abstract:
A dramatic
concentration of income and wealth, disproportionally rewarding relatively
small elites in society, has become evident especially in the last four decades
in the United States, but similar disparities also exist worldwide. The
phenomenon has become perhaps the most glaring deficiency in the functioning of
modern capitalism. Economists address this issue in terms of free-market and
non-market (government policy) solutions or approaches; but government
interventions have not worked and even free trade has rewarded owners of
corporations rather than workers, including in the foreign countries where
investment has migrated. The strong rationale for rewarding capitalists is
still lauded as the source of entrepreneurialism and innovation, but rising
inequality and decreasing social mobility have discredited “trickle-down”
theories and foment social discord. The most intractable disparities prevail in
rewards garnered by individuals whether from their personal efforts,
inheritance, or just good luck. Corporate
payroll systems are clearly out of balance, which indicates that shareholder
capitalism has not been functioning properly. Few politicians believe that
regulation and taxation of higher income and wealth are the best or only
recourse. Resolution must revolve ultimately around notions of social control,
especially realistic shareholder control over managers. However, getting rich
as an executive in a top-tier corporation indeed seems appropriate, perhaps as
much as for talent in professional sports or Hollywood. Of course, the issue subsides
in a growing economy.
keywords:
rich-poor gap
middle class
technological unemployment
globalization
utility maximization
trickle-down effect
ultra-high net worth individuals
shareholder capitalism
integrity of the market
incentive pay
minimum wage law
Introduction
Debate about the rich-poor gap, though it is an
ancient conundrum, continues unabated; indeed wealth and income inequality has
special salience recently as the Biden administration in the United States
attempts to address the issue. Especially during the last four-five decades in
the United States, a dramatic concentration of income and capital,
disproportionately rewarding a relatively small elite in society, has become
manifest. Compensation to top
earners has skyrocketed while inflation-adjusted earnings of the median
American household have been essentially unchanged. Widening income and wealth
disparities have become perhaps the most glaring issue in modern capitalism, increasingly
evident in almost every country in the world.
A variety of figures supporting this trend are
commonly cited, for example by Business
Week, Credit Suisse Wealth Report,
and many others. The World Inequality Report
2018 presented systematic data designed for society to conduct informed debate
on inequality. Since 1980, the
global top 1% captured twice as much income growth as the 50% poorest individuals.
(This bottom 50% has nevertheless enjoyed pivotal growth rates.) While the top
1% captured 27% of total growth, the bottom 50% captured 12%. Projections to
2050 do not represent much improvement. The global middle class, which contains
all of the poorest 90% income groups
in the European Union and United States, has been squeezed.
According to USA
Today (7/1/20), taxable income declared by the top 1% of Americans soared
from 10% in 1980 to 20% in 2019 (of a much larger total). Meanwhile, the lowest-earning 25% accounted for less
than 4% of income. Graphics in Domhoff (2012) showed
that compensation for top executives was less than 50x workers’
pay until around 1980; whilst figures cited today have increased as high as over
400x. The same ratio is about 25:1
in Europe.
From 1990 to 2005 American
CEO pay increased almost 300% (adjusted for inflation) while production workers
gained a scant 4.3% (Ibid).
Piketty’s (2014) figures indicate since 1973 the share of GDP garnered by the wealthiest
1% of Americans has risen from less than 8% to more than 19%. The share of
American employment in manufacturing has declined from nearly 30% in the 1950s
to under 10%, such that even drudgery gives way to unemployment.
Piketty argued that America has pioneered a
hyper-unequal economic model in which a top tier of capital-owners and
“supermanagers” grab a growing share of national income and accumulate more and
more of the national wealth. The figures show that income and wealth gains in
the last 4 decades have gone to a tiny percent of the rich, while real wages to
labor have been stagnant. Both economic and political forces allow and even
favor the concentration of wealth into the hands of the very top elites, which
is manifest in and also attributable to this worldwide trend cited by Piketty toward
higher returns from economic growth going to capital than to labor. The steady elimination
of jobs and squeezing out an entire economic middle class has generated more
antagonistic, unstable, even dangerous politics.
