14 June 2018

The government this week announced new legislation that will require the largest companies in the UK to report on and justify the pay ratios between the average worker and the highest earning ones.

Under the new regulations, which will come into effect in 2020 and are a part of wider corporate governance reform, businesses will also have to report how their directors take employee and stakeholder interests into account, their 'responsible business arrangements', and how an increase in share prices will affect executive pay.

In announcing the new rules, Business Secretary Greg Clark said he understands "the anger of workers" and promised that the new measures would help "build a fairer economy that works for everyone", but his comments focused mostly on protecting the reputations of big business.

"One of Britain's biggest assets in competing in the global economy is our deserved reputation for being a dependable and confident place in which to do business ... requiring large companies to publish their pay gaps will build on that reputation by improving transparency and boosting accountability at the highest levels," he said.

Further, trade unions were sceptical as to how much the laws would actually help to reduce income inequality and called for more strident action to be taken.

"Publishing and justifying pay ratios is a first step, but more is needed. Fat cat bosses are masters of self-justification and shrugging off public outcry. New rules are needed to make sure they change," General Secretary of the TUC, Frances O'Grady, commented.

Indeed, the Institute of Employment Rights recommends that the framework of labour law must undergo reform before income inequality can be adequately tackled. Reducing the gap between rich and poor is not only a matter of fairness, but is also linked to improvements in many social issues, including crime – a matter touched upon by Metropolitan police Assistant Commissioner, Patricia Gallan, who this week told the Guardian that "those that end up in the criminal justice system tend to be the people who have less money and less opportunity in our society ... it is not good if people do not feel they have the stake in society".

In our Manifesto for Labour Law – which has the support of major unions and has been welcomed within political parties across the left – we propose reinstating sectoral collective bargaining, through which employers' associations and trade unions negotiate minimum terms for wages and conditions across entire sectors. These minimums can then be built upon by enterprise level agreements between individual companies and the trade union that represents their staff. This process facilitates the fair distribution of profit and has proven to be an effective method of reducing inequality. As the graph below shows, higher levels of union membership is correlated with lower income inequality and vice versa.

Read more about our Manifesto for Labour Law