InCome Inequality

Graduate Business 570-02

7 Oct 2015

Do individuals and corporations have a responsibility to see that income is distributed in a way to maintain a “middle class”?

        Income inequality has increased in the U.S. for the past few decades, faster than in other developed countries in Europe and North America. Income inequality exists for many reasons: age, sex, race and gender discrimination; unequal opportunities for training and education and labor market discrimination. Additionally, changing attitudes toward the definition of a family; a rise in single families headed by a female; high divorce rates; an aging population; unfortunate events such as illness, accidents, mental health issues; cultural issues; lack of positive role models; failing behavioral traits; teenage pregnancy; dropout rates; week work ethic and low aspirations.  

        Paul Krugman in his New York Times piece: "For Richer", Oct 20, 2002; suggests income inequality is also affected by a change in corporate morality. CEO's pay in the U.S. has increased dramatically in the period beginning in 1972 through 2002, increasing from 39 times the average pay of workers to 1,000 times the pay of the average worker in that time frame. This increase in compensation is attributed to a shift in corporate culture that softened the fear of outrage caused by the reporting of generous CEO compensation packages. Two theories emerged: first the free agent effect; second: CEO's appoint board members that determine their salary. The free agent effect suggests that an emphasis has been placed upon the getting the right man for the job, mirroring free agency in baseball as the talent goes to the highest bidder. Members of a board of directors who have been appointed by the current CEO are likely to act in a manner that would benefit the CEO's compensation package.  These factors can impact the average CEO's pay dramatically in short order.

        Krugman suggests that the inevitable effect of more compensation at the top of the corporate pay scale means less remaining for those whose pay lands in the middle of the scale and lower. Other factors such as globalization, skill-biased technological change and the "superstar" hypothesis also have an effect on income inequality by eliminating unions and reducing blue collar wages.  The New Deal enacted by President Roosevelt post WWII, effectively imposed wage control in order to compress wage gaps. This worked for over 30 years until a shift in corporate morality took a hold, resulting in the explosion of CEO compensation that is now commonplace today.