The role of free
trade
Largely
explained in terms of technological change and globalization, American middle
class jobs have been turned over to machines or migrated overseas. Yet even
overseas average job holders have benefitted less than investors. Worldwide
since the 1980s, owners of capital and top managers have captured an increasing
share of the world’s income from production while the share going to labor has
fallen. The realization that both globalization and technological progress have
rewarded the owners of capital rather than their workers is not a new phenomenon:
John Milton Keynes lamented a “new disease ...technological unemployment. … due
to our discovery of means of economising the use of labour outrunning the pace
at which we can find new uses of labour.” (1930) Substituting capital for
labor, or cheaper foreign labor for domestic, became increasingly attractive in
the modern era. Many American jobs created domestically have been in low-wage
industries such as retailing and food service.
The classical economists’ argument is that free
trade is a win-win arrangement because the generally lower consumer prices that
may arise from imports will exceed the wage losses in the home market. Thus,
despite so many middle-class jobs lost as a result of out-sourcing production
(and contributing to an ever-rising trade imbalance), the overall home economy
is supposed to be better off because of lower prices for consumers – a utility-maximizing
outcome. Obviously, our longstanding adherence to this theory has its victims –
the American economy has suffered a persistent deficit and American workers are
not better off. Since the 1970s, the
proportion of American adults participating in the work force has been hitting
new lows. The gains that have been achieved through free trade have gone to the
richest percent of the population.
The Peterson Institute
of International Economics estimated that 39% of the increase in income
inequality in America is caused by its trade deficits – we have moved so much
middle-class manufacturing overseas. While in theory the gain to American
consumers from cheaper imports offsets the loss of income to American workers,
the gain from cheaper costs is garnered increasingly by capital, not labor.
Since labor's share of economic growth has been declining worldwide, the
relatively higher return on capital becomes part of the inequality debate.
Though foreign labor has been grabbing American jobs, those foreign workers are
robbing us to reward plutocrats, just as our labor has been doing.
The Trump
Administration’s trade wars did not rectify the problem. Trump argued also that
many trade deals (such as Nafta and Asian Free Trade negotiations) have not
been in the direct interest of “America First”. However, classical economics
would hold that free trade is in the global interest, and global benefit is what
free trade is supposed to accomplish.
Donald Trump won the
2016 election on the platform that free trade was not “fair trade”, and our
trading partners –even Europe- were “laughing at us”. But national protectionism
has garnered legitimate support from economists. Paul Krugman and others in the
1980s identified the “free trade fallacy” that trade relationships are
disadvantageous for some traders because of oligopolistic advantage. Now it can
be further argued that it is the corporate owners of companies that benefit
from free trade agreements, not the workers nor even the countries.
Economic
rationale for rewarding the capitalists
The United States
is generally cited as the most unequal advanced country in terms of income
differentials between rich and poor. This circumstance is lauded by many as a
source of American dynamism – for driving wealth creation, hence thrift,
innovation, enterprise. Thus, inequality in theory should boost economic growth
through the implicit incentive for seizing opportunity and for hard work, and
because riches are saved and invested to “trickle down” to the rest of society.
Inefficiencies arise today due to ebbing trickle-down effects and even barring
talented poor people from education or other opportunities that money can buy.
Today’s dual circumstance of rising inequality and inadequate social mobility
feeds social dissension and has promoted ill-conceived populist policies. To
the extent public policy does address these issues rationally, the favored
position of the few, especially the power of money interests, can tilt policy
in favor of even more concentration of wealth and influence.
