Category Archives: Income Inequality/Gap

The Growing Income Inequality as a Global Problem

Source: Howard Risher, Compensation Benefits Review, Vol. 46 no. 2, March/April 2014

… Now the recent book Capital in the Twenty-First Century by French economist Thomas Piketty has triggered increased media attention to the situation. It is a heavy book both in the number of pages, over 600, and in terms of the subject. It is not bedtime reading as his argument is disturbing. … My purpose in this editorial is to highlight key points for specialists in compensation management. I believe everyone who works in compensation should be aware of his conclusions. … A thread that runs through the book is how equality/inequality changed through the last century. His primary measure of inequality is the percentage of national total income going to the top decile—that is the top 10% of earners. While the United States is discussed in more depth than other countries, he tracks the trends in several countries, and the patterns are strikingly similar…

…Although Piketty does not discuss it, since 1980 there has been a significant shift in the occupational structure of the U.S. workforce and a decline of unionization. The prominent economist Joseph Stiglitz contends, “Strong unions have helped to reduce inequality, whereas weaker unions have made it easier for CEOs, sometimes working with market forces that they have helped shape, to increase it.” The strongest unions now are in the public sector where there is a convergence of lower level pay levels with the highest salaries, with the latter held down by political pressure….

…A central point of his argument is the “rise of the supermanager”—the “explosion of very high salaries.” His data show that trend dates to 1980 and is evident in the United States, Britain, Canada and Australia— although the United States is more extreme…. But it is no doubt true that executive pay and Piketty’s argument would not be a cause for concern if the compensation of the other 90% had kept pace as it did for roughly three decades after World War II…

How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide

Source: Standard & Poor’s, Economic Research, August 5, 2014

∙ At extreme levels, income inequality can harm sustained economic growth over long periods. The U.S. is approaching that threshold.
∙ Standard & Poor’s sees extreme income inequality as a drag on long-run economic growth. We’ve reduced our 10-year U.S. growth forecast to a 2.5% rate. We expected 2.8% five years ago.
∙ With wages of a college graduate double that of a high school graduate, increasing educational attainment is an effective way to bring income inequality back to healthy levels.
∙ It also helps the U.S economy. Over the next five years, if the American workforce completed just one more year of school, the resulting productivity gains could add about $525 billion, or 2.4%, to the level of GDP, relative to the baseline.
∙ A cautious approach to reducing inequality would benefit the economy, but extreme policy measures could backfire.

Do Health Care Costs Fuel Economic Inequality in the United States?

Source: David Blumenthal and David Squires, Commonwealth Fund blog, September 9, 2014

The growing debate over economic inequality in the developed world, highlighted by Thomas Piketty’s Capital in the Twenty-First Century, raises an interesting question that is particularly pertinent to the United States. Have escalating health care costs contributed to the huge economic gap between America’s rich and the rest? The evidence, it turns out, is suggestive, but not definitive.
From the perspective of the more than 150 million Americans who receive health insurance through their employers, health care costs may, in fact, be widening inequality. Economists generally agree that employers for the most part treat workers’ compensation in all forms—wages and benefits—as a single expense. When health insurance premiums go up, employers may reduce take-home pay to keep overall compensation in check. Because health costs have grown so quickly over the past several decades, an increasing share of workers’ total compensation has gone toward health insurance premiums. These higher premiums partly explain why middle-class wages have stagnated, lagging productivity gains. Rising health care spending—both on premiums and out-of-pocket costs—totally erased wage gains for a typical family from 1999 to 2009….

Are Football Coaches Overpaid? Evidence from Their Employment Contracts

Source: Randall S. Thomas and R. Lawrence Van Horn, Vanderbilt University, Draft of August 25, 2014

The commentators and the media pay particular attention to the compensation of high profile individuals. Whether these are corporate CEOs, or college football coaches, many critics question whether their levels of remuneration are appropriate. In contrast, corporate governance scholarship has asserted that as long as the compensation is tied to shareholder interests, it is the employment contract and incentives therein which should be the source of scrutiny, not the absolute level of pay itself. We employ this logic to study the compensation contracts of Division I FBS college football coaches during the period 2005 – 2013. Our analysis finds many commonalities between the structure and incentives of the employment contracts of CEOs and these football coaches. The se contract s’ features are consistent with what economic theory would predict. As such we find no evidence that the structure of college football coach contracts is misaligned, or that they are overpaid.
On Sidelines, Researchers See C.E.O.s
Source: Steve Eder, New York Times, September 1, 2014

An Economy Doing Half Its Job – Findings of Harvard Business School’s 2013–14 Survey on U.S. Competitiveness

Source: Michael E. Porter & Jan W. Rivkin, Harvard Business School, September 2014

From the press release:
A new survey of Harvard Business School (HBS) alumni focuses on “An Economy Doing Half Its Job”: large and midsize firms in America have rallied strongly from the Great Recession, but middle- and working-class citizens are struggling, as are small businesses.

“The United States is competitive to the extent that firms operating here do two things: win in global markets and lift the living standards of the average American. The U.S. economy is doing the first of these but failing at the second,” said Harvard’s Michael E. Porter, Bishop William Lawrence University Professor, based at Harvard Business School, and co-chair of HBS’s U.S. Competitiveness Project. “This is a critical moment for our nation. Business leaders and policy makers need a strategy to get our country on a path towards broadly shared prosperity.”

