- Geoff Mulgan
The Contribution Reward Fund: an answer to pay inequality and the neglect of essential work
The gap between the social value of people’s work and their monetary reward is wide and widening. In the US, for example, nearly half of the lowest paid jobs are ones deemed essential. Here I argue that this is a sign of remarkable collective stupidity in our economic arrangements, and I suggest an answer.
Pay inequality is once again becoming a major public policy issue. One reason is generic: the strong long-term trends towards pay inequality show no signs of letting up with falling real incomes for those without college degrees. Another reason is more specific: the realisation through the pandemic that many of the jobs which are most essential to society are amongst the lowest paid, from nurses and care workers to retail staff.
Together these have fuelled a realisation that contribution and reward are ever less clearly correlated: our systems of pay are seriously out of kilter.
Traditional economics maintained that pay is a natural fact of market dynamics, and the interaction of supply and demand. But this view doesn’t hold up well to scrutiny. Important sectors – notably banking – can pay consistently high salaries in part because they are guaranteed by the state. Others have their reward levels set by quangos and review bodies – including most public sector pay. There is no escaping the fact that patterns of pay are strongly shaped by politics and public policy.
So what can be done? Many governments have implemented or considered solutions to the generic trends towards pay inequality. Tax credits played a crucial role in reducing inequality in the UK and the US in the 2000s. So did the introduction or raising of minimum wages. Basic incomes are now being piloted in many countries and cities. I won’t comment here on their virtues and vices.
But all of these measures are by their nature generic. They make no distinction between different kinds of work and contribution and they make no moral judgements about desert. My proposal is that these policies need to be complemented with a different approach. I call this a Contribution Reward Fund (CRF).
Government would create a fund, financed through general taxation, whose primary purpose would be to adjust pay to make it fairer, based on judgements of which occupations are both most valuable to society and most under-rewarded. The fund might initially be quite small relatively to total pay. But over time it could become substantial, complementing the dynamics of market forces.
Its task would be to make judgements about desert and then to redistribute in the light of those judgements.
How would decisions be made? A simple option is that these would be made by a commission which would use polling and other measures to gauge the public mood and then make recommendations on compensatory payments. A second, better alternative, would combine this with a citizens assembly of randomly selected individuals to agree on a list of the most underpaid occupations most in need of adjustment (citizens assemblies are becoming much more common around the world as a way to make decisions). This assembly (the CRF Assembly) would review pay levels; deliberate on social worth; and make recommendations on where the gap between contribution and reward was greatest, with a commission charged with turning these recommendations into practical actions.
For example, each member of the assembly could be given notional credits to distribute between different occupational groups after the assembly has debated the issues and options. A member, given 10 credits, might choose to give to give 5 each to nurses and truck drivers.
A bolder alternative, perhaps to be introduced after a few years, would make this open to all of the public: through an online platform enabling any registered voter to award credits online to their preferred occupations, with the platform also providing relevant data, and discussion fora.
So let’s imagine the CRF Assembly came up with a list that prioritised care workers, nurses and lorry drivers. The Contribution Reward Fund would then pay a premium directly to workers in relevant occupational categories. These payments would be public (and of course could be refused), with both the name and address of the recipient (except where there were particular reasons for privacy, eg a history of being the victim of domestic violence).
How might the numbers work? Tax raises around £800bn a year in the UK. Let’s suppose the CRF was initially set at 1% of tax revenues, or £8bn. For the sake of simplicity imagine that the CRF assembly decided to allocate all of its funds to care workers. There are around 1.5m employed in adult social care, over 850k of whom are care workers and 135k directly employed by individuals. If this was the only group prioritised in year one for payments, then each might receive a supplement of a bit over £5,300 for the year, payable through HMRC. This figure could be higher if a cut-off was used, eg applying only to salaries under a certain level (eg £40k) – though again this could be a topic for deliberation.
If a group had been prioritised several years in succession this could then prompt legislation to set a new, higher, minimum wage for the occupation, perhaps with the label Priority Sector Minimum Wage. In the USA, for example, nearly half of workers earning less than $15 an hour are essential workers, and although some received modest bonuses through the pandemic most now face the prospect of declining real pay as inflation rises.
The proposal for a CRF has many distinctive features which would mark an important break from the past norms of largely technocratic welfare decision-making.
First, it recognises that pay is a moral question as well as a market question. It is right for society to debate the worth of different jobs. In the first half of the 20th century welfare reformers generally believed that contribution mattered as much as need. But since then welfare debate has steadily reduced the space for any recognition of the moral aspect of contribution, focusing instead uniquely on needs.
Second, a model like this would open questions of pay and reward up to democratic debate and direct engagement. At present the great majority of pay decisions are made by the relatively privileged, either in management positions or sitting on pay review bodies. Most pay decisions are made by men - yet women predominate in many of these essential jobs and would probably be the main beneficiaries of what I propose.
Third, the proposed approach would be flexible and allow for learning. If, over time, pay levels for particular groups rose then there would be less need for adjustment. New issues could also come into view: for example a CRF Assembly might decide to prioritise green jobs for a period. It might also recommend higher minimum wages for particular sectors, such as care.
The administration of such a scheme would involve some complexities. It would require definitions of who should be entitled; eg how far would allocations to care workers spread to management, or how to handle borderline cases – such as temporary workers – and many others. But these are all soluble and there are precedents to build on: government ruled on who counted as ‘essential workers’ at the beginning of the crisis – and gave them priority access to tests, and in some sectors there were modest bonuses.
There are also many related issues, from access to childcare to statutory sick pay, that are relevant to fair rewards. This is where more classic commission type functions would be relevant, making transparent adjudications and justifying these in terms of interpretation of the public wishes as well as technical considerations.
Critics would warn of unintended knock-on effects: would employers adjust pay levels downwards, or would there be too much turbulence in decisions (eg what would happen to motivations if the rewards fell sharply in one year?). These are good reasons for introducing it at a relatively modest level – such as 1% of tax revenues rather than 5 or 10% and adapting in the light of experience, using data and evidence.
But the key issue is that such a scheme would of course become political in the best sense. Occupations would make their case to the public. Newspapers and discussion programmes would debate the pros and cons of future adjustments. Occupational groups would become more careful about taking any industrial action that cut against the moral aspect of their service.
This kind of politicisation is entirely healthy. In essence I am proposing applying simple principles of collective intelligence to pay and reward – enabling our society to think and reflect on what’s most valuable.
The economics profession has largely failed to address these inequalities, trapped within outmoded ways of thinking. As a result such discussion of the politcs of pay is essentially suppressed, which is why reward and contribution have drifted so far apart. When it comes to pay we are collectively stupid.
I’m sure there may be variants of this idea that are better. But let’s not shy away from its core proposition: that pay is in part a social fact, a collective decision about what we value. At present our institutions are failing to make these decisions well and millions suffer as a result. The idea that decentralised markets are an adequate way to set pay fairly looks ever less credible.