Despite the
accepted wisdom that rising income incentivizes free enterprise —i.e., entrepreneurism, innovation, etc—
rising inequality has immense political salience within countries because it is
regarded as unfair and detrimental to the vast majority of citizens. The
perceived unfairness becomes more controversial during recessionary times as broader
society is deprived of the benefits of asset bubbles, cheaper credit, etc. In
the financial crisis of 2008-9, rich bankers were bailed out while many others
lost homes and jobs. In the current boom in securities’ markets, those already
on the “inside” benefit inordinately. Without a compleat equality of
opportunity, income inequality might only be resolved by resorting to wealth
redistribution as in the old communist societies or democratic-socialist states
of 20th century Europe, which formulae are perceived as failures.
Ever since, neither market enterprises nor governments have found satisfactory
solutions.
Nobel-laureate
Joseph Stiglitz (2013) cited Singapore as providing lessons for the United
States. Very high saving is driven by government policy – 36% of income for
young workers goes into self-funded nest eggs to pay for healthcare, housing,
and pensions. Ninety percent of Singaporeans are homeowners. The government
also invests heavily in education, R&D, science and technology. Since 1980
Singapore’s economy grew 5.5 times faster than the US.
Robert Reich’s 2013
documentary “Inequality for All” showed how the United States, while not the
richest society, is more unequal in wealth than any other advanced country, and
the problem is not abating. A “World Ultra Wealth Report” by Wealth X cited the
number of “ultra-high net worth” individuals through 2020, with net worth
exceeding $30 million (in constant 2018 dollars); and the United States
accounted for more than 1/3 of them –China was a distant second with less than
10% of them). Expansion of wealth even during the pandemic was attributed to
monetary expansion from central banks and strong financial market performance. US
chief executives still are making it big, with compensation in 2019 up nearly
1000% since 1978, while typical worker salaries rose little more than 10%.
Executive compensation was as much as 386 times the typical worker –up from 195
to 1 in 1993, 42 to 1 in 1980, and 20 to 1 in 1965.
“Exorbitant CEO pay is a major
contributor to rising inequality that we could safely do away with. CEOs are
getting more because of their power to set pay, not because they are increasing
productivity or possess specific, high-demand skills. This escalation of CEO
compensation, and of executive compensation more generally, has fueled the
growth of top 1.0% and top 0.1% incomes, leaving less of the fruits of economic
growth for ordinary workers and widening the gap between very high earners and
the bottom 90%. The economy would suffer no harm if CEOs were paid less (or
taxed more).” Economic Policy Institute, 8/14/2019
Market response for top-tier wages: Executive
compensation
Corporate payroll systems are clearly out of
balance, increasingly since the 1970s favoring the very top income earners.
Economists can address this phenomenon in terms of free-market and regulatory
approaches, but practice does not conform to theoretical idealism. Managers and
unions, as well as policy makers, simply resort to collective bargaining, ad
hoc pay negotiations, or political activism. Yet there seems little prospect of
robust systemic reform. Even after the 2008-9 financial crisis, bankers’
bonuses quickly resumed their upward climb – their financial crisis did not
change mindsets.
Notions of “shareholder capitalism” underpin
business logic, and these views are widely understood and accepted: Owners of
any enterprise are depended upon to compel managers to maximize long-term
profitability, certainly net of the payroll burden. However, application of
this theory is very imprecise in practice. Stockholders cannot exactly
determine value added by particular managers or company departments in
isolation. Value added by managers may be calculated simply in terms of profits
or losses, but obviously there cannot be accurate knowledge of alternative
performance; and what the financial crisis clearly demonstrated was that risk was
not properly calculated.
In practice, executives at the very top of
enterprises can reward themselves at a level that often seems out of proportion
with actual performance: bonuses, golden parachutes, and a winner-take-all
division of rewards while losers take the dire burden of losses in terms of
workforce reductions or firings among those with less power to influence such
decisions. This tendency is indeed predominant. Despite productivity being up
by 80% since the 1970s the average worker’s pay has been essentially flat,
increasing less than one quarter of that in the 4 decades up to 2019.
