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Bryan Caplan on why minimum wage advocates want a gradual phase-in: it hides the negative employment effects
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In an EconLog blog post from December 2013 (“Phase-In: A Demagogic Theory of the Minimum Wage“), GMU economist Bryan Caplan makes some excellent points about the typical legislative process of phasing-in gradual increases in the minimum wage to something like $15 per hour over several years or more like in Seattle vs. just increasing the minimum wage to $15 per hour immediately. Here’s Bryan (with some numbers and dates adjusted to reflect current conditions):
Increases in the minimum wage are usually “phased-in.” Why not just immediately impose the minimum wage you actually want?
There is a major difference between employers’ response to sharp-and-sudden versus slow-and-gradual minimum wage hikes: visibility. If the minimum wage unexpectedly jumped to $15 today, the effect on employment, though relatively small, would be blatant. Employers would wake up with a bunch of unprofitable workers on their hands. Over the next month or two, we would blame virtually all low-skilled lay-offs on the minimum wage hike – and we’d probably be right to do so.
If everyone knew the minimum wage was going to be $15 in 2017, however, even a large effect on employment could be virtually invisible. Employers wouldn’t need to lay any workers off. They could get to their new optimum via reduced hiring and attrition. When the law finally kicked in, you might find zero extra layoffs, because employers saw the writing on the wall and quietly downsize their workforce in advance.
If you sincerely cared about workers’ well-being, of course, it wouldn’t make any difference whether the negative side effects of the minimum wage were blatant or subtle. You’d certainly prefer small but blatant job losses to large but subtle job losses. But what if you’re a ruthless demagogue, pandering to the public’s economic illiteracy in a quest for power? Then you have a clear reason to prefer the subtle to the blatant. If you raise the minimum wage to $15 today and low-skilled unemployment doubles overnight, even the benighted masses might connect the dots. A gradual phase-in is a great insurance policy against a public relations disaster. As long as the minimum wage takes years to kick in, any half-competent demagogue can find dozens of appealing scapegoats for unemployment of low-skilled workers.
The fact that activists’ proposals include phase-in provisions therefore suggests that for all their bluster, they know that negative effects on employment are a serious possibility. If they really cared about low-skilled workers, they’d struggle to figure out the magnitude of the effect. Instead, they cleverly make the disemployment effect of the minimum wage too gradual to detect.
MP: Bryan makes a great point and helps explain why all recent minimum wage hikes to $15 per hour are being phased-in gradually over several years and not raised immediately: Seattle’s $15 per hour minimum wage won’t take effect until 2017, 2018, 2019 or 2021 depending on the size and type of employer, Los Angeles’s $15 per hour minimum wage won’t take full effect until 2020, and San Francisco’s $15 per hour minimum wage won’t be in effect until 2017.
The logic of protectionism leads to an absurd conclusion: complete self-sufficiency at the individual level
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I had a post last week on CD about French economist Bastiat’s use of reductio ad absurdum (reduce to absurdity), a technique he used frequently in the mid-19th century to disprove and discredit the positions of his opponents by taking their unsound arguments to their logical, but often absurd and ridiculous conclusions. In his 1975 book Defending the Undefendable (full text available online here for free via Mises.org) economist Walter Block uses a reductio ad absurdum approach to very effectively expose the major flaw in the position of those who oppose free trade and free trade agreements, and who instead often support protectionism and other restrictions on international trade.
The text below is adapted from Chapter 23 (“The Importer”) of Walter’s excellent book in which he defended “the pimp, prostitute, scab, slumlord, libeler, moneylender, and other scapegoats in the rogues’ gallery of American society.” In the original version of the book in 1975, Walter focused on the aggressive advertising campaign of the International Ladies’ Garment Workers’ Union that was being implemented at that time to promote the struggling domestic garment industry against the rising tide of lower-cost imported clothing. I’ve taken the liberty of updating the text below with more contemporary references (emphasis added).
