It is encouraging to see a growing number of businesses and local authorities adopting the living wage and this week’s piece by Jeremy Warner, assistant editor of the Daily Telegraph, is proof that the movement has reached far and wide. In his article, Warner considers the adverse effects of low pay but, more importantly, identifies that pay levels are threatening to become more about PR than social justice.

For example, some of the living wage’s most prominent private sector advocates (KPMG, Barclays, HSBC) are unlikely to have a significant number of low-paid staff who would benefit from the policy and many cleaning and catering jobs are still outsourced. Only when we see organisations with large numbers of low-paid staff implementing the living wage will we know that the movement has truly arrived.

Warner also touches on a problem highlighted by the TUC last year: that an increasing proportion of companies’ money is going to profits, rather than wages. And it seems that the shift from wages to profits is hurting those at the bottom of the income scale much more than those at the top.

We cannot ignore the fact that some Goldman Sachs staff (the subject of Warner’s article) are still set to receive average bonus payments of £250,000. This reflects the findings of last year’s Incomes Data Services Directors’ Pay Report, which showed that the average wage rise for FTSE 100 directors was 27 per cent in 2011. With bank bonus season nearly upon us, there are undoubtedly more stories of astronomical rewards in the financial sector to come.

Meanwhile, at the other end of the income scale, the majority are feeling the effects of real-terms reductions in take-home pay (with 2012 seeing an increase in national average earnings of just 1.6 per cent on 2011). The consequent lack of demand does not bode well for the long term health of the economy and, as an increasing number of academics and commentators have illustrated, it is in fact inequality of income  rather than low pay alone, that leads to so many of the economic and social ills we associate with poverty.

It would be naïve, then, to think that we can negate the effects of income inequality merely by promoting policies like the living wage while turning a blind eye to runaway high pay. In order to tackle the negative effects of income inequality, the welcome enthusiasm to promote the living wage must be met with a willingness to tackle pay at the top.

At the mid-way point in the Coalition Government’s five year term, Living Wage Week has shone a welcome light on insufficient wage levels at the bottom of the income scale in the UK. But, as a wealth of evidence shows (e.g. in Wilkinson & Pickett’s The Spirit Level), a vast and widening gap between top and bottom earnings, rather than low wages themselves, is what leads to so many of the ills we traditionally associate with poverty.

So how has the current Government fared in tackling income inequality so far? And why does it matter?

A new report by One Society, The Coalition Government and Income Inequality: The half term report, charts some progress by the Government but demonstrates that more must be done. The report kicks off with an important political point: that the Government’s three key priorities of building stronger families, stronger communities and a stable economy cannot be achieved unless income inequality is addressed.

Contributors Stewart Lansley and Kate Pickett pick up on the third of these priorities by exploring how ‘excessive’ levels of income inequality are holding back economic growth and causing instability. Lansley, an economist and financial journalist, argues that the upward redistribution of income in favour of a small elite has restricted consumer spending, encouraged debt and created an economy more vulnerable to financial crises.

Deborah Hargreaves of the High Pay Centre also writes a section which assesses Vince Cable’s efforts to curb high pay in the private sector. So far these have been insufficient to produce any meaningful change.

At the other end of the pay spectrum, the Joseph Rowntree Foundation’s Chris Goulden and One Society’s Sue Christoforou look at action the Government has taken on low pay. While it is encouraging to see the National Minimum Wage (NMW) being extended to apprentices and the adult rate of NMW being paid to those aged 21 for the first time, the below-inflation up-rating of the level of NMW has tightened the squeeze on low-waged employees. The report also includes contributions on how the Government’s policies on tax enforcement, welfare reform and income tax have impacted upon income inequality.

It should be noted that the Government have shown some signs of progress, particularly on pay in the public sector as Duncan Exley, Director of One Society, argues. A recent One Society report, Leading the Way on Fair Pay, demonstrates that as a result of this Government’s Localism Act some local authorities are doing well to narrow pay ratios and are encouraging local employers to follow suit on policies such as the Living Wage. The hope is that this good practice will eventually filter into contractors and the wider private sector.

One Society’s half term report should be read carefully by policy makers and politicians alike. When a nation’s wealth reaches a certain level it no longer matters how wealthy a society is; what matters is how equally the riches are shared. Levels of ill health, social unrest, teenage pregnancy, drug addiction, etc. all soar as the gap between rich and poor widens.

What is more is that policies to address income inequality are becoming increasingly popular with the public. A poll last year showed that 74% of people think income inequality is too high and even CEOs are beginning to recognise they are probably overpaid. Meanwhile No. 10′s favourite think tank recently warned that the Conservative Party are still see as the party of the rich.

Even if this Government’s concerted attempts to restore economic growth and balance the budget are successful, it must do more to tackle income inequality so that the benefits can be felt by all.

The chief executive of WPP, Sir Martin Sorrell, yesterday suffered significant embarrassment when the company’s remuneration report was rejected by 60% of the company’s investors. This is the latest in a series of widely-reported rebellions.