Nothing depicts this rich-poor gap, and payroll
discrimination, better than Wall Street. No one doubts that banking and finance
in America should evoke shame in someone, be it private bankers or the
government. Despite the Dodd-Frank Act and volumes of other new laws, the
regulatory system remains in a mess; and if free-market competition instead
would work its magic, why has the integrity of Wall Street not been secured? In
theory financial institutions exist to provide trust in the provision of
capital because their reputation and the integrity of the market is valued
above all else by the financial intermediaries themselves. Yet, Goldman Sachs
profited from the financial crisis in 2008 by selling mortgages to its clients
that were deliberately designed to fail. Bank of America was found liable for
fraud in the sale of faulty loans (through its acquisition of Countrywide
Financial Corp). Morgan Stanley offered inside information about Facebook’s
initial public offering to selected customers only. International banks rigged
LIBOR, an interest rate used to peg contracts worth trillions; and the “London
fix” which is a benchmark for global currency markets, where turnover is $5
trillion daily, is suspected to be manipulated through a practice called
“banging the close” whereby banks submit a succession of orders just as the
benchmark is set at 4 pm.
Major penalties were assessed against JP Morgan
Chase, which was fined a record $13 billion for its involvement in faulty
mortgages, having already lost $6 billion in its “London whale” trades. The
bank’s 2012 annual report revealed legal exposure in numerous other cases –
facing investigations into alleged manipulation of international interest rates
and also the California electricity market, bond dealing involving the city of
Milan, its energy trading business, its collections litigation practices, and
its role in Bernard Madoff’s Ponzi scheme. All the while, ratings agencies
published opinions about banks’ financial health that were completely wrong, seemingly
oblivious to their own malfunction. Clearly, all this indicates “market
failure” (and non-market –government— failure to intervene). What illustrates
this best is the fact that throughout the banking crisis and the aftermath,
bankers continued to reward themselves with generosity unmatched in history.
Many studies have charted alleged abuses in
executive pay. In 2013 the Institute for Policy Studies in Washington revealed
“widespread poor performance within America’s elite CEO circles. Chief
executives performing poorly –and blatantly so— have consistently populated the
ranks of our nation’s top-paid CEOs” for many decades.” Taking a sample group
of the nation’s best-paid chief executives over two decades, nearly 40% of the
CEOs were either fired, their firms either collapsed or took a bailout (22%),
or the CEOs’ firms paid major fraud claims (8%). Only 8% were given the ax, but
they exited with an average $48-million golden parachute.
Public disapproval of “golden parachutes” rarely has
much impact, since the deal was contracted in advance. Similarly, “say on pay”
votes only curb some of the most egregious excesses. Company boards facing such
votes can manage to win them by dropping particular overgenerous perks. Some
practices have been curtailed, such as big severance awards vested simply by
quitting or retiring, or topping up pensions when bosses retire earlier than
planned. Boards have been compelled to more carefully cost out and justify
perks that may have previously been regarded as practically free.
Golden goodbyes are more difficult to change for
various reasons. Pay consultants use more generous existing pay packages as
basis for negotiating with a new boss, to attract the desired talent.
Contesting a past pay package can easily dissuade new candidates. Often
candidates for the top jobs also employ law offices specializing in pay
negotiations, and PR firms to sell their talents; and by the time the chosen candidate
fails to perform it is too late. Public outcry tends to be after-the-fact,
rather than in the optimism of a new hiring. Lawsuits only can “claw back”
mistakenly generous pay packages if there is firm evidence of, say, financial
misstatement.
Shareholder capitalism assumes effective monitoring
by owners, as represented by the Board of Directors. However, corporate
boardrooms have historically been largely ceremonial, often just friends of the
boss, who might not contribute much in terms of oversight and expertise. The
Sarbanes-Oxley Act of 2002 and new rules at the New York Stock Exchange in 2003
obliged boards of directors to take more responsibility for preventing fraud
and self-dealing by corporate executives. Arguably there have been ill-effects
such as more paperwork, but in “Boards that Lead” (2013) the authors argue that
boards of directors are in a “third revolution” as strategic partners with
management. The authors depict better relationships between company directors
and executives where directors act proactively in recruiting top talents and
also preparing for their departure.
