How Government Created Wage Inequality

It’s a popular maxim of the left today that wage inequality is out of control in the United States, and you know what? They’re right. The latest statistics show that CEO’s make somewhere along the lines of 300 times more than their employees, on average. This figure certainly sounds astounding, and there are lots of arguments for why this is such a terrible injustice. I’m not going to discuss the merits or perils of inequality today, but rather I’ll focus on how we arrived at such a staggeringly high disparity in wages.

For as long as there have been CEO’s running companies with employees, there has been a wage gap. The fact that as you move up the company hierarchy, your compensation increases is something which I will venture to say most people find to be normal and not morally reprehensible in and of itself. Rather, I believe that the outrage at this wage disparity appears after people see how large that gap actually is.

In the mid 60’s the average CEO made 20 times what their employees made, and in the mid 70’s they made almost 30 times what their employees made. These disparities continued to gradually increase, and by 1989 CEOs were making almost 60 times what their employees made. So the growth in this disparity had been occurring for quite some time, and then, as now, the non-CEOs of the world were becoming discontented with this disparity.

When Bill Clinton was elected in 1992, he promised to tackle this issue. He planned to achieve this by not allowing companies to write off salary expenses if the salary was over $1 million per year. It was a soft government control that on the surface sounded reasonable. After all, they aren’t preventing a company from paying their CEO whatever salary they deem fair, but simply eliminating the taxpayer subsidization of such high salaries.

It didn’t work.

Not only did it fail to slow the growth of the wage gap, but it likely resulted in even more unexpected damage to shareholders and American innovation. At the beginning of Clinton’s term, average CEO compensation was at $4.9 million, after his bill passed average CEO compensation skyrocketed to $20.3 million, meaning that the average CEO compensation at the time was nearly 400 times that of their employees!

2018-04-03 12-05-07_CEO Pay Continues to Rise as Typical Workers Are Paid Less _ Economic Policy Ins

How is it possible that Clinton’s bill, intended to shrink the wage gap, had actually had the opposite effect? It’s simple. When the rule changes regarding tax write offs and high salaries were implemented, CEOs began taking less in salary, and more in stock options. If the stock performed well, they got paid out in huge bonuses. This did two things, 1) it incentivized CEOs to value short term stock gains above all else, and 2) it created competition among executives, as their earnings were now required to be made public. CEOs never really cared how much more they were making than their employees, but they sure as hell cared if they could be making more money as a CEO elsewhere.

The first result of this legislation is particularly damaging, because it not only grew the wage gap, but it damaged the long term profitability of American companies, jeopardizing millions of American jobs while CEOs made short sighted decisions to optimize the lining of their own pockets. Money that had previously been invested in R&D was now being used to boost dividends and short term stock performance.

There are other hazards to this short term viewpoint as well, such as the dramatic rise in cost of the Epipen treatment. In 2014, a company called Mylan offered a stock grant worth up to $82 million dollars to their top five executives if their earnings and stock prices met the companies’ targets by the end of 2018. If the company did not achieve these targets, the executives would receive nothing. Almost immediately, the price of the Epipen treatment doubled; and with a government granted monopoly on the product, consumers were left out to dry.

There’s an old expression about the way in which the road to hell is paved. While I have no doubt that inside the government their are workers who are good and decent human beings, genuinely seeking to improve the world around them, these actions almost always have unintended consequences.

 

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