Benefits to a smaller income gap?

Great Debates
21

If you want a debate about your question, then basing it on a contrived, overly weak example is not the best way. Your question is interesting, so I’ll go there, but first an examination of your example.

It could also be argued that the success is not 50% due to the manager, and that the hard work of the farmers is more important. If the farmers readily share equipment, are competent and cooperative and generally do not require oversight, then paying half to the manager is ridiculous.

Second, even if the unrealistic percentage isn’t contested, the question is why middle managers in real life don’t make 10 times the wages of the workers. A basic understanding of economics, including supply and demand is required to understand why the compensation for various jobs is determined. I’ll have to simply things, so bare with me. Where better to start than the Dummies web site? Let’s look at their article, Considering Factors that Affect Job Pay

Note that the basic premise of the OP isn’t listed. If the premise were true, then this article could be simply replaced by a formula

Since there are actually other factors listed, I think the burden of proof to show why this factor determines compensation falls on the OP. As common sense shows, the market price of the job is a more important factor. That is determined by many other factors, several of which are listed above.

As an aside, this example ignores the owner. What is she getting out of this?

OK, leaving the example aside, the question must be asked how much tampering with wages are happening in the actual job market. Since compensation is generally not determined solely as a factor of a person’s individual contributions to the profitability of an organization, then this begs the question of what constitutes artificial flattening of wages.

Can we still find a question in this? I think a better question is a straight “Is it beneficial to have a smaller wage gap than a larger one?”

There have been several good answers so far, but I would have to agree with the first one give by ITR Campion, that when the rich get too powerful they use that power to maintain their position in society. If the wage gap were too large, it would restrict mobility in society. The various costs of admission to elite society would rise to deny opportunities to the poor.

The advantage of a flatter wage scale is greater mobility, offering a better chance to people to compete on abilities and not solely of the luck of which family they are born into.

22

I contested the percentage myself in the OP by going on to say that the market decides how much they felt a job facilitates other jobs (which depends on various factors like experience, the organization of that company, etc.) It was intended as a simple example, not a realistic example, which I thought was perfectly obvious. (But apparently wasn’t.)

But so, thank you for moving on to the question itself and answering it.

23

:dubious:You are assuming a lot there, especially on this site. :smiley:

And this base assumption is wrong. It’s how much an alternative will cost me. If I can get a ready supply of other farm manager willing to work for $50k a year, then there is no reason to pay $250k, regardless of the number of other jobs this position facilitates.

24

Equal work is absurdly easy to define. It means “equal work”.

Now, measuring how much work is done is an entirely different and more difficult problem.

This is interesting stuff. Where are these quotes from?

25

Yeah but it would be stupid, if you were qualified to hold such a position, to take it for $50k when the market valued it at $250k a year. Just as it would be silly to offer jobs as a McDonald’s burger flipper at $150k when you only need to offer $15k a year to get a sufficient number of applicants to fill out all the open positions.

26

How exactly does this support your argument that jobs are priced by how much net value they bring to the company and not by the balance of supply and demand which is my contention?
Just as it would be silly to offer jobs as a McDonald’s burger flipper at $150k when you only need to offer $15k a year to get a sufficient number of applicants to fill out all the open positions.
[/QUOTE]
So do you agree that it’s the market price for jobs?

27

History is littered with peasant revolts - most of them fail. The larger issue it points to is social stability. With too much income disparity (and you can have a pretty substantial income disparity before this happens) people stop understanding each other. They stop understanding each others needs. And they tend to stop caring about each other. The poor don’t think the rich have any problems - how could they? The rich don’t understand why the poor don’t just “fix it” - but that’s harder than they can imagine when you are near subsistence level.

28

I didn’t make that argument. I said that jobs are valued based on haggling on both sides based on various factors. But one of those factors is how vital the position is, which is the key item of all of those behind the exponential growth of the pay scale. Supply and demand is in there, of course. But so is questions like whether you’re hiring internally or externally, how much experience the candidate has, etc. What all factors lead into a particular value are decided based on a lot of internal weighing of countering forces. But, again, of all of those forces acting on the eventual price, it’s the human view that a manager is like a conduit that allows the work of everything below it to pass through or completely shut down, possibly even being able to increase the flow beyond what had previously been viewed as its peak, and so it’s worth a percentage of the total cost of everything below it, at minimum.

For instance, according to this page, says that in a 5-layer company, the level of increase of pay is 28%->44%->75%->141% growth above the average pay of the level below. Assuming that the lowest level each make $20k a year, then our payscale will go something like:

$20,000
$25,600
$36,864
$64,512
$155,474

It looks like the Span of Control at your average US company is probably somewhere around 7 or 8 subordinates per manager. Since it can be shown that companies with a higher span of control give higher wages, it’s likely that the base assumption that a person’s wage is a sum of a percentile of the wages of those directly below him has some merit. Assuming 7.5 employees per subordinate, we see:

$25,600 / (20,000 * 7.5) = 17.1%
$36,864 / (25,600 * 7.5) = 19.2%
$64,512 / (36,864 * 7.5) = 23.3%
$155,474 / (64,512 * 7.5) = 32.1%

No one is worth a full 50% of all of their subordinates totaled, but there is a nice growing value as you go up the chain, which is what we would expect.

