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Why CEOs should not be blamed for income inequality



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CEOs with fat pay cheques have always taken the blame for income inequality.

To ease the tension on unequal pay, the US Securities and Exchange Commission announced in August that listed companies are required to make the salary and median income of the CEO public information as a ratio to their workers’ median pay public starting 2017.

But a National Bureau of Economic Research paper by a group of US scholars revealed that inequality between firms is more important than inequality within firms at driving the overall pay gap.

In other words, pay inequity impact the pay gap the most when it takes place between firms with and not within firms.

The paper, by Jae Song of the Social Security Administration; David J. Price and Nicholas Bloom of Stanford University; Fatih Guvenen of the University of Minnesota; and Till von Wachter of the University of California, Los Angeles, looked at a sample of more than 100 million employees and linked their pay to the average pay within their own firm.

They found that while incomes of the highest-paid workers, those earning more than 90% or 99% of all others, had indeed grown faster than the median, but had not grown faster by a huge margin over the course of three decades.

ALSO READ: CEOs are willing to take pay cuts to work for top brands

The researchers found employees at the 90th percentile earned 1.69 times as much as the firm’s average wage in 1980, and 1.73 times as much in 2013.

However, employees at the 99th percentile earned 3.57 times the firm’s average in 1980, and 3.48 times in 2013.

From this they concluded “virtually all of the rising dispersion between workers” was caused by the dispersion between firms, contradicting the common belief that it is the 1% gobbling up all the wealth.

But these findings do not sit well some researchers.

The Wall Street Journal reported economist Marshall Steinbaum at the Center for Equitable Growth questioning the sampling technique of the research, saying the team could have missed the growth of the top 0.001% earners and as a result underestimated the impact of ultra-high earners on income inequality.

In response to the criticism , Bloom and his team re-ran their tests with the entire sample and found that their original findings largely hold for 99.8% of workers.

But they did find the top 0.2% of earners at firms with more than 10,000 employees did see their income grow much faster than other workers at their own firms.

This suggests that rising executive pay is indeed part of the story.

The researchers also backed with their study by suggesting that the income inequality comes from the best-paying companies that are pulling away from the worst-paying companies.

Bloom said this is happening as firms are becoming more specialised, with the most productive workers gravitating toward the most successful firms.

ALSO READ: Why Unilever’s CEO is “ashamed” of his pay

Image: Shutterstock

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