The position of many Democrats and union organizations like the AFL-CIO is that past trade agreements like NAFTA and now the proposed Trans-Pacific Partnership trade bill cause American jobs to be lost, displaced, and outsourced to countries like Mexico, Panama and Korea. On a superficial level, that argument seems plausible. After all, every toy, motorcycle, T-shirt or tomato that could have been produced domestically, but was instead imported, represents work that could have been performed by Americans. Certainly, this means less employment for American workers than would otherwise be the case. If the argument was limited to this aspect of trade, the case for the restriction, if not prohibition of imports, would be well-made.
The argument, however, is fallacious, and the consequences to which it logically leads are clearly unsound. The premise which opposes free trade and justifies protectionism on the national level also justifies it on the state level. We shall ignore the political impossibility (unconstitutionality) of one state setting up tariffs between it and other states. This is, after all, irrelevant to the economic argument of the anti-free trade advocates like many Democrats and the AFL-CIO. Theoretically, any one state could justify its policy in exactly the same way that a nation can. For example, the state of Montana could bar imports from other states on the grounds that they represent labor which a Montanan could have been given but was not. A “Buy Montana” program would then be in order. It would be just as illogical and unsound as any “Buy American” campaign.
The argument, however, does not end at the state level. It can, with equal justification, be applied to cities. Consider the importation of a baseball glove into the city of Billings, Montana. The production of this item could have created employment for an inhabitant of Billings, but it did not. Rather, it created jobs, say, for the citizens of Roundup, Montana, where it was manufactured. The city fathers of Billings could take the AFL-CIO’s anti-trade position and “patriotically” declare a moratorium on trade between the citizens of their city and the foreign economic aggressors in Roundup. This tariff, like those of the larger political subdivisions, would be designed to save the jobs of the citizens.
But there is no logical reason to halt the process at the city level. The anti-trade thesis can be logically extended to neighborhoods in Billings, or to streets within neighborhoods. “Buy Elm Street” or “Stop exporting jobs to Maple Street” could become rallying cries for the protectionists. Likewise, the inhabitants of any one block on Elm Street could turn on their neighbors on another block along the street. And even there the argument would not stop. We would have to conclude that it applies even to individuals. For clearly, every time an individual makes a purchase, he is forgoing the manufacture of it himself and outsourcing its production. Every time he buys shoes, a pair of pants, a baseball glove, or a flag, he is creating employment opportunities for someone else and, thereby, foreclosing those of his own. Thus the internal logic of the protectionist argument leads to an insistence upon absolute self-sufficiency, to a total economic interest in forgoing trade with all other people, and self-manufacture of all items necessary for well-being.
Clearly, such a view is absurd. The entire fabric of civilization rests upon mutual support, cooperation, and trade between people. To advocate the cessation of all trade is nonsense, and yet it follows ineluctably from the anti-trade and protectionist positions. If the argument for the prohibition or restrictions of trade at the national level is accepted, there is no logical stopping place at the level of the state, the city, the neighborhood, the street, or the block. The only stopping place is the individual, because the individual is the smallest possible unit. Premises which lead ineluctably to an absurd conclusion are themselves absurd. Thus, however convincing the protectionist, anti-trade arguments might seem on the surface, there is something terribly wrong with them.
MP: Even though Walter’s book is now 40 years old, his strong defense of free trade and complete take-down of protectionism above is as fresh and compelling today as it was in 1975; just like Bastiat’s economic wisdom from the mid-1800s is timeless, and remains as relevant today as it was more than 150 years ago.
Q: How convinced are economists as a group of the benefits of free trade in general and the benefits of free trade agreements in particular?
A: Pretty strongly convinced, according to this University of Chicago survey of 42 top economists. In response to the statement “Past major trade deals have benefited most Americans,” 93% of the economic experts agreed (weighted by their confidence on a scale from 1 to 10), and none disagreed (7% were uncertain). Ht/Jon Murphy
Quotation of the day on how free market capitalism has primarily benefited ordinary people, not the rich….