Added Jan W. Rivkin, Bruce V. Rauner Professor of Business Administration and co-chair of the Project, “The findings of the 2013-14 survey shed light on why the fates of firms and citizens are diverging. American workers are captives of what the survey shows to be the weakest aspects of the U.S. business environment—for instance, our polarized politics and our struggling systems for educating young people and developing their workplace skills. Firms, in contrast, are beneficiaries of our nation’s greatest strengths—like our research universities and vibrant capital markets. Firms can escape the weaknesses in the U.S. business environment by moving abroad, but workers can’t.” …

…This year’s findings and subsequent research emphasize three areas that are critical for America’s future competitiveness: (1) the K-12 education system, (2) the skills of the American workforce, and (3) transportation infrastructure. …

The Marriage Effect: Money or Parenting?

Source: Kimberly Howard and Richard V. Reeves, Brookings Institution, Social Mobility Memos, September 4, 2014

There is a growing marriage gap along class lines in America. This may be bad news for social mobility, since children raised by married parents typically do better in life on almost every available economic and social measure. But it is important to try and understand why the children of married parents do better. Is it simply because they have, on average, higher family incomes? (Two earners are better than one, and one household is cheaper to run than two.) Or are two committed spouses better able to provide consistent parenting? Is it marriage itself that matters, or is marriage the visible expression of other factors, that are the true cause of different outcomes? And if so, which ones?…

Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances

Source: Jesse Bricker, Lisa J. Dettling, Alice Henriques, Joanne W. Hsu, Kevin B. Moore, John Sabelhaus, Jeffrey Thompson, and Richard A. Windle, Federal Reserve Bulletin, Volume 100 no. 4, September 2014

From the abstract:
The Federal Reserve Board’s Survey of Consumer Finances for 2013 provides insights into the evolution of family income and net worth since the previous time the survey was conducted, in 2010. The survey shows that, over the 2010-13 period, the median value of real (inflation-adjusted) family income before taxes fell 5 percent, while mean income increased 4 percent. The differential movements in median and mean incomes are consistent with increased income inequality over the 2010-13 period, though some of that differential growth simply reversed the cyclical decrease in income inequality that occurred between 2007 and 2010. Both median and mean real family net worth were little changed over the 2010-13 period, and the data suggest that the distribution of net worth also became more unequal over this period. Offsetting changes in asset ownership rates and asset prices left the middle of the net worth distribution relatively unchanged, while the top and bottom of the net worth distribution moved in different directions. This article reviews these and other changes in the financial condition of U.S. families, including developments in assets, liabilities, debt payments, and credit market experiences.
The Top 10% of White Families Own Almost Everything
Source: Matt Bruenig, Dēmos, Policy Shop blog, September 5, 2014

…The top 10% of families own 75.3% of the nation’s wealth. The bottom half of families own 1.1% of it. The families squished in between those two groups own 24.6% of the national wealth. The present wealth distribution is more unequal than it was in 2010, the last year this survey was conducted. Specifically, the top 10% increased their share of the national wealth by 0.8 percentage points between 2010 and 2013. The bottom half and middle 40% saw their share of the national wealth fall by 0.1 and 0.7 percentage points respectively….

Title VII, the Rise of Workplace Fairness, and the Decline of Economic Justice, 1964–2013

Source: Touré F. Reed, Labor Studies in Working-Class History of the Americas, Vol. 11 no 3, Fall 2014
(subscription required)

…While the rise of diversity reflects the conservative turn in American politics since the 1980s, diversity’s disregard for economic inequality can be traced in part to the limitations of Title VII. To be sure, Title VII has succeeded in opening opportunities to minorities and women while making the workplace “fairer” for everyone. Nevertheless, its narrow focus on employment bias helped establish a framework that divorced discrimination from the structural roots of poverty and unemployment. Indeed, the Kennedy and Johnson administrations’ commitment to commercial Keynesianism precluded comprehensive antipoverty initiatives of the sort proposed by Secretary of Labor Wirtz or even Senator Humphrey’s S1937. Though much has changed since 1964, the employment opportunities available to minorities and women remain bound to the trajectory of the broader economy. The high rates of black unemployment and poverty today, for example, are a reflection on the health of the sectors of the economy that have employed a disproportionately large share of African Americans – the public sector, manufacturing and construction, transportation, and retail and service. Title VII is, of course, still relevant to the life chances of underrepresented groups. Nevertheless, if the endgame is simply to secure a seat at an ever-shrinking table, more and more minorities and women will remain standing in the unemployment line….

Inequality: Rebuilding the Middle Class Requires Reviving Strong Unions

Source: Robert A. Borosage, Campaign for America’s Future, August 2014

From the summary:
America now suffers the most extreme inequality of the industrial world, as the broad middle class continues to sink. Why does the U.S. no longer enjoy widely shared prosperity? The most popular explanations focus on the changes wrought by globalization and technology, and the transition to a service economy. The most touted remedies are greater education and more worker training.

But, if history is any guide, the most important policy is too often the least mentioned: workers regaining a voice at work, through organizing and broad-based collective bargaining. The power to bargain across entire sectors of the economy enables workers to demand a fair share of the profits and productivity they help to create. A voice at work limits executive excesses and curbs wage theft and other fair labor violations.

In this report, Robert Borosage explains, “It is not a coincidence that prosperity was widely shared when unions were at the height of their power in the decades after World War II, and that inequality has soared as unions have been weakened.”

Though down to 14 million members, unions remain one of the largest membership groups in the United States. Polls reveal that far more working people would like to form a union than now have one. But the rules that have been rigged against workers – from the rules of the global economy to the trampling of labor laws – have to be changed. Government policy helped strengthen the hand of workers and build the middle class coming out of World War II, and today government must once more become an ally of working people. The effort to make that happen will meet fierce resistance, but the report shows that the first steps have begun.
Inequality: A Broad Middle Class Requires Empowering Workers
Source: Robert A. Borosage, Campaign for America’s Future blog, August 28, 2014