The Broader Market

by Jordan Eizenga

Inequality in incomes has risen greatly over the past decade.  Economists and policymakers do not really dispute this.  What they do dispute is the caused of the inequality. 

Crudely, there are two broad views on inequality.  The first view is that income inequality is a function of the gains in productivity being expropriated by managers and executives.  Thus, the poor wage growth for the working class is due to high income earning corporate executives paying themselves high incomes at the expense of the wages for lower income workers. 

The second view is that income inequality is a function of weak productivity growth of lower income earners relative to high-income earners. This view rests on the assumption that workers receive a wage that equals their marginal productivity of labor. That is, workers are paid a wage that reflects their productivity and thus, the reason they have not been paid more in recent years is because they have not been more productive.

Despite the recent acrimony over Wall Street bonuses, the first view is actually quite difficult to prove – it is not clear that bosses are taking the gains made by their workers and paying themselves more.  This is not to suggest it does not occasionally occur – it is simply difficult to prove it occurs.  Evidence also suggests that it is not terribly widespread.  For this reason, let me focus on the latter of the two views.

Let’s assume the second view is true and assume that workers have not become more productive.  Even under this assumption, executives and management are not free from responsibility for the lack of productivity of workers. Management puts in systems that increase or decrease productivity for workers. Contrary to what you might think, worker productivity is not simply a function of a lazy or earnest worker doing a good or bad job.  Workers are usually quite limited - by decisions made by management - in what they can and cannot do.

This suggests that weak productivity growth for lower and middle-income earners could partially be a function of management decisions.  If American executives and managers had made better decisions, workers would be more productive and be paid more.  Yet, this result does not seem fair.  It does not seem right that workers should receive less because of ineffective managerial decision-making.  This is not to rail against management. It is simply to say that workers should have more of a role in corporate decision making if their wages are going to be a function of those decisions.