Mind the gap

Labour must learn to love the market because it is the best route to delivering the party's core goals of a stronger economy and a fairer society. That was the message from Chancellor Gordon Brown yesterday, reclaiming his mantle as one of the party's original modernisers. Mr Brown told the Social Market Foundation that it was time for the left to abandon "kneejerk" opposition to the market.

It's no surprise that parts of the party find it hard to marry the market to social equity though, looking at figures on the explosion in pay inequality in the late-1990s published yesterday. The figures taken from the government's New Earnings Survey don't even include sky-high self-employed earners such as football stars.

Gargantuan pay deals for directors have left two-thirds of the workforce earning less than the average, according to researchers at Incomes Data Services. While the bottom 10th of earners have seen their before-tax pay rise by 46% over the last decade, the pay of the top 10th has risen by 54%, with the sharpest gains concentrated right at the top of the earnings scale.

While the national minimum wage has put a floor under poverty pay, Incomes Data Services says it has little impact on overall inequality because of the size of the gains made by the few at the top. The result has been to drag the mean wage up the scale so that two-thirds now fall below it.

Fat cat pay is a contentious issue. Labour party whips spiked a backbench bill last week sponsored by the former Asda boss, Archie Norman, now a Tory MP, which would have made it more difficult for companies to offer huge payouts to failed directors. The trade secretary, Patricia Hewitt, has instead promised a review of the issue, but the government is reluctant to step in fearing accusations of being anti-business.

"Labour hasn't got a coherent narrative on inequality," says Peter Robinson, chief economist at the Institute for Public Policy Research. "Rewards seem to be have been doled out particularly unfairly over the past four years."

It's hardly Labour's fault, of course, that its first four years in power coincided with the excesses of the dot.com bubble, when many chief executives mistook themselves for masters of the universe, and demanded commensurate salaries. But as yesterday's figures highlight, without government intervention the labour market can produce highly unequal results.

This is particularly true in an age of what one economist has dubbed "winner takes all" markets. Opera singers and football players are the classic example. Huge profits are to be made from the performances of the best, as new forms of communication widen their potential audiences to billions. But when anyone can turn on the telly and watch David Beckham or listen to a CD of Angela Gheorghiu, being second best doesn't pay - as the footballers of the Nationwide league are learning painfully.

For a social democrat party, presiding over such vast gaps in incomes can be an uncomfortable experience. Most of Mr Brown's praise for the virtues of competition was reserved for markets for products and services, where successive programmes of deregulation and liberalisa tion have clearly delivered benefits for consumers.

Labour has gently rolled back some of the Thatcherite reforms of Britain's employment framework. When talking to a union audience, ministers trumpet the introduction of the minimum wage, recognition rights for unions and the adoption of various employment directives from Brussels. When they talk to business the message is quite different, with ministers praising Britain's relatively lightly regulated labour market, particularly compared with some high unemployment economies in Europe. Even the relatively light reregulation which Labour has introduced has gone down badly with business.

The government is struggling to regulate the employ ment market fairly, according to Mr Robinson of the IPPR: "They haven't figured out how to have a reasonably robust system of regulation of the labour market while making sure it functions efficiently."

In the short term, bold action on top pay is unlikely. The government is no doubt hoping that the City's new band of activist shareholders will do the job for them. Enraged by the excesses revealed when the dot.com bubble burst, big institutional investors are on the warpath. They have already put the kibosh on a £20m pay package for Jean-Pierre Garnier at GlaxoSmithKline and on an £18m deal for Prudential head, Jonathan Bloomer.

But in the longer term, as the market widens the rewards for talent and luck, harder questions remain. Without government action on boardroom pay or redistribution, rising pay inequality is likely to lead to a widening gap in household incomes, an embarrassment for social democrats.

One sure-fire way of narrowing the gap between rich and poor would be a good old-fashioned recession. But that is hardly a solution Mr Brown would approve of.