View from City Road: Training away the wage differential

So - relatively speaking - the rich have got richer and the poor have got poorer after all. The gap between the wages of the high and low paid is greater now than at any time this century, with wage differentials increasing more rapidly in Britain in the past 15 years than in any leading country other than the United States.

Wages for the lowest paid 10th of male workers fell from pounds 3.64 an hour in 1978 to pounds 2.95 an hour in 1992, using today's prices. At the same time, the wages of the best paid 10th rose from pounds 6.99 to pounds 8.50. The effect is even greater on take home pay as a result of changes in the tax and benefit system.

Forget the morality for a moment; this trend has its roots in the hiring and firing needs of companies, something with important economic implications. As the Institute for Fiscal Studies points out in an analysis of the issue published yesterday, the main reason the gap has widened is the fact that that companies are prepared to pay a premium for well- educated and flexible workers. They have less need for the unskilled, who also face greater competition from low-wage workers in developing countries.

As the demand for unskilled workers has disappeared many household heads have found themselves no longer able to provide for their families. Yet the benefits system deters the partners of unemployed men from taking work because their earnings are offset by cuts in their partners' social security payments.

Education and skills have become increasingly important. Young men who leave school at 16 are having to enter the labour market - if they can - for lower real wages than earlier generations. And only educated and relatively well-off workers tend to see their wages rise as they gain experience.

So what can we do? More education and training is the standard - perhaps the only - answer. The taxpayer will have to grit his or her teeth and subsidise people who wish to retrain during their working lives. But this is no panacea - the benefits of better education and training take time to feed through. And there is no guarantee that developing countries will not choose the same path. They may even arrive at Utopia before us.