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…. is from Milton and Rose Friedman, writing in Free to Choose (1979):
Industrial progress, mechanical improvement, all of the great wonders of the modern era have meant relatively little to the wealthy. The rich in Ancient Greece would have benefited hardly at all from modern plumbing: running servants replaced running water. Television and radio? The Patricians of Rome could enjoy the leading musicians and actors in their home, could have the leading actors as domestic retainers. Ready-to-wear clothing, supermarkets – all these and many other modern developments would have added little to their life. The great achievements of Western Capitalism have redounded primarily to the benefit of the ordinary person. These achievements have made available to the masses conveniences and amenities that were previously the exclusive prerogative of the rich and powerful.
Martin Feldstein on how GDP accounting underestimates growth and improvements in economic well-being
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In today’s WSJ, Harvard University economics professor Martin Feldstein has an excellent op-ed (“The U.S. Underestimates Growth“) about a recent topic covered in a series of posts on CD — how “the official statistics are missing changes that are lifting American incomes” (see especially the post “Another possible limitation of GDP accounting – it may fail to capture improvements in economic well-being in the Information Age“). Here’s an excerpt of Professor Feldstein’s op-ed (my emphasis):
Today’s pessimists about the economy’s rate of growth are wrong because the official statistics understate the growth of real GDP, of productivity, and of real household incomes. Government statisticians are supposed to measure price inflation and real growth. Which means that, with millions of new and rapidly changing products and services, they are supposed to assess whether $1,000 spent on the goods and services available today provides more “value” or “satisfaction” to American consumers than $1,000 spent a year ago. Even more difficult, they are tasked with estimating exactly how much it costs now to buy the same quantity of “value” or “satisfaction” that $1,000 could buy a year ago.
These tasks are virtually impossible, and the problem begins at the beginning—when an army of shoppers go around the country at the government’s behest to sample the prices of different goods and services. Does a restaurant meal with a higher price tag than a year ago reflect a higher cost for buying the same food and service, or does the higher price reflect better food and better service? Or what combination of the two? Or consider the higher price of a day of hospital care. How much of that higher price reflects improved diagnosis and more effective treatment? And what about valuing all the improved electronic forms of communication and entertainment that fill the daily lives of most people?
In short, there is no way to know how much of each measured price increase reflects quality improvements and how much is a pure price increase. Yet the answers that come out of this process are reflected in the CPI and in the government’s measures of real growth. This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.
The measurement problem is particularly severe for new products. Consider a new drug that improves the quality of life, reducing pain or curing a previously incurable disease. The ability to buy that new product means that a dollar is worth more than it used to be, and that the properly measured level of real GDP is higher. The official method of calculating the price index doesn’t incorporate this new product until total spending on it exceeds some threshold level. It is then added to the government’s price calculations, but only to record whether the cost of the drug goes up or down. The main effect of raising well-being when the drug is introduced is completely ignored. The same is true of other new products.
The result is that the rise in real incomes is underestimated, and the common concern about what appears to be the slow growth of average household incomes is therefore misplaced. Official statistics portray a 10% decline in the real median household income since 2000, fueling economic pessimism. But these low growth estimates fail to reflect the remarkable innovations in everything from health care to Internet services to video entertainment that have made life better during these years, as well as the more modest year-to-year improvements in the quality of products and services.
While changes in officially measured real GDP statistics don’t fully capture increases in Americans’ standard of living, year-to-year fluctuations are still useful as one indicator of business-cycle conditions.
MP: As I concluded in my related post, perhaps all of the discussions about GDP being below potential GDP and fretting about sub-par economic (GDP) growth are really simply a reflection of the fact that GDP is really no longer the best measure of economic performance, economic growth and economic well-being in the Information Age. Professor Feldstein seems to come to the same conclusion.
And here are a few other economic factors that have significantly improved our economic well-being over time that aren’t captured at all in official GDP statistics: a) increased convenience and b) increased selection of products.