This isn’t to say that I’m correct, but I think the fact that one might expect such a thing and that it’s humans who are doing the haggling, that any such expectation will factor itself in. And you’ll note that Adam Smith talks about the manager taking a “share”, i.e. a percentile. I think it would be a harder argument to make that there isn’t an assumption that a manager takes a share of the proceeds of his subordinates, than that he does.

29

Addendum, but let me also note that assuming a span of control of 7.5 that the total amount of revenue that goes to all people is split like:

Tier 1: $20,000 * 3164 = $63,280,000
Tier 2: $25,600 * 422 = $10,803,200
Tier 3: $36,864 * 56 = $2,064,384
Tier 4: $64,512 * 8 = $516,096
Tier 5: $155,474 * 1 = $155,474

Adding up tiers 2-5, we get a total sum of $13,539,154, meaning that all of management (assuming my 7.5 SoC is accurate to modern day America) is only held accountable for 17.6% of the company. The remaining, majority portion, still goes to the brute laborers.

30

I don’t see how disparities in income affect access to education.

Certainly numbers of people with enough income to afford education affects this, but (absent inflation) income gaps do not.

Take a hundred people. Education takes (say) 10K per year. Because of their income, fifty people cannot afford to spend 10K per year, forty-nine can afford to spend the 10K, and one can afford to spend 100K per year. Reducing income for the top fifty does not affect educational access at all. Neither does increasing income for the top fifty. The only thing that will affect this is increasing income for the bottom fifty, and that will be true even if the income gap is maintained or increased.

Suppose you double everyone’s income except the richest guy. His income you increase by ten fold. You now have a much larger gap, but increased access to education.

Income gap has nothing to do with it, unless you want to make the mistake of considering the economy as a zero-sum game.

Regards,
Shodan

31

Money is power. You can get access to the politicians, you can send lobbyists to do your work. Via campaign contributions, you can impact laws and enforcement. You can feed at the tax payers trough.
As money gets concentrated into the few, their political power gets stronger and stronger. Nobody had a chance to vote for these people. But they are king makers. They influence the parties into offering the candidates they want.
Money and power are intertwined. When you think about a concentration of wealth, also think about a concentration of political power going to people behind the scenes.

32

To use my previous numbers, let’s say that we simply mandate, via law, that the payscale in a company gives exactly 10% greater than the average pay of all of his direct subordinates.

We have $76,819,154 to split between 3651 employees. So we need to solve for…

x * 3164 + (x * 1.1) * 422 + ((x * 1.1) * 1.1) * 56 + (((x * 1.1) * 1.1) * 1.1) * 8 + (((x * 1.1) * 1.1) * 1.1) * 1.1 = $76,819,154

Which equates out to x = $20,716.74 and makes our payscale:

Tier 1: $20,716.74 * 3164
Tier 2: $22,788.41 * 422
Tier 3: $25,067.25 * 56
Tier 4: $27,573.98 * 8
Tier 5: $30,331.37 * 1

(Yes, that does still add up to ~$76,819,154.)

You get payed more for advancing up the hierarchy, so it still isn’t true socialism, but we have increased the average pay of 86% of our population. Not by a terribly large quantity, no, but if you save up that $716.74 for 18 years you can afford almost $13k towards putting one child through college. That’s a fairly significant advantage, even if it’s not the whole cost. Once you add in loans, shipping your child off to college becomes a lot more feasible if you have that $13k sitting handy.

(Looking at those actual numbers though, it seems like trying to flatten the scale truly is ultimately pointless. You’re just depriving those who could use money effectively in the economy from having it, at the expense of giving a lot of people a few spare cents.)

33

If that were the case, then it should be straightforward to find evidence for it. At least tell us why all the sites which give average salaries for positions never mention this. Likewise, how do companies change salaries for manager when profitability goes up or down? Or when the number of subordinates are increased or decreased? Why are average salaries based on geographic factors, which is an indication a market price for jobs, and not a job by job calculation of salary on the basis of the number of subordinates. Sales people are routinely paid on commission, and certain sectors, such as securities will pay bonuses based on individual or group performances, but this is not typical for all manager in general.

When I set up our office in Japan, the US head office asked typical salaries for the various positions such as accounting manager, logistic manager, and technical manager. Oddly enough, we didn’t discuss if the accounting manager would require two assistants or three assistants.

34

I’m not arguing against capitalism. Capitalism, with some government regulations to filter out the excesses, is a far better system than socialism.

I wasn’t arguing for equal pay. Back in the '80s a lot of people were following Deming in saying that everyone in a category should be paid the same except for a few outliers at the top and bottom. I’m not even for that. But the pure capitalist system where people get paid exactly according to their contributions is as much of a fantasy as the purely socialist one. I’ve been in lots of performance and salary review meetings, even ran one, and there is no magic formula giving a person’s contribution. The simple fact is, those in power get more, because to them whatever they do is worthwhile - even if the company is losing money. So, in real life some of the difference in pay between the manager and the farmer is deserved, and some of it is not deserved.

