Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macroeconomist and expert strategist at APG, on whether the wage gap in the Netherlands is still widening.

Anyone who visited an Albert Heijn store in recent weeks ran the risk of encountering empty shelves. Cause: a strike in the supermarket chain's distribution centers. The reason was dissatisfaction among the staff in the distribution centers about the increased wage gap between the company's employees and its top management. Whereas the supermarket chain’s management is taking good care of itself, the collective bargaining agreements of ordinary employees are being increasingly squeezed, says CNV negotiator Roel van Riezen in Trouw.

Top tier
Over the past decade, income distribution actually appears to be quite stable, Kalshoven said. This is true both for the primary income distribution (income before it is redistributed by the government through taxes, benefits and allowances, ed.) and for standardized disposable incomes. The so-called Gini coefficient for income inequality has fluctuated around a value of 0.29 for about a decade. This puts the Netherlands in the same range as Belgium and the Scandinavian countries. Before redistribution, the Gini coefficient is 0.55. “So, the government’s measures are bringing inequality down considerably,” he says.

Incidentally, that does not mean that nothing is changing. The top 10 percent of incomes earn about a third of total income - a proportion that has remained the same over the past decade. Kalshoven: “But the income of the richest 1 percent and especially the top 0.1 percent of big earners did rise over that period, CBS figures show. In 2019, that top tier earned 3.7 percent of total primary income, up from 2.3 percent in 2011. In disposable income - after government measures - it is less extreme, but still an increase of 1.8 percent to 3.2 percent. So the ratio between lower and middle incomes on the one hand and the absolute top on the other did grow more skewed in recent years, although this recovered somewhat during the Covid crisis.”

Unfair
Most attention is focused on the 0.1 percent of the Dutch population that earn the most, but that top tier has little impact on the inequality rate. Precisely because it is such a small group. But even if the impact on, say, the company's unit costs is negligible, there are indirect economic effects of a higher wage for the top earners, Kalshoven continued. “People see it as unfair and unjust, as we saw with the strikers at the distribution centers. That can lead to calls for raising the wages of other staff as well. The main argument for this, of course, is high inflation, but top salaries do add up. The increase in wages of all employees is of course reflected in the wage bill. And that in turn can translate into higher prices for products in stores, higher wage demands and so on. In other words, wage moderation at the top can also help prevent a wage-price spiral.”

The question is whether reducing the pay gap should be left to the market or whether it is a task for the government. “In the Netherlands, we have set it up so that the primary income distribution originates in the market. Then government measures - taxes, benefits and allowances - provide redistribution. This is not always successful, however. There are always people who devise tax constructions or divert to a tax haven.”

Tinbergen standard
The government can also reduce the wage gap from the other side, by raising the minimum income by 10 percent, which is exactly what happened this year. “Even in America, a country that has greater income disparities than the Netherlands, you can see that wages at the bottom of the income distribution have recently been rising faster than those at the top. We have also seen the old union slogan ‘pennies instead of percentages’ reflected in wage agreements. Wage increases of a (partly) fixed amount mean that lower wages are rising faster than higher wages.”

The fact remains, however, that the Tinbergen standard is rarely met by large companies. This rule, attributed to Dutch economist and physicist Jan Tinbergen, states that the highest-paid worker in a company should earn no more than five times the wage of the lowest-paid worker. “Someone on the minimum wage earns about 25,000 euros a year and the CEO of a large publicly traded company may earn a few million. Then, of course, you quickly arrive at a multiple of that ratio, in some cases a ratio of 1 state to 100 or more. But going back to what I said earlier: this is only a very small group. The title CEO really does not guarantee a million dollar salary. The average CEO in the Netherlands earns ‘only’ about 16,000 euros per month. That’s not bad, of course, but the focus is mainly on the absolute top earners.” 

Inequality
Finally, Kalshoven points out that there are different forms of inequality. “For example, wealth inequality in the Netherlands is a lot more skewed than income inequality. In addition, there are big differences in the labor market. Some will always have job security while others have to make do with temporary work or a temporary (zero hours) contract. And then there is the inequality between buyers and renters, where some can accumulate wealth while others may have to spend years on a waiting list to qualify for social housing. These are forms of inequality that are not reflected in the aforementioned Gini coefficient.”