Hamish McRae: Social mobility requires more than breaking down barriers

Incomes are only one form of inequality. There are many others

What on earth can we do about inequality? We know the UK has relatively large disparities of wealth by European standards, though not by US or Asian ones. We know that there has been a huge and expensive effort by the Labour Government, and to be fair some effort by the Conservatives, to help people who are, for whatever reason, at a disadvantage. But we know too that these efforts have largely failed, hence the Government's White Paper yesterday, the "golden handcuffs" for teachers in difficult schools, and the various other policies it proposes to narrow the divide.

Inevitably, the whole debate has become intensely political, sometimes quite nastily so, but it is argued in curiously old-fashioned terms. It is, for a start, about what is happening in Britain – what should we do about access to the professions or to Oxbridge – rather than about what is happening in the world. It is also about barriers to entry rather than about the specialist skills needed.

Thus, Alan Milburn is to head a commission to look at the problems working-class pupils have in getting into the law, medicine, the army, politics and the media. He is not looking at problems of access into financial services, the main employer of foreign graduates and post-grads. Finance is an international industry, whereas the others are largely domestic, and the barriers there are the highly specialised skills that are (for better or worse) demanded.

The problem with this political approach is that it is likely to fail. You can prise open a bit more access to say, the law, but you won't have a material impact on society. If you start from the other end and look at inequality from an economic perspective rather than a political one, you are much more likely to open up real opportunities for people who have had a difficult start in life.

Anyone worried about rising inequality has to face up to two powerful economic headwinds. One is the rising demand for specialist skills; the other, globalisation. Most people are aware that virtually all the net growth in employment in any developed economy is in jobs that need some form of tertiary education. So anyone who does not have that is at an immediate disadvantage. He or she is competing for a diminishing pool of jobs and that competition tends to cut the real wages of those jobs. It gets worse. A lot of the skills needed in the new service industries are "soft" ones, skills in interpersonal relations or salesmanship, and they are hard to teach. Go to a car factory now and you will find relatively few people working on the production line. Most of the jobs are in design, finance or sales and marketing. The millions of jobs in mass manufacturing are gone for ever.

Many have gone abroad, often in ways we don't even see. We all throw around the word globalisation without fully appreciating its impact on equality here. Put crudely, it decreases inequalities between countries but increases inequality within them. My own stark introduction to that was at a software company on the outskirts of Bangalore. We were in something that looked like a lecture room in a university campus, with people sitting at computer workstations and with screens around the edge of the room. One of the large screens changed and a chap looked up, tapped something into his computer and it changed back again. He was making a small adjustment to the computer system of a British power utility. A "British" job had gone to India and we would not even know it. So, even reasonably highly skilled workers here are competing against people on the other side of the world, who are just as clever, probably rather harder working and becoming just as well educated as we are. And they have lower wages, maybe much lower. Competition comes not just from Asia, it can be from much nearer home. Why is Dell shutting its factory in Ireland and moving to Poland? You have guessed it.

Faced with this, the reaction of many people is a mixture of anger and despair – or if you are a politician, to come up with lots of "initiatives" that show you are doing something but that we all know will have negligible effect. That seems to me to be too gloomy, for there are things we can do and by so doing, help curb rising inequalities and hopefully reverse them. Reverse them? Well, yes. I think that is likely to happen over the next generation because differentials are wider than they need to be for economic purposes. If that seems an odd way of putting it, the point is simply that people who have invested years in acquiring skills need to be rewarded for that, or they won't acquire and use them.

So the first requirement to reduce income inequality is to up-skill. We all know that in theory but there seems to be a disconnect between what young people are told and the reality. Do students know that doing a "hard" subject, such as maths, at A-level greatly increases lifetime earnings? Or has the exam/testing culture had the perverse effect of encouraging them to do soft subjects because they get better grades?

The next thing is to create better loop-backs. If people fail to get over the various qualification hurdles the first time, they need other opportunities to do so. I also suspect we could do with less of a credential culture – not to use qualifications as a barrier to entry to the extent we do now. We should not kid ourselves that up-skilling will solve income inequalities but it should stop them growing.

Incomes, however, are only one form of inequality. There are many others and tackling those needs a thoughtful "try it and see" approach rather than a "this is the fault of the Government" one.

Take health. We have a mindset that health inequality is the fault of the NHS or of wider social policy. But the really big health differentials are driven by lifestyles. They are, in that sense, the responsibility of all of us. So the question is how to encourage us to take that responsibility more seriously. This is a huge area where the Government has to its credit been very active, but we may be at the limits of what can be achieved by anti-smoking and anti-obesity campaigns. The next steps will be harder: how do you push responsibility away from government, back to people?

The good news in all this is that there are a number of reasons to suspect that, for the next few years, income and wealth inequalities will narrow. Some of this is the mechanical consequence of the downturn. Incomes in financial services will certainly come down and a harsher fiscal climate will encourage the public sector to trim its top earners. As for asset inequality, the combination of falling house prices and smaller pension pots has massively narrowed the gap that existed 18 months ago.

But there are costs to society from this. If high earners earn less, tax revenues will plunge, putting more of the burden on to middle earners. That is already happening. The huge losses raked up by the banks will savage company tax revenues. Charity incomes and endowments are plunging too. I think most of us would like to live in a somewhat more egalitarian society. But we should be aware that the hit taken by the rich and not-so-rich is massive and this will have a seismic impact on the revenues that the Government will have to tackle inequality for years to come. So it will have to find lower-cost solutions – which may be no bad thing either.

h.mcrae@independent.co.uk