Rich getting richer, study finds

Income inequality is growing in the Netherlands, a recent study shows. The income of the highest earners has exploded since 1998.

Growing income inequality was long the Loch Ness monster of the Netherlands. Some claimed to have seen it, but nobody could prove it really existed.

But the claim has now been substantiated. Since 1998, financial rewards (including both fixed salaries and bonuses) paid to a small sliver of employees has been outpacing the income of the remainder of the Dutch workforce, a study by the Bureau for Economic Policy Analysis (CPB) has found. Between 1998 and 2006, the fraction of national income that ended up in this financial elite’s pockets grew from 1.3 to 2 percent. On average, the members of this select crowd earned a salary of 347,000 euros before taxes in 2006, the report released last month found.

Only 0.1 percent of the Netherlands’ workforce belongs to this subset of lucky few, the CPB said in its most detailed foray into Dutch income inequality so far. The bureau was unable to obtain data for the years since 2006, thus leaving it uncertain whether the trend has continued.

“The CPB study makes it clear that, by and large, income distribution has not changed a lot,” said Paul de Beer, a professor of labour relations at the University of Amsterdam. “Only a very small fraction has profited greatly in recent years. The Netherlands is experiencing a trend similar to the one in the US, described by Philip Cook and Robert Frank in their 1996 book, The Winner-Take-All Society.”

Data provided by public companies in their annual results suggest that bonuses continued to rise throughout 2007 and 2008, but a more ambiguous pattern developed over 2009. The first 50 companies that published their results paid 55 executives higher bonuses while decreasing those of 45. About ten corporate executives will only receive their bonuses if their companies’ profits or dividends recover.

Good or bad for the economy?

Growing inequality could be good for the economy, said Jaap Koelewijn, a professor of finance at the University of Nyenrode, if it led to the more effective use of capital and human resources. “But no relationship exists between companies’ profitability and their highest rewards,” he said. “Do they lead to better performance? Not at the top of the labour market, they don’t. At that level, people only compare their income to whomever they consider peers in relative terms. The absolute figure becomes pretty much irrelevant.”

Bas Straathof of the CPB echoed Koelewijn’s conclusions. “Our research shows the relationship between performance and rewards at public companies is weak,” he said.

Professor Kees Koedijk, the long-time chairman of an economic policy think tank that advises the Dutch parliament, said that income inequality in the Netherlands remained fairly limited. “But once people start earning a million euros a year, it becomes hard to explain.”

De Beer said excessive compensation at the top could lead people less suitable for executive positions to seek them anyway. “Rather than trying to excel at their work, people begin to behave in a way that creates the best chances for promotion,” he said.

By now, the negative effects high bonuses have had on risk-assessment in finance are well known among politicians and regulators. But Koelewijn said he thought the phenomenon was more pervasive. “Bonuses encourage risk-seeking behaviour in general,” he said. “They also contribute to an ‘if it isn’t expensive it can’t be good’ attitude.”

The professor recalled a dinner party where salaries were discussed. The last to share his income was a partner in a major consultancy firm. He earned three times as much as all others at the table combined.

Societal effects: an ivory tower

What does growing income inequality mean for society? Koedijk said he feared it could undermine social cohesion. Those on top, particularly in finance, can do as they please for the rest of their life after landing a top position. This leaves them free from entering into any long-term commitments.

“Income inequality is something you have to live with,” Koelewijn said. “But take professional football players, for instance. Should they be paid a bonus, even if they fail to deliver? That would be socially undesirable.” Koelewijn said remuneration proved harder to correct in other realms of society. “Only supervisory boards can move to correct compensation, but these people are drawn from the same pool the executives are.”

De Beer added that the growing inequality showed a small elite feels increasingly detached from the rest of the working population. “Earning 30 to 40 times more than others has nothing to do with actual performance,” he said.