Tuesday, November 10, 2015

Inequality Seems to be Mostly About Where You Work

Income inequality is a big deal in contemporary political discussions. Lots of people believe the appropriate response to that is to redistribute from richer individuals/families to poorer individuals/families.

But what if what's making the rich is rich is ... who they work for?

New research indicates that inequality between firms (do people get paid the same at different employers) is a bigger deal than inequality within firms (do people get paid more or less in the same place).

Common thinking is that it must be the latter: the executives are getting paid too much.

But the data doesn't show that. Instead it shows that there are companies that are doing very well where everyone is getting paid more.*
For example, the employee at the 90th percentile earned 1.69 times as much as his firm’s average wage in 1980, and 1.73 times as much in 2013. An employee at the 99th percentile earned 3.57 times his firm’s average in 1980, and 3.48 times in 2013.
They also checked whether it was only the tippy-top executives that were driving inequality:
... They did find the top 0.2% of earners at firms with more than 10,000 employees did see their income grow much faster than other workers at their own firms.
That's not many people: 20 out of 10,000 whose pay is growing faster than everyone else's. We could make an argument about inequality and "those rich", but it isn't a very large group, and would be unlikely to yield enough money to support any sort of redistribution program.

Currently, there are three explanations being explored for inequality between firms:

  • Sorting: the more promising firms are getting better at isolating and hiring the more promising job candidates.
  • Core Competencies: the firms that are doing so well are outsourcing a lot of their work to contractors (who don't pay as much) reserving a bigger pie for those left behind, or
  • Barrier to entry: the successful firms are better at preventing free entry, that might reduce revenue, and ultimately what compensation could be afforded.
My money is on the last one.

Read the whole thing entitled "What’s Driving Inequality: CEO Pay or Company Success?" on The Wall Street Journal's website, or retitled "Inequality — A Company Thing" in the November 5 print issue.

* I can contribute a personal anecdote here. I have a friend who moved to the bay area in 1978. He had zero future (not too bright, not ambitious, undereducated, slacker personality). Anyway, he got a job as a janitor at chip maker in Silicon Valley and retired before he hit 50, mostly on the basis of stock options and the high risk strategy of reinvesting his retirement contributions in company stock.

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