Legal structure of enterprises also has changed the
degree of control of owners over managers. The conventionally-structured
corporation is ostensibly required to be mindful of the wishes of stockholders
in such matters as compensation, but diverse other structures have evolved that
allow more freedom from owners and regulators, more akin to partnerships. The
essence is a move towards types of firms which pay out more of their earnings
rather than accumulating reserves. Examples emerging since the mid-1970s
include Real-estate Investment Trusts, Energy Master Limited Partnerships, and
Business Development Companies. Compensation in these special entities can
amount to a distribution of profits, which are not kept as Retained Earnings.
Non-market response: Regulatory
approaches
An indicated course of action is for governments to
impose binding measures on firm directors, payroll committees, etc, or else
raise taxes on exorbitant incomes. However, empirical evidence is ambiguous on
prospects for success of government policies to regulate business. The 2008 bailout
agreements reached by the Bush and Obama administrations, though attempting to
curtail excessive bonuses, did not immediately restrain executive
self-aggrandizement. Existing pay contracts protected prevailing compensation
levels, and when those contracts ran out new contracts did not seem to change
things. The Pay Czar appointed by President Obama was quick to observe that he
had no intention, nor sufficient power, to actually dictate payroll decisions;
and it seems doubtful the existence of such an office had any real effect.
The Securities and Exchange Commission proposed a
new rule regarding CEO pay in compliance with a mandate in the Dodd-Frank Act.
The SEC voted in September 2013 to open its proposed version to comments for 60
days, but what finally went into effect in 2015 was a rule that required most
large corporations to calculate the ratio of the pay of their CEO to the median
pay of all their employees. It was designed to provide transparency on the
diversion of corporate resources from workers to top management. By extension,
wealth goes to shareholders because stock-related bonuses provide executives
the incentive to boost share prices. The implication is that managers will
direct corporate capital towards dividends for stockholders, rather than
investment which might set up their companies for future profit and benefits to
all stakeholders but not typically reflected in near-term stock price.
One mitigating factor, whether imposed by market or
regulatory forces, might be lesser risks and returns. Probably the most
important international non-governmental institution regulating global finance
is the Bank for International Settlements in Basel, Switzerland, which has a
historically conservative reputation. BIS primarily affects European banking,
where higher capital ratios under Basel 3 imposed limits on risk, and thereby
windfall profits and the associated pay bonuses. Basel 3 (the Third Basel Accord, devised under the auspices of
the BIS) is a global, voluntary regulatory standard on bank capital
adequacy.
Various measures were initiated in Europe to limit
bonuses for high-income earners, with indefinite success. The logic of
controlling payroll decisions with administered caps on bonuses, mandatory
director votes or employee “say on pay”, etc appeals to liberal governments.
Pre-crisis evidence indicated that lavish bonuses rewarded big, risky gambles
that seemed to pay off; but when everything went wrong starting in around 2008,
few top bankers seemed to be fairly penalized. We can theorize that risk favors
asymmetric bets, with large gains more likely to be identified and rewarded
than indefinite losses. Big cash bonuses then encourage further risk taking.
Where company payroll policies are inclined to
reward exceptional performance highly, the unintended consequence of
government-administered caps on variable pay such as bonuses is to drive up
fixed pay. A higher fixed-cost base limits ability to cut costs in a downturn
and also to build incentives into pay structures.
Private firms have adapted by deferring all or part
of bonuses, to enable firms to “claw back” bonuses that led to some long-term
detriment. A simpler approach is to award bonuses in the firm’s equity or
subordinated debt, meaning the bonus will be directly impacted by poor firm
performance.