It would be easy to get the idea that shareholders are now tackling the soaring levels of executive pay and that robust government action is unnecessary. That idea would be a mistake.

The WPP rebellion was unlike other rejections of remuneration reports that have recently taken place because WPP has actually been performing well. Other rebellions have taken place in companies where performance was seen as substandard.

In other words, votes against remuneration reports have been used as a proxy for discontent about other issues: shareholders have NOT been saying that ever-increasing top pay is a problem.

There is less to the shareholder spring than meets the eye. The vast majority of companies still have their remuneration report approved.

As Robert Peston wrote just before the WPP AGM:

“There have been just four defeats so far of companies in votes on their so-called ‘remuneration reports’, and only one of these companies has been in the FTSE 100 list of biggest businesses. That does not represent an exponential increase in shareholder rebellions”.

The narrative of the shareholder spring is misleading: rebellions get much more coverage than the commentators like Peston and Nils Pratley who point out that “radical reform to the way companies are managed and directors are paid still lies years away”.

It is important to remember why “radical reform” is urgently necessary. On Tuesday, it wasreported that the average FTSE 100 CEO saw their pay increase 12% to an average of £4.8m: approximately 200 times average private sector pay. By contrast, disposable incomes for the rest of us are set to fall for the third year running (pdf).

Even if the so-called shareholder spring does not run out of steam, if it continues at its present underwhelming rate, a few executives may see their pay reduced from levels that are ridiculous to levels that are merely astounding, while the gap between top pay and average employee pay will continue. This soaring inequality is bad for businesses, bad for the economy and bad for society.

To mark tax freedom day on Tuesday, the Adam Smith Institute called for ”lower taxes… to ease the tax burden on London’s low and middle-income workers…” instead of mandating a “job-killing living wage”.

At first glance, it may seem intuitive to reduce poverty and stimulate demand by cutting taxes rather than pushing up wages. It would probably be simpler but there are many reasons why it would not be effective.

Prime amongst them is that low pay is effectively taxpayer subsidised. The Institute for Fiscal Studies estimates that sub-living wage pay costs taxpayers £6 billion a year (due to the costs of in-work benefits etc). But this is only a fraction of the real cost.

Once the indirect impacts of poverty and inequality are factored in, the figures are staggering. These include the Joseph Rowntree Foundation’s estimate that child poverty costs the taxpayer £25 billion each year, despite the fact that 57% of children in poverty have at least one working parent.

As for the cost to businesses, recent research by the IPPR and Resolution Foundation suggests that in many sectors it would be minimal. For banking, construction and computing companies, paying staff a living wage would add roughly 1% to the total wage bill (even the notoriously low-paying retail sector would only see a 5% rise).

Some employers, such as the London Borough of Islington, have implemented a living wage without increasing their costs.

In addition, the introduction of a living wage has tended to improve productivity in businesses by reducing absenteeism and improving motivation.

Those who think that decent pay is bad for business tend to forget that business suffers from the reduction in consumption brought on by stagnating wages. As Chris Huhne pointed out yesterday:

Today’s business press contains worrying signs that Vince Cable’s efforts to rein in executive pay are under attack.

The first is a story in the Financial Times (£), reporting that the Business Secretary is likely to back down on his proposal that company pay policies should be backed by a ‘supermajority’ of up to 75% of shareholders.

The only good argument against a 75% threshold appears to be the potential for a small group of investors to wield undue influence. However, it is possible to draft the legislation in a way that takes account of this – by requiring, for example, that those voting against remuneration reports represent a minimum number of shareholders, or a minimum proportion of the total number of shareholders. These are already requirements for investors wishing to propose a resolution at an AGM.

By contrast, there are several good arguments for the proposal. The recent high-profile rebellion at CitiGroup, where 55% of investors failed to back the company’s remuneration report, made the news because it was unusual. As the High Pay Commission’s research found, ‘defeat over remuneration is rare – even at the height of the financial crisis only five companies lost the vote on their remuneration report’.

Most investors are extremely passive in their voting behaviour, which means that most overpaid execs will be able to rest easily, knowing that a majority of investors rebelling against their proposal is very unlikely.

The second worrying story is the widely reported view of the CBI that greater shareholder powers would lead to investors ‘micro-managing‘ companies. I’d like to reassure the CBI that they needn’t fret about that: institutional investors typically have holdings in thousands of companies, and so do not have the time to micro-manage anyone.

The CBI should also consider that investors should, perhaps, be somewhat more assertive. Over the last few decades, executive pay has risen out of all proportion with either company performance or employee pay, which leads to perversely motivated executives and undermotivation in the wider workforce.The CBI says that the IDS research which showed a 49% year-on-year rise in top pay has been ‘misread’, but numerous other studies point in a similar direction.

The CBI says it represents British business. Perhaps it is time to remember that the interests of British businesses, and the interests of their executives, are not always the same thing.