Choosing to go to college requires a comparison of the expected increase in earnings from getting a degree versus the loss of earnings from being in college and not working, and from paying tuition. We can neglect stuff like social pressure here. If a parent sees a giant gap in earnings, and if the parent sees that his child is not a superstar, then the payoff for going to college is much less than if the gap were reduced and there was space in the middle class, as it were. I bet there is a Nash equilibrium in here somewhere. You can draw 4 boxes - college/no-college vs manager job/farmer job. no college/managers job is an illegal state. Clearly college/manager job is best, but no-college/farmer is far better than college/farmer given that a farmer’s wages are very low. A middle class position would open up two new slots, and one might well be optimal. If you want numbers I’ll have to farm it out to my daughter the real economist.

No, since this compares two scenarios, only one of which will happen. However, I think that the very slow recovery from the 2001 recession, and the slow recovery in employment (very slow by historical standards) was due to making the remedy for a consumption decrease a stimulus for improved investment. Tax cuts back then was a good solution, but the tax cuts gave money to the wrong people. Giving them to working people would have increased consumption, which would have increased employment, which would lead to a faster recovery.

35

Affording education is not only about paying tuition. My parents both grew up in New York during the Depression. College, CCNY, was free. My mother’s father was a plumber, and though times were tight he did okay, and she and all her sisters went to college. My father’s father had died, and his mother was very poor. He didn’t go because the family could not afford him not making money for the four years it would take for him to graduate.

Ah, the trickle down fantasy. In fact a decrease in the income gap comes not from the wealthy losing out, but from the bottom seeing income growing at a greater rate than the wealthy, which happened during the Clinton years. A gap increases when those on the bottom see little growth, and the wealthy make lots, which happened during the Bush years. If both grew sides grew income by equal amounts during these years, we’d be much better off. The rich doubling while the poor triple would be even better.

36

That’s nice. What does it have to do with an income gap?

So the trickle down fantasy isn’t a fantasy at all.

And of course, you are mistaken - an income gap can decrease just as easily when the rich get poorer as when the poor get richer.

You are conflating factors. Income gap is irrelevant. If my income is growing, the benefit to me does not change at all whether my neighbor’s income triples, doubles, or drops. Absent inflation, how well the rich do makes no difference whatever to how well the poor do. The poor would be exactly as well off if their income increased if the rich got richer, poorer, or stayed the same.

Income gap is simply a tool to whip up class envy. “Beggar your neighbor” is a pretty stupid basis for a political or economic philosophy, but some people can’t seem to do any better.

Regards,
Shodan

37

It’s from his memoirs, The Singapore Story and From Third World to First. Not terribly stylish writing but these flashes of unorthodox (from a Western point of view) insight make it worthwhile for anyone interested in policy.

38

I already did so. In post 9 I gave a list of reasons why a large pay gap is harmful. I also offered an easy way to shrink the gap, namely by eliminating government handouts to the rich.

39

Their income disparity had a big impact on their education, even when the education was free.

If it were true a faster rise in high income earners income should result in a faster rise in low income earners’ incomes. Better economic conditions help everyone, but the help isn’t coming from trickle down. Rising tide and all that.

Of course it can - but that isn’t what has been happening, not in the US anyway. Maybe in Russia in 1917. Not a recommended technique, though. I’m sure you’ve seen the data indicating that under Democratic administrations the poor do better than under Republican ones - but that the rich do also.

Not if the income increase is coming from cutting wages and benefits instead of from a general increase in the economy. A big chunk of the rise in incomes for the wealthy in the past 8 years came from increasingly risky and aggressive investment strategies. If these had resulted in real economic growth, that would be fine, but things like the demand high yield mortgage backed securities created a demand for high yield, subprime, mortgages, which incentivized mortgage brokers to sell people stuff they couldn’t afford. Moving jobs offshore increases pressure on wages which decreases demand. In the short run that was good for the rich, but when things collapsed the rich lost tons of money. The economy is interconnected - you can’t have one segment do something and claim that there is no impact on the others.

“Class envy” is a moronic response to a real and measurable gap. Returning the top tax rate to what it was during the boom of the '90s is hardly beggaring anyone. What you can’t seem to get through your skull is that an economy in which everyone participates is better for all parties. Your way gets us to the point where you start wondering where all the consumers went.

Workers are both producers and consumers. You seem to see workers as only a bunch of people with the nerve to ask for living wages where they should be grateful for getting even the minimum wage or close to it they don’t deserve. If they get paid a decent wage, they are cutting into the profits of the downtrodden executives. If they borrow money they are being foolish. So, eventually they stop consuming and you say “wha happened?” - and say that the solution is to give more money to the rich so they can build more factories to sell to … ???

Maybe it would be a good idea if you’d stop with the soundbites like “class envy” and “beggar the rich” and start thinking about how the economy really works.

40

It would appear that you’re making a value judgment here - money in the hands of an investor is worth more than money in the hands of a consumer. If I’m portraying that accurately - can you tell us why you’re making that judgment?