Unequal Companies=Income Inequality

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I’ve talked often about the abrogation of the social contract that obtained between companies, their employees, and their communities.  That schism- advocated by Dr. Milton Friedman– has been accompanied by the erosion of the US middle class and the flattening of wages (except for corporate executives).

But, things are changing.   Now, that the economy has turned the corner (albeit gingerly), finding employees who are willing to work for the lowest wages that have been the norm for nigh a decade is becoming more difficult.  So, the more profitable companies – desperate for employees- are raising wages. So now a new gap begins- the difference between wages paid by our most profitable and our least profitable enterprises.

First,  we should recognize that we have wide gaps among the S&P 500 (the stock market index of 500 of the larger companies listed on the New York or NASDAQ [over the counter] stock exchanges).  Peter Orszag (Obama’s retired Budget Director) and Jason Furman (Chair of the Council of Economic Advisors) examined various factor among the non-banking firms that are part of the S&P 500.   [I am sorry to inform you that President Trump just killed all references to inequality research performed by the Council of Economic Advisors (among other deletions).  If you would like to see this research, please contact me and I will share my copy that has been archived.]

They found that companies in the 90th percentile (more profitable than 90% of all the stocks on the index) had returns on capital (ROC) that skyrocketed from 22% in 1982 to 99% in 2014.  The companies in the median (half more profitable, half less profitable) only had their ROC move from 9 to 16%.  But, for those in the 25% percentile (75% of the firms were more profitable) the ROC was unchanged- at 6%.

Furman Orszag Wage Disparity

Jae Song, David Price, Fatih Guvenen, Nicholas Bloom, and Till von Wachtler published a working paper for the National Bureau of Economic Research.  Called “Firming up Inequality”, these folks examined the payroll data for 100 million employees between 1980 and 2013 (almost the same period examined by Orszag and Furman).  (This data was accessible from the Master Earnings File of the Social Security Administration.)  They also examined the rates of pay among members of the same corporate employer.

They found that employees at the 90th and 99th percentile had much greater gains than those among the median and lower paid workers.  But, the highly paid folks, relative to those employed by the same firm as they, did not have the ratio of their wages increase.  In other words, those working for the top companies managed to maintain their pay ratios through the increases; there was little dispersion in the rate of increase.  Except for the top 0.2%, where there is a marked disparity.

The authors consider two possible causes for this trend.  One is that companies that dominate their market segment (virtual monopolies) can secure more profits from a given revenue compared to those in more competitive marketplaces.  These firms do pay their employees a portion of this “excess profits”  (sometimes called rents by economists).

The other reason may be that the more skilled employees gravitate to the better firms- and those with less skills are weeded out, forced to find new employers.   Outsourcing may be another factor in that trend, to boot.

The first reason may be more on point.   After all, Orszag/Furman’s research depicted that the technology and health care firms are the high profit entities.   And, these firms develop their profits from intangible assets- patents, technology standards, networks of customers and suppliers.   The more mundane firms generate their revenue and profits from tangible assets- factories, land, etc.  And, those with intangible assets present a more formidable barrier to entry- so competition is greatly attenuated.

Which is another reason why we need our government to police these monopolies more carefully- as the regulations and laws so stipulate.

 

 

 

 

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