Toward resolution
As noted earlier, the issue revolves around the
notion of realistic stockholder control of managers. If disgruntled
stockholders adopt the “Wall Street walk” by simply selling stock when managers
engage in too much risk, this might be less constructive than trying to improve
management. It is assumed that hedge funds for example are too short-term
oriented, quick to buy or sell stock rather than engage management directly
through ownership control. However, probably disengaged stockholders are worse
than hedge funds. At least, the behavior of bankers, CEOs etc especially that
was uncovered as a result of the financial crisis, was a wake-up call to
stockholders who recognized either they must be more vigilant or governments
will be more inclined to step in. However, governments remain chary to
intervene in free-market capitalism.
Trends in compensation policy in the banking
industry are slowly turning course from the halcyon days prior to the 2008
financial crisis. However, political efforts are less the reason than the
mechanisms of shareholder capitalism. In fact industry reform often runs counter
to lawmakers’ intentions. For example, legislative limits on bonuses have made
banks rely more on basic pay awards; but this makes incentivizing pay more
difficult –basic pay is not be tied to performance, and remuneration cannot be
deferred to a future point where performance becomes more manifest.
Pay and employment for bankers did decline after a
peak in 2010, as the investment-banking industry faced a structural downturn. Higher
capital standards and tougher regulations emerged, for example forcing derivative
trading onto exchanges where fees are less exorbitant than in negotiated
“over-the-counter” transactions. Revenues and profitability fall faster than
costs as pay and employment adjustments lag. Bonuses have been limited by
regulations, for example Europe beginning in 2014 prevented bonuses bigger than
annual salaries. Also stockholders may rise to the occasion and become more
careful, after watching their top employees pocket large bonuses while
stockholders (and taxpayers) suffered the industry’s losses in 2008. Still, many banking subsidiaries have only
the parent bank as stockholder, and that type of ownership may be more amenable
to management decisions on pay.
Bankers’ pay may illustrate the social consensus on
the compensation issue best. “Few issues rile the public, and politicians, as
much as bankers’ pay, for obvious reasons. Investment banking is an industry
that in the past seems to have been run mainly for the benefit of its employees
rather than its shareholders or its customers.” (The Economist May 11th 2013:15) However, after the 2008 crisis
shareholders finally exerted some downward push on pay. “Both the number of
people employed in banking and the amount they are paid are falling fast… Average
pay has probably fallen by about 20% since the crisis.”(16) The causes and
direction of this trend are complex, and as argued at the outset, excessive pay
still prevails. Managing the banking business manifests a need for reform in
the cost and pay structures despite strong profitability.
Ad
hoc
evidence indicates that management is indeed pursuing reform at banks. Goldman
Sachs holds training programs for top management, and is adjusting its approach
to disclosure and transparency, pulling back on its world-beating (but of
course controversial) proprietary-trading business, realigning internal
incentives, for pay and promotion for example, all in a mood of post-2008
introspection. However, Goldman Sachs remains committed to a business model
that is designed to put it in difficult situations. Stephen Mandis (2013) charts
the journey of the bank from partnership to public company, from trusted
advisor to amoral trader, listing conflicts that arise when you underwrite
debt, advise on deals and take your own proprietary positions.
Should CEOs really be paid less?
The dramatic inflation in executive pay since the
1970s has contributed to the still-growing problem of inequality. The guiding
principle of modern payroll systems at the top levels (as well as bottom levels
traditionally) is that pay be performance-related. Managers ostensibly will
work harder in the interests of owners (employers) if they become stockholders
themselves, and the vehicle for this is stock “options” as part of their pay
(usually bonuses). Typically, options are granted for achievement of particular
performance targets. Executive pay especially benefits from a roaring stock
market. Michael Dorff (2014) contended that performance-based executive pay
should be scrapped in favor of the more sensible salary system that prevailed
until the 1960s. He argued that a basic salary system would be good for
companies by reducing the payroll burden, good for executives in terms of more
stable, sufficient income; and certainly it would be good for countries and
society to reduce the rich-poor gap.
However, many members of society make inordinate
fortunes from their talents (market speculators, entrepreneurs, leading lawyers
or consultants, superstars of sports and entertainment, etc); why shouldn’t
management talent? Rigid salary structures that ignore ways to reward superior
performance may inevitably lose out to incentive-based payroll systems. Getting
rich as an executive in a top-tier corporation indeed may seem appropriate.
