"CEO Pay Continues to Rise as Typical Workers are Paid Less" -Economic Policy Institute
"Despite substantial gains in productivity since the 1970s, worker pay has remained flat. " -ThinkProgress
"CEO-to-worker pay gap is obscene" -LA Times
"CEOs get paid too much, according to pretty much everyone" -Harvard Business Review
"The pay gap between CEOs and workers is much worse than you realize" -Wash Post
But is this really the case? The problem with these studies is that they are made in the absence of comprehensive data on wages paid by companies/firms (which you would think is pretty important for a study about income inequality). For instance, I recently saw a "study" that said CEOs are paid 380 times more than the average worker. But the authors used average CEO pay from only the top 180 Fortune 500 companies and compared it to the average US worker. That's egregious cherry picking. A more accurate study would be to compare the CEO pay of ALL companies (which is much, much lower) with the average US worker, rather than just the most successful companies. Or perhaps comparing the top CEOs pay with the pay of the same percentage of wage earners (think Lebron James, Albert Pujols, Tom Cruise). But that wouldn't make for a very exciting headline.
Since we're about to storm the houses of every CEO in the country with our pitchforks, there is obviously a need for more robust data analysis. A recent study published in the National Bureau of Economic Research did just that. The authors looked at employer-employee data for US firms from 1978-2012. The data set was a one-sixteenth percent representative sample of workers from a 100% population of US firms between 1978 and 2012 (i.e., it's not cherry data picked). It is based on administrative records so there is very little measurement error compared to survey-based data.
The results.
"Pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups."
So no, your boss isn't taking raise after raise while you are stuck making next to nothing. In fact, the data also shows that individuals in the top one percent are paid LESS relative to their firms' mean incomes than they were in 1982. So the pay gap between CEOs and the workers of a company is actually getting smaller!
So where's the economic inequality coming from then?
"Virtually all of the rise in earnings differences between workers is accounted for by increasing differences in average wages paid by employers."
I've constructed a shitty example to help make it more clear. Jim works for Company A. In 1978, the CEO of Company A made three times more than Jim. From 1978 to 2012, the wages of both Jim and Company A's CEO increased, but they increased at the same rate, so their pay difference didn't change. To explain the rise in income inequality, we need to look at what's happening over in Company B, where Simeon works. In 1978, the CEO of Company B made three times more than Simeon. Again, from 1978 to 2012, the wages of both Simeon and Company B's CEO increased at the same rate, meaning their pay gap stayed the same. The key however, is that wages for both Jim and the CEO over at Company A increased at a higher rate from 1978 to 2012 than the the wages for Simeon and the CEO over at company B.
The results of this study are true across regions, industries, sex, age, and tenure. (An interesting side note, when the author's looked at the trends based on gender, they found that the pay gap between gender is rapidly closing.)
These empirical results fly directly in the face of bleeding heart liberals that claim "a key driver of wage inequality is the growth of chief executive officer earnings and compensation." (A major finding of Picketty).
So what's causing certain companies to pay their employers better than others?
The authors offer a few explanations, but they are currently conducting more research to find the answer.
Reason 1: Growing productivity differences between firms
Simply put, some companies are just better than others.
Reason 2: Increased sorting
In the 1980s, firms were employing workers from a broader set of skill levels, but have become increasingly specialized over time. Due to the rise of specialized professions, some firms pay much higher average wages because their average worker quality has increased.
Intrigued by these results, I decided to look at what the top 30 paying firms are in the US (you can find the list here.). The highest-paying companies in America include Facebook, Cisco, Microsoft, Google, Apple, eBay, SanDisk, and various banks and oil companies. The fact that a lot of these companies are at the leading edge of technological development explains why their workers are making more compared to someone working at McDonalds. As technology advances, this will likely lead to even further income inequality as the skill set needed to operate and manufacture increasingly complex and innovative products and services at tech companies increases, while the skill set required for flipping burgers at McDonalds does not change.
But what about banks? Why is that such a lucrative business?
Quantitative easing from the Federal Reserve. Here's how it works:
"The Federal Reserve buys federal treasury bonds from big banks, at an artificially high price. The banks pocket the profit and invest it in other assets such as stocks, driving up their price and making more money. The Fed could buy the treasury bonds directly from the U.S. Treasury Department, but that wouldn't give free money to the banks, which is the whole point of QE." (Read the whole story if you want to see how QE also causes a rise in stock prices, further benefiting only the richest of Americans)
In the end, the income inequality is likely a combination of changing technology and economic markets along with a massive quantitative easing program designed to give free money to the richest banks. The key here is that you need to put your pitchfork away. CEOs are not the reason you aren't making more money.
