Academic journal article New Zealand Journal of Employment Relations (Online)

Research Note: Pay Gaps between Management and Non-Management Employees

Academic journal article New Zealand Journal of Employment Relations (Online)

Research Note: Pay Gaps between Management and Non-Management Employees

Article excerpt


The last few decades have seen a pattern of increasing income inequality in developed economies. In the later part of this period, the main driver of income inequality has been identified as being a widening pay gap between the top 10 per cent of income earners and the rest.

Recently, there has developed a growing acceptance among commentators that orthodox economic theories do not adequately explain why top end income shares continue to grow. As an alternative, commentators are increasingly turning to exploring whether these trends can be explained by institutional factors effecting income determination. Amongst other things, such analysis has noted a correlation between increasing income inequality between top income earners and the rest and decreasing union membership/collective bargaining rates.

This article will examine a particular aspect of increasing top end income shares - being widening 'pay gaps' between the respective earnings of management and non-management employees in firms. It will attempt to explain this trend through an institutional analysis of how pay is determined within modern firm structures, and in particular the effect of social norms on how management set pay and on levels of collective bargaining.

The Pay Gap Issue

It is well documented that across OECD economies since the 1980s, there has been growing inequality amongst income earners. From the mid-1990s, this has been largely driven by a growing gap between the income of the top 10 per cent of income earners and remaining 90 per cent (Jaumotte & Buitrón, 2015).

A major influence in the increasing top income shares has been a widening difference between what firms pay their top earners and the rest. Further, this trend appears to have been largely driven by management in firms receiving much larger pay increases than non-management employees.

For example, in the US over the last 30 years, the bottom 90 per cent of wage earners had a real wage increase of around 15 per cent as compared with 150 per cent for the top one per cent and 300 per cent for the top 0.1 per cent. In the US during the same period, pay ratios between CEOs and typical workers in firms increased from around 30:1 to 200:1 (Stiglitz, 2013). In the UK during 1985-2011, the one per cent of wages earners had pay increases of 117 per cent, the top 10 per cent had an 81 per cent increase, while the pay of the bottom 10 per cent improved by 47 per cent (United Kingdom Office for National Statistics, 2012). During this period in the UK, there have been very significant pay increases for executive employees (Rashbrooke, 2013). In New Zealand, since the mid-1980s, income for lower and middle income earners has hardly moved in real terms. During the same period, the pay of the top 10 per cent of wage earners has risen by 80 per cent in real terms. The pay of CEOs has risen by this same amount since the mid-2000s (ibid.).

'Pay gaps' between management and non-management employees have been particularly prevalent in liberal market/Anglo-Saxon economies. An assessment of a basket of AngloSaxon against European/Japanese economy data revealed that up until the late 1970s, executive pay took up a similar share of firm income (five to eight per cent), but recent data shows that while, the share in European/Japanese economies have not significantly shifted, the share in Anglo-Saxon economies has jumped to around 15 per cent (Stiglitz, 2013). However, since the mid-1990s co-ordinated market economies are increasingly catching the pay gap disease. For example, in Germany, the gap between lower and higher income earners has been increasing since the mid-1990s, with real wages of union members hardly moving during this period (Bamber, Lansbury & Wailes, 2011).

While pay gaps tended to narrow coming out of the Global Financial Crisis (GFC), as the economic recovery took place they apparently widened again. In the US, the share of executive pay took a slight dip post GFC but since 2010 has risen back to pre GFC levels, (Stiglitz, 2013). …

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