Beware Of Income Inequality Campaigns

President Obama has elevated “income inequality” to political talk’s top shelf.  New York City Mayor de Blasio has made income inequality one of his highest priorities.  Is this the next mission of the day?

What is, unfortunately, not clear is what each of these politicians mean by income inequality and how do they proposed to fix it?

The President has proposed raising the minimum wage from $7.25 to $10.10.  Hmmm.  Sounds like a big jump, from $15,000 a year to $21,000.  I wonder whether that would be enough if all of American industry adopted it?

With the average Fortune 500 CEO earning $15,000,000, this substantial increase may not narrow the difference much.  Even more to the point, there is nothing to suggest that next year these CEO’s would not take home $17 million or more.  What would we do then with the minimum wage, raise it again?

If we were to take a picture today of income distribution in the US, it would be crystal clear that a few make a lot of money and a lot make little or none.  The static picture, however, does not really tell the whole story.  Many of those who earn little are being fairly paid because they lack the necessary skills to earn more.  This cohort must be seen as it is and its “income inequality” treated uniquely.  For example, assisting this cohort is aimed at enabling them to survive, not buy a flat screen TV.

Another group consists of unemployed who do possess employable skills or are fully capable of retraining.  This group languishes largely because the economy is not sufficiently strong to provide full employment opportunities.  This cohort needs temporary benefits, like unemployment payments and job training programs.

The overlooked group are employed.  They are the backbone of American workers who get no subsidies and worry endlessly about the cost of their children’s education.  This cohort often calls out asking where the American dream has gone?

These later two groups are the ones where “income inequality” actually applies.  To be clear, the inequality is not that a CEO makes $15 million a year, and the average income of this group is just south of $50,000.  The boss (or owner) always earn more.  The inequality, however, rises from the discovery that the CEO’s renumeration continues to rise and the average person’s does not.

Saying this differently, the increase in productivity which results form the combined efforts of workers and executives is not divided fairly.

There are several explanations for this phenomena.  Most companies survey the local and national market and determine compensation for similar jobs.  Once the CEO’s pay begins to move up, no company board feels comfortable holding their CEO back.  With the average workers, outsourcing, increased productivity tools, and layoffs have combined to hold their pay pretty flat.  Hence the spread between the average and the top increases year after year.

In a perfect world, shareholders would hold the CEO’s feet to the fire for not taking care of employees.  But shareholders are mostly faceless and tend to be more demanding of stock appreciation.  Hmmm.

So will the minimum wage hike work?

It is doubtful if that is the only variable that is changed.  Some argue that the higher minimum wage will attract more qualified workers who will displace those current earning the $7.25.  Hmmm, maybe but that is only part of what’s likely to happen.

Raising the minimum wage will have two other impacts.  Companies that compete with low wage countries will be disadvantaged, and some may be forced out of business.  And all companies will be forced to raise prices which eventually will impact all consumers.

Surprised?  You should not be.  The stagnation of the average US income is tied to globalization and companies striving to remain competitive by holding down wages and outsourcing work.  Walmart, Target, Kohls, and so many others bring us goods and services at prices which seem to hardly change.  This benefit we all accept.  It is now becoming clearer what the unpaid costs really were.

As in all complex problems, responsibility can be spread around.  The days of high paying manual labor are over.  Auto workers need new skills.  Office workers must employ digital skills and keep them current.  Employment portability has replaced the former “life time employment” expectation.  It’s a new world, and these responsibilities lie squarely on the individual, not the government.

In the perfect world, pay policies would be adjusted to levels necessary to meet cost of living needs, and going forward would reflect a fair distribution of company earnings and productivity increases.  By necessity senior executive renumeration as a percent of total company pay must narrow with respect to the average salary.  Practically speaking, no CEO is likely to reduce their own salary but the expectation that their yearly increase per cent might be no greater than that of the average worker (and probably slight less).

The ironic aspect of these proposals is that when the average worker makes more, they will buy more goods and services, and pay more in taxes.  Increased tax revenues will take the pressure off “taxing the rich” and consuming more goods and services will improve the economy.  For the CEO’s, that’s a win-win.

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