Here are some more thoughts on the AFL-CIO’s questionable methodology used to calculate its annual CEO-to-worker pay ratio (373-to-1 for 2014).
1. Questionable Math for Worker Pay. In its 2014 report, the AFL-CIO reported that the average rank-and-file worker made $16.94 per hour and $35,239 annually in 2013 based on “average worker pay according to Bureau of Labor Statistics data for production and non-supervisory workers.”
But there’s a problem with the AFL-CIO’s calculation as I pointed out here and here. They apparently used the average weekly earnings in 2013 of $677.87 reported by the BLS for production and non-supervisory workers, and simply divided by 40 hours per week to arrive at an hourly wage of $16.94. That’s not correct. The average hourly wage in 2013 for those rank-and-file workers was actually $20.14 (19% higher than the AFL-CIO figure) and the average workweek for those employees was only 33.7 hours.
There were 94,614,000 production and non-supervisory workers in 2013, with a likely mix of some full-time and many part-time workers. But the average workweek of 33.7 hours for those workers reveals that the typical worker in that category is working part-time (below 35 hours per week), and not full-time. As I reported recently, that means that the AFL-CIO is comparing total compensation for CEOs working full time to the cash wages of primarily part-time “rank-and-file workers,” hardly a fair or valid comparison.
In the most recent update of its website, the AFL-CIO reports $36,134 as the annual wages of the average rank-and-file worker in 2014 without any details except to say again that “Average worker pay is according to Bureau of Labor Statistics’ 2014 data for production and nonsupervisory workers.”
But the $36,134 annual pay is based on an average hourly wage of $20.60 and an average workweek of only 33.7 hours. So once again it’s a comparison of total CEO compensation to cash wages only for mostly part-time workers. But you would never know that from the AFL-CIO’s website because the details are never explained, and I guess nobody ever bothered to check the bogus math.
2. Confiscation and Redistribution of CEO Pay. And what’s the whole point of the AFL-CIO’s annual CEO-to-worker pay ratio? The sub-title of the AFL-CIO’s Executive Paywatch website pretty much sums it up: “High paid CEOs and the low wage economy.” The AFL-CIO’s message seems to be that if CEOs weren’t being so generously compensated then the rank-and-file workers would be doing much better. For example:
America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while workers’ wages have stagnated.
The AFL-CIO has completely fallen here for the zero-sum, fixed pie fallacy, one of the most common economic mistakes that falsely assumes that one party can gain only at the expense of another. But let’s assume that there is a “fixed pie of wages” and do some redistribution of CEO compensation to see how that would affect average rank-and-file worker pay.
According to the AFL-CIO, the “In 2014, CEOs of the S&P 500 Index companies received, on average, $13.5 million in total compensation according to the AFL-CIO’s analysis of available data.” Note that the exact number of companies is not mentioned, but let’s assume that $13.5 million is the average for all S&P 500 CEOs. As a group, those 500 CEOs received $6.75 billion in compensation last year. If the AFL-CIO could confiscate that entire amount and redistribute $6.75 billion to the current 97,923,000 rank-and-file workers what would they get? An annual increase in pay of $69 for each worker before taxes, or about $1.33 more per week and less than 4 cents per hour. In other words, complete confiscation and redistribution of CEO pay would make almost no difference for the average rank-and-file worker.
The AFL-CIO also compares the starting wage at Walmart of $9 per hour to the $9,323 hourly compensation of Walmart CEO Doug McMillon (based on $19.4 million in annual compensation and a completely unrealistic assumption of a 40-hour workweek for McMillon – what S&P 500 CEO works 40 hour per week?). Walmart has an estimated 600,000 part-time employees in the US, and if McMillon’s compensation were confiscated and distributed to the part-time associates, they would each get about $32 per year extra before tax, or about 62 cents per week and an hourly increase in wages of only 2 cents (assuming a 30-hour week). Again almost no difference at all.
Bottom Line: There might be a number of economic reasons that real wages have stagnated for some rank-and-file workers, but high or rising CEO compensation for some S&P 500 CEOs is completely unrelated (orthogonal) to the starting wages at Walmart for unskilled workers and the average hourly pay of most part-time rank-and-file workers. And here’s something the AFL-CIO won’t report — the average hourly pay for rank-and-file workers increased by 1.9% in 2014, which is almost 50% greater than the 1.3% increase in the average annual salary for all 21,000 CEOs last year (see details here).
The nearly 400-to-1 ratio for CEO-to-worker pay reported by the AFL-CIO for 2014 gets my “Biggest Blindly Accepted Statistical Falsehood of the Year Award.” Well no it’s actually a tie with the gender wage gap myth and the perpetual and incessantly repeated “77 cents on the dollar” statistical falsehood. What’s disappointing is that the much of the media seem to blindly accept both of these statistical falsehoods without ever questioning the sloppy and shady methodologies that are used to perpetuate these statistical myths. One exception is this excellent article by IBD’s John Merline (“Do CEOs Make 300 Times What Workers Get? Not Even Close“) who concludes:
What’s not understandable is why the mainstream press keeps repeating the massively inflated 300-to-1 number without noting the statistical legerdemain that produced it.
from AEI » Latest Content http://ift.tt/1IJRbmb
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