The big bosses are taking all the money! USA Today dutifully reports: “CEOs in the AFL-CIO’s pay database released Wednesday earned an average of $13.5 million last year, which is 373 times more than the $36,000 per year paid to the average production and nonsupervisory worker, says the AFL-CIO. CEO pay in the AFL-CIO study increased 16% in 2014.”
According to the union, that CEO-to-worker pay ratio pay is “simply unconscionable. … It doesn’t have to be this way. Lawmakers should raise the minimum wage and protect U.S. workers by not engaging in bad trade deals. Corporations should pay their employees a living wage. And workers should have a collective voice on the job to demand their fair share.”
But before we do all that supposedly wonderful stuff that the AFL-CIO wants us to do, let’s take another look at those numbers. As my AEI colleague Mark Perry points out, you really shouldn’t compare — as the AFL-CIO does — the wages of the average worker to the compensation of CEOs at a few hundred, large companies, often multinationals. In 2014, the BLS reports that the average pay for America’s 250,000 chief executives was only $181,000. So the CEO-to-worker pay ratio for the average CEO compared to the average worker is only about 4, not nearly 400.
And if you calculate the CEO-worker pay ratio at the 100 largest US companies — which I did using 2013 PayScale data — it works out to 79-to-1 — a fraction of what the exaggerated AFL-CIO analysis finds. Only five companies had a ratio of over 200-to-1, by the way, that year.
Well, maybe even that 79-to-1 ratio is too rich for you. Take Northrop Grumman, where the ratio was about 80-to-1. If the entire $6.2 million compensation of its CEO that year was redistributed to workers, it would have only increased their paychecks by $100 or so.
And what is driving higher CEO pay? Is it mostly greedy CEOs manipulating compliant boards? Here are Steven Kaplan and Joshua Rauh in the paper “It’s the Market: The Broad-Based Rise in the Return to Top Talent” taking issue with that theory in favor of technology:
Our evidence is not obviously consistent with those who suggest that the increase in pay at the top is driven by a recent removal of social norms regarding pay inequality. While top executive pay has increased, so has the pay of other groups, who are and were less subject to disclosure and, arguably, less subject to social norms. This is particularly true of private company executives and hedge fund and private equity investors. Overall, we believe that our evidence remains more favorable toward the theories that root inequality in economic factors, especially skill-biased technological change, greater scale, and their interaction. Skill-biased technological change predicts that inequality will increase if technological progress raises the productivity of skilled workers relative to unskilled workers and/or raises the price of goods made by skilled workers relative to those made by unskilled workers. For example, computers and advances in information technology may complement skilled labor and substitute for unskilled labor. This seems likely to provide part, or even much, of the explanation for the increase in pay of professional athletes (technology increases their marginal product by allowing them to reach more consumers), Wall Street investors (technology allows them to acquire information and trade large amounts more easily) and executives, as well as the surge in technology entrepreneurs in the Forbes 400. Globalization may have contributed to greater scale, but globalization cannot drive the increase in inequality at the top levels given the breadth of the phenomenon across the occupations we study.
Hopefully, enough reality checking will stop politicians from doing this: “Striking a populist note, Clinton, who announced on Sunday she was running for president in 2016, said American families were still facing financial hardship at a time ‘when the average CEO makes about 300 times what the average worker makes.'”
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