Shortfalls
in job seekers in particular sectors –such as hospitality, retail, many
others-- has compelled employers to raise wages. In America job vacancies are
at the highest level in decades. Job vacancies seem to be in low pay industries
where pay does not compensate for perceived risks. For the past 4 decades, the
tide favored capital over labor, especially with the power of multinational
corporations in the globalization era and the weakening of labor unions, and
the potential for technology to replace workers. Workers have acquired
bargaining power.
Whereas
the financial crisis a decade earlier had caused the share of global wealth
held by the top 1% to actually decline in 2008, during the pandemic the wealth
gap increased. The financial crisis of course wrecked its havoc on wealthy
bankers and the like, while in contrast the pandemic led to a rescue response
that benefitted holders of wealth. Central banks’ policies of cutting interest
rates and amassing assets led to huge inflation in the value of securities and
property held by the rich. “Another example of Wall Street winning and Main
Street losing” (Mary Daly, Federal Reserve Bank of San Francisco).
Non-market response for bottom-of-the-ladder
wages: The Minimum Wage Debate
It seems an absurdity that politicians, not
economists, should determine a fair floor level to compel employers to pay
employees (alas, not just civil servants), especially because it is impossible
to give accurate consideration to skill levels and job realities, market
competition, economic disparities in different regions, etc. But that is the
basis for the existence of minimum-wage laws, and even many economists feel
this political intervention in the labor market is beneficial. Society
generally feels a “living wage” to be a moral imperative.
The obvious argument against government-mandated pay
levels is that such laws are effectively equivalent to an employment tax, and
the question is who will pay this “tax”. It might be offset by improvements in
productivity and reduced turnover, but more likely employers avoid the tax by
reducing employment, or they increase prices or move to a lower-wage location.
The tax might also be offset by replacing workers with technology, or by
dropping benefits to keep total compensation the same. The more direct response
is that businesses simply curtail operations.
Today’s technology is different from earlier
technological waves that were “labor augmenting”, rather it seems to reduce
employment, particularly of workers without technological skills. Technology in
the current generation has destroyed large swathes of work in the middle of the
wage and skill distribution. This has contributed to the hollowing out of labor
markets –polarizing into high- and low-skill occupations with fewer jobs in the
middle. Highly-skilled workers design and manage technology, but low-skilled
workers who might have once been laborers in factories are displaced. Today
there are too many such job seekers competing for low-wage positions. The
simple reality is that the bottom tier of job markets can expect depressed
wages. Indeed, the share of income going to labor worldwide has fallen in
recent decades.
The counterpart of the declining remuneration of labor
is the rising return on capital. (Labor would have lost out to capital even
more dismally except for soaring pay awarded to a relatively small population
of high earners according to Elsby and Hobijn (2013) – so-called “labor-force
polarization”.) Economists such as Tomas Piketty argued that this disparity
indicates a need to once again focus on distribution, as happened in the 19th
and early 20th centuries, to allay the social strains that sometimes
have threatened capitalist systems.
Redistribution is most often addressed through taxation.
The “employment tax” of a Minimum Wage can be taken
directly out of profits, reduced benefits to keep total compensation the same,
or alternatively passed on to customers, shareholders, or providers of debt or
capital assets by reducing their “rents” on the assets. It seems unlikely the
“tax” can be assessed against the pay of higher-wage employees. To many, the
wage gap between top and bottom earnings obviously warrants some
redistribution, but still we see little indication of that happening. The more
ready recourse is usually to raise prices.
The direct cost of not mandating a “fair wage” might
be more government welfare such as food stamps, inherently subsidizing
employers. There is also an indirect cost of having an increasingly unequal
society, which is a national calamity and we have only begun to see the
consequences. Human capital is being paid too little to generate wealth for
employers, leading some to think in terms of social revolution.
