Recent studies show that after a brief pause the income disparity of the U.S. has continued to grow, CEOs salaries are back up and belief in U.S. as the “land of opportunity” is faltering. The gap is widening here and abroad with a couple of notable exceptions, China and India.
As reported in the World of Work Report of 2013 issued by the U.N.’s International Labor Organization, the average ratio of the 15 largest U.S. companies CEO compensation is back to over 500 times the average earnings of their employees or back to the same level as before the market crash of 2009. This compares to the same measure for the Netherlands at around 60 times, China at 130 times, and the United Kingdom at 220 times.
This of course is a comparison of CEO income to the average worker’s income. Also this year, Bloomberg reported on the pay multiple of some of the Standard and Poor’s 500 Index of companies between the CEO’s pay and that of their lowliest worker. The most egregiously high multiple was between Ron Johnson’s compensation package at J.C. Penney’s and his least paid full time employee. The multiple was a staggering 1,795 times.
Joseph Stiglitz, Nobel Laureate in Economics, has stated that if the income inequality were not enough he sees “increasing economic inequality leading to increasing inequality in political power.” In his mind the spiral continues leading to increased economic inequality which will not be possible to reverse without significant changes in our economy and how we regulate and run our businesses.
Looking beyond the U.S. at global income disparities, a report from the World Bank’s Development Research Group Poverty and Inequality team draws interesting conclusions. It’s author, Branko Milanovic, explains how income inequality has been looked at with different formulas applying to different groups. He argues it is best to look at global inequality composed of individuals, not nations, as this shows the most accurate views of the disparities.
The three major conclusions of this report are that:
- Researchers who wish to highlight the growing unevenness of global income focus on growing inter-country gaps. These statistics do not consider population sizes in their respective countries. Those who wish to show a more positive outcome adjust their numbers to account for the population densities of countries such as China and India.
- Because of China’s economic growth, supported by India’s, the data shows they are single handedly forcing world population inequality to decline. The report states, “Perhaps for the first time since the Industrial Revolution, there may be a decline in global inequality.”
- Attempting to plot the cause of global inequality (using the Thiel coefficient rather than the Gini), the author looks at the reasons for inequality between 1870 and 2000 based on the two factors of “class” and “location”. Class is defined as the inequalities between the classes of rich and poor worldwide while location is the size of the gaps between mean incomes of one country versus another. The data shows the importance between these factors has inverted since 1870 so that location is now the dominant factor.
Further the two elements that affect future inequality are economic growth and location. If the economic growth in the third world stagnates then pressure for migration from poor countries to wealthy ones will increase as people seek to better their circumstances. This would take advantage of incomes that vary considerably from country to country.
It is best illustrated by the reality that the ‘poorest’ Americans are still at the 60% percentile of world income distribution. This means our poorest have a higher annual income than 60% of the world’s population. Absent economic growth, people will seek to migrate to locations where the lowest income is still significantly higher than the incomes of where they are.
These articles raise a few suggestions for how income inequalities should be addressed. In the United States we must:
- Enforce the recently enacted Dodd-Frank law that requires companies to reveal their CEO-to-worker pay ratios. For more than three years this requirement has been bottled up in an SEC that has failed to draw up the rules to implement it. Of the 94 rules called for in the Dodd-Frank law the SEC has drafted only 39 of the required rules or less than half. This ratio would increase shareholder and employee pressure on rubber stamp boards of directors that owe their positions to their CEOs and on the greed of higher management to either limit CEO compensation or increase the wages of the average worker. James Cotton was possibly the first person to propose publishing this ratio in a 1997 article in the Northern Illinois University Law Review. The dean of the University of Toronto’s Rotman School of Management, Roger Martin, said “When CEOs switched from asking the question of ‘how much is enough’ to ‘how much can I get,’ investor capital and executive talent started scrapping like hyenas for every morsel. It is not that either hates labor, or wants to crush their lives. They just don’t care.”
- Congress must pass a law reversing the Supreme Court Citizens United ruling that removed constraints on the money companies can spend to sway the electorate. In addition we should require a company’s shareholders to approve campaign contributions.
- Joseph Stiglitz says the U.S. needs to stop rent-seekers in the U.S. economy who “extract profit from existing industries without contributing value – in the form of innovation, entrepreneurship, and growth – to the economy. They use their wealth to consolidate their power, by influencing regulations and government policies. This has happened in many instances – we see it in our military and drug companies, in our banks that succeeded in stripping away regulations, which allowed them to earn huge profits at the expense of the rest of society – and it’s not a model for a competitive dynamic economy.” Further he supports the raising of taxes on capital gains and suggests it should be taxed at the same rate as income. He states, “And government can use those increased revenues to invest in those areas that will give a boost to the opportunities of the middle and bottom income earners – especially investments in education, health, technology, and infrastructure.”
These are just a few of the most obvious steps we should take to rebalance the economic differences between the top 1% and the rest of our citizenry. We should support politicians that are working this agenda. Further, we need to invest in the economic growth in the rest of the world to insure the collective economic security and fairness increases for all the world’s citizens.
Use the following links to obtain additional information:
http://www.ilo.org/global/research/global-reports/world-of-work/lang–en/index.htm . Go to the right hand column scrolling country and region briefs until you reach your area of interest. Select the country of interest.