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The Progressive Economics Forum

Who’s over or under-paid?

We all know that the wages and compensation individuals receive in private competitive markets reflects their productivity, unless pesky unions and government regulations get in the way–because Economics 101 (and Michael Hlinka) have told us so.  

Corporate CEOs are worth every penny their “independent compensation committees” award in compensation and stock options them because they are “creating value” and hedge fund operators are worth the billions they made helping the world learn about the impact of financial crises.     Meanwhile minimum wage workers, union members and public sector workers must all be overpaid because regulations, unions with their monopsony power, accommodating politicians and labour laws have all interfered with the magic of the market.  

That’s why politicians such Tim Hudak and his confreres want to contract out public services, restrict the powers of arbitrators and weaken labour laws.  

The conviction that wages in private markets reflect their marginal productivity is usually just taken as a matter of ideological economic faith: there have been surprising few empirical studies done testing this.    Efficiency economic theories actually suggest that wage structures are likely to be overly compressed.

A study just published by the Institute for the Study of Labor, Are Occupations Paid What They Are Worth? that actually examines wages by occupation with productivity data using matched panel data from Belgium finds the opposite.    Instead, they found:

“a clear pattern of significant overpayment at the top (‘Managers’, ‘Professionals’), and underpayment at the bottom of the occupational hierarchy (‘Service and sales workers’, ‘Craft and related trades workers’, ‘Plant and machine operators’, ‘Elementary occupations’)”

 

Armine has written recently about even the IMF, Conference Board are now showing concern about the the negative impacts of growing income inequality on a macro economic level.   This study shows there’s no justification for it on a micro-economic level either.

Comments

Comment from Jeff Dean
Time: September 30, 2011, 9:12 am

The analysis of economic rent would give you a good indication of who’s overpaid – who “earns” their income by an actual contribution to society and whose income comes from privatizing economic rent.

A mining company that’s given a gold deposit and then pays it all to the CEO. He didn’t create the gold or the market that values it, but “earns” a huge income nonetheless.

Or an exceptionally good teacher who’s paid the modest amount in her contract. Her presence increases local property values (see links below) but she doesn’t get paid for that.

http://www.npr.org/blogs/money/2011/01/25/133215055/the-tuesday-podcast-how-much-is-a-good-teacher-worth
http://www.biggerpockets.com/renewsblog/2011/04/06/school-districts-real-estate-prices/

Comment from Andrew Jackson
Time: September 30, 2011, 10:48 am

And the Belgian wage structure is much flatter than that of Canada.

Comment from ganon
Time: September 30, 2011, 1:21 pm

One more thing needs to be factored in, and strengthen the argument for equality even more: the unearned knownledge inheritance that top paid individuals draw on when producing. http://www.unjustdeserts.com/

Comment from Chad Purcell
Time: October 5, 2011, 10:31 am

I will use my own career as my example of wage inequality. I am a career truck driver and recently took an OTR (over the road) longhaul down to Texas from Ontario. I normally work locally and am paid by the hour. However upon receiving my pay stub for this trip I noticed that my per mile rate was $0.37/mile. This is the same rate I was being paid 15 yrs ago when I first started driving. Costs for the average household have gone up dramatically in the same time period and yet wages within the transportation industry have essentially been frozen. Drivers are the backbone of any trucking company and without them none of the other employees would have a job, yet they are the lowest paid and have been for nearly 30 yrs.

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