The argument that better wages stimulate consumption
is ambivalent. The counter-argument is that lost jobs due to minimum-wage
increases will decrease demand in the economy. So any mandated wage increase is
experimental –as were other government programs such as the Social Security
system.
Some reforms that might be considered in the longer
term include:
1. Minimum
Wage law might include provision for compensatory reduction in top-level wages.
How to administer this idea is problematic. We might concoct a mathematical
formula, say, by calculating the added wage cost at the bottom and taking that
amount from executive payrolls.
2. The
earned income tax credit is available only to low-income working families,
which more directly addresses the real problem of poverty instead of low
individual wages.
Of course, the entire issue largely disappears in a
growing, full-employment economy.
The Biden agenda
The pandemic caused some changes
in capitalism as we knew it, though the longevity of new trends is indefinite.
In terms of employment (and wages), the earliest stretch from winter to spring
2020 witnessed a loss of 20 million American jobs. Workers stayed home, and
businesses were wiped out even faster than during the 2008-9 financial crisis.
However, in the summer new businesses and jobs recovered dramatically. Much of
this occurred in home-based cottage industries, often sole proprietors and
online; and new business was created in retail, food preparation and delivery,
trucking, accommodation, healthcare, scientific and technical services, as
skilled individuals had been cut loose from large corporations. With generous
government support, as well as the banking system remaining sound,
entrepreneurs and consumers both resurfaced. Historically such trends portend
high economic and productivity growth. Although employment is still well below
levels before the pandemic, high demand for workers seems to be exerting upward
pressure on wages, hence may have some positive impact on the rich-poor
gap.
President Biden promised to start
narrowing income and wealth gaps, which underpinned every part of his economic
program, from multi-trillion dollar spending plans to a proposed tax increase which
would be the biggest in a generation.
Both Trump and Biden administrations introduced major
rescue and recovery initiatives to combat the pandemic. However, the U.S.
wealth divide widened further during the pandemic –the top 1% of
households added $4 trillion in net worth.
Biden outlined plans to
·
broaden union rights; and create well-paid, union
jobs with infrastructure investments
·
support families
and help restore women to the labor force with measures including expanded
child tax credit and child care
·
reform and bolster the social safety net,
including expanding support for healthcare and education
·
increase taxes on corporations and wealthy
households, including international accord on a
minimum tax for big global companies; and address tax loopholes
·
boost minimum wages, and
·
fight racial injustice in the economy.
On all these fronts, Biden seeks political redress to
reverse trends exacerbated over decades, even centuries. However, Republicans
inevitably resist government spending, debt, and taxes. Biden’s proposals
struggled to make headway, despite US having the highest levels of inequality
in the developed world.
References:
Charan, Ram, Dennis Carey and Michael Useem, Boards that Lead, Harvard Business
Review Press, December 10, 2013
Credit Suisse 2013 Global Wealth Report
Domhoff, William, Who Rules America: Wealth, Income and
Power, University of California Santa Cruz, 2012
Dorff, Michael, Indispensable
and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It,
University of California Press, August 2014
The
Economist, Special report on international banking, May 11th
2013; and various editions
Elsby, Michael and Bart Hobijn, The Decline of the US Labor Share, Brookings Papers on Economic
Activity, Fall 2013
Institute for Policy Studies, Executive Excess 2013: Bailed Out, Booted, Busted, Washington DC
August 28, 2013
Keynes, John Maynard, “Economic Possibilities for our Grandchildren”
(1930)
Mandis, Stephen, What
Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and its
Unintended Consequences, Harvard Business Review Press 2013
Piketty, Tomas, Capital
in the Twenty-First Century, Harvard University Press, 2014
Reich, Robert, Inequality
for All (Sundance Film Festival) 2013
Schwarz, John E, Common
Credo: The Path Back to American Success, Liveright Publishing, August 19,
2013
Stiglitz, Joseph, Singapore’s Lessons for an Unequal America, New York Times,
3/18/2013
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