality driven in this way, if the US parallel holds, will not help the British growth rate.

The authors scoff at the notion that winners need lower taxes to motivate them even more; instead, they turn the argument on its head, saying that while confiscatory taxes for the rich are counterproductive, progressive taxation could boost growth by reversing the misallocation of resources. They don't favour higher income tax, though, but rather a progressive tax on consumption - so the winners have to pay more for luxuries, making the value of winning rather less.

All this places the British argument in a different context. Defenders of the status quo insist simultaneously that Britain has a highly flexible labour force, which is a launch pad for growth, and that job insecurity is a fiction. They claim everything has changed but nothing has changed. But there is a developing winner-take-all tendency at the top of the labour market, and at the same time, as Paul Gregg shows in the Business [section of the newspaper], there has been a sharp fall in the number of years that men can expect to hold their jobs.

So while the winners capture ever higher salaries. middle earners become more insecure, and those at the bottom actually see hourly rates fall. We are invited to laud all this in the name of promoting growth and efficiency; but if Frank and Cook are right we should be highly sceptical. We have ever higher-paid winners and more desperate losers. It will bring nothing but lower growth and much social pain.