Rising executive pay behind income inequality

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For years, statistics have depicted growing income disparity in the United States, and it has reached levels not seen since the Great Depression. In 2008, the last year for which data are available, for example, the top 0.1 percent of earners took in more than 10 percent of the personal income in the United States, including capital gains, and the top 1 percent took in more than 20 percent. But economists had little idea who these people were. How many were Wall street financiers? Sports stars? Entrepreneurs? Economists could only speculate, and debates over what is fair stalled.

Now a mounting body of economic research indicates that the rise in pay for company executives is a critical feature in the widening income gap.

The largest single chunk of the highest-income earners, it turns out, are executives and other managers in firms, according to a landmark analysis of tax returns by economists Jon Bakija, Adam Cole and Bradley T. Heim. These are not just executives from Wall Street, either, but from companies in even relatively mundane fields such as the milk business.

The top 0.1 percent of earners make about $1.7 million or more, including capital gains. Of those, 41 percent were executives, managers and supervisors at non-financial companies, according to the analysis, with nearly half of them deriving most of their income from their ownership in privately-held firms. An additional 18 percent were managers at financial firms or financial professionals at any sort of firm. In all, nearly 60 percent fell into one of those two categories.

Other recent research, moreover, indicates that executive compensation at the nation’s largest firms has roughly quadrupled in real terms since the 1970s, even as pay for 90 percent of America has stalled.

This trend held at Dean Foods. Over the period from the ’70s until today, while pay for Dean Foods chief executives was rising 10 times over, wages for the unionized workers actually declined slightly. The hourly wage rate for the people who process, pasteurize and package the milk at the company’s dairies declined by 9 percent in real terms, according to union contract records. It is now about $23 an hour.

“Do people bitch because Engles makes so much? Yeah. But there’s nothing you can do about it,” said Bob Goad, 61, a burly former high school wrestler who is a pasteurizer at a Dean Foods plant in Harvard, Ill., and runs an auction business on the side to supplement his income. “These companies have the idea that the only people that matter to the company are those at the top.”

With executive pay, rich pull away from rest of America, Washington Post

This is a very good article that takes a look at income inequality and why it has risen as America has got richer over the past four decades.

In the 1970s, the average hourly wage began to decline precipitously. It stabilized in the mid-1990s and began to rise again. The increase in labour participation rates due to the addition of women in the paid work force has meant that Americans’ per capita and household income levels have risen. However, now labour force participation rates are at their lowest in 30 years.

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4 Comments
  1. Edward Harrison says

    I provided limited commentary on this issue of executive pay and wage gaps because I don’t have any well-thought out solutions to the problem. We could have the government reach in to corporation and regulate pay. That seems like a solution that would give government too much control. On the other hand, allowing executives to essentially set their own pay has created the disparity we see now. I imagine the solution has something to do with shareholder rights. But there again, many companies are dominated by shareholders which themselves are large corporations and investors. If anyone has comments that could shed light, I’d like to hear them.

    1. El Viejo says

      A year or so ago on Bloomberg Satellite radio on one of the morning shows Arthur Levitt (former head of SEC) said that CEO’s pay and bonuses should be tied to long term success of his/her policies through a delay or other mechanism. Stockholders want immedieate returns. This has just created havoc in this country.
      In the movie “The Graduate” the neighbor told Dustin Hoffman that the word was “plastics”.  I would maintain that the word for today is “sustainability”.

    2. El Viejo says

      A year or so ago on Bloomberg Satellite radio on one of the morning shows Arthur Levitt (former head of SEC) said that CEO’s pay and bonuses should be tied to long term success of his/her policies through a delay or other mechanism. Stockholders want immedieate returns. This has just created havoc in this country.
      In the movie “The Graduate” the neighbor told Dustin Hoffman that the word was “plastics”.  I would maintain that the word for today is “sustainability”.

  2. Edward Harrison says

    I provided limited commentary on this issue of executive pay and wage gaps because I don’t have any well-thought out solutions to the problem. We could have the government reach in to corporation and regulate pay. That seems like a solution that would give government too much control. On the other hand, allowing executives to essentially set their own pay has created the disparity we see now. I imagine the solution has something to do with shareholder rights. But there again, many companies are dominated by shareholders which themselves are large corporations and investors. If anyone has comments that could shed light, I’d like to hear them.

    1. El Viejo says

      A year or so ago on Bloomberg Satellite radio on one of the morning shows Arthur Levitt (former head of SEC) said that CEO’s pay and bonuses should be tied to long term success of his/her policies through a delay or other mechanism. Stockholders want immedieate returns. This has just created havoc in this country.
      In the movie “The Graduate” the neighbor told Dustin Hoffman that the word was “plastics”.  I would maintain that the word for today is “sustainability”.

      1. Anonymous says

        that is probably the best idea yet that I’ve heard…something along the lines of commission based on net income or sales revenue or something like that over a period of time, and like many commission schedules, it could be benchmarked to stimulate growth and production. This actually probably really would work and make everyone happy since it stimulates growth. Great call and a great start for brainstorming on this necessary issue. Cheers! :)

  3. Anonymous says

     The solution is to change our religion.  When you reduce the whole of human striving to a game of Monopoly, it should be clear how that is gonna end.  There is no reset in capitalism.  Don’t be looking for the mechanism to redistribute the wealth,  or “correct” the natural progression of the game.  We all understand the rules, and we all have decided to play by them.    We took the Communion a while ago.  After all, it offered such exciting possibilities.  Somehow though, we overlooked the fact that Monopoly isn’t a game that is won, so much as it is a game that breaks.  The winner ends up with empty hotels, railroads with no riders, and money that suddenly has no value.  But maybe I’m just a cranky loser. 

  4. Anonymous says

     The solution is to change our religion.  When you reduce the whole of human striving to a game of Monopoly, it should be clear how that is gonna end.  There is no reset in capitalism.  Don’t be looking for the mechanism to redistribute the wealth,  or “correct” the natural progression of the game.  We all understand the rules, and we all have decided to play by them.    We took the Communion a while ago.  After all, it offered such exciting possibilities.  Somehow though, we overlooked the fact that Monopoly isn’t a game that is won, so much as it is a game that breaks.  The winner ends up with empty hotels, railroads with no riders, and money that suddenly has no value.  But maybe I’m just a cranky loser. 

  5. hutrade says

    that is probably the best idea yet that I’ve heard…something along the lines of commission based on net income or sales revenue or something like that over a period of time, and like many commission schedules, it could be benchmarked to stimulate growth and production. This actually probably really would work and make everyone happy since it stimulates growth. Great call and a great start for brainstorming on this necessary issue. Cheers! :)

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