Convenience. We can now shop from home using the Internet as a convenient alternative to the much more time-consuming process of physically driving to a store, paying to park in some cases, dealing with crowds of people, waiting in line to pay, etc. According to GDP accounting, $1,000 worth of expenditures on clothes, books, DVDs, wine, food, electronic goods, and footwear counts exactly the same for GDP whether you purchased those items online from the convenience and comfort of your home using websites like Amazon, eBay, Zappos, Lands End and Jos. A Bank or whether you physically visited brick-and-mortar stores to make those purchases. For many consumers today, the economic value of the significant increase in the convenience of shopping from home using the Internet never gets captured, even though $1,000 of goods purchased online must have more economic value than $1,000 of goods purchased in stores because so many of us now make a majority of our purchases online.
Selection. When I look through old Sears catalogs from previous decades like the 1950s, 1960s and 1970s, I’m always impressed by the relative lack of selection for items like household appliances. Especially in the 1950s and 1960s, the selection of appliances like refrigerators, freezers, ovens, ranges, dishwashers, washing machines and dryers was extremely limited – sometimes to fewer than 5 or 6 models, frequently with no choice of color. Today, the Sears website offers more than 400 different ranges, more than 500 different refrigerators, more than 100 washers, more than 200 dryers, and about 50 different freezers. Want a gas grill? Choose from almost 80 different Sears models from $39 to $5,000. The increased selection over time available to consumers for hundreds of other items generates significant economic benefits that are never captured by official GDP statistics.
For transportation, we now have more options than ever before, and those options increase economic well-being without ever necessarily making a contribution to increasing GDP. For local travel, we can now choose between traditional taxis and options that never existed before like Lyft, Uber, Sidecar, Gett (in NYC), Zipcar and Car2Go; and for long-distance travel we have new options available like Megabus, Bolt Bus, Peter Pan, Best Bus, Vamoose, in addition to Amtrak and air travel (there are 123 options daily for travel between DC and NYC by bus or train).
The selection and variety of food and restaurants available today is greater than ever before, there are more than 3,000 breweries now in America, Airbnb and EatWith give us new travel options that never existed, and the list goes on and on.
Bottom Line: Increased convenience and increased selection definitely make our lives better, raise our standard of living, and increase our economic well-being – even though that economic value can’t be measured and therefore won’t ever be captured easily by GDP accounting. I’ll take 1-2% sub-par economic growth measured by real GDP if it means I’ll continue to experience an increase in my economic well-being from the continuing introduction of new products, ongoing increases in the quality of existing products that can’t accurately be measured, continued increases in the selection and variety of products and services available, and increases in convenience that save me time and make consumption easier than before.
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Here are some more thoughts on the AFL-CIO’s questionable methodology used to calculate its annual CEO-to-worker pay ratio (373-to-1 for 2014).
1. Questionable Math for Worker Pay. In its 2014 report, the AFL-CIO reported that the average rank-and-file worker made $16.94 per hour and $35,239 annually in 2013 based on “average worker pay according to Bureau of Labor Statistics data for production and non-supervisory workers.”
But there’s a problem with the AFL-CIO’s calculation as I pointed out here and here. They apparently used the average weekly earnings in 2013 of $677.87 reported by the BLS for production and non-supervisory workers, and simply divided by 40 hours per week to arrive at an hourly wage of $16.94. That’s not correct. The average hourly wage in 2013 for those rank-and-file workers was actually $20.14 (19% higher than the AFL-CIO figure) and the average workweek for those employees was only 33.7 hours.
There were 94,614,000 production and non-supervisory workers in 2013, with a likely mix of some full-time and many part-time workers. But the average workweek of 33.7 hours for those workers reveals that the typical worker in that category is working part-time (below 35 hours per week), and not full-time. As I reported recently, that means that the AFL-CIO is comparing total compensation for CEOs working full time to the cash wages of primarily part-time “rank-and-file workers,” hardly a fair or valid comparison.
In the most recent update of its website, the AFL-CIO reports $36,134 as the annual wages of the average rank-and-file worker in 2014 without any details except to say again that “Average worker pay is according to Bureau of Labor Statistics’ 2014 data for production and nonsupervisory workers.”
But the $36,134 annual pay is based on an average hourly wage of $20.60 and an average workweek of only 33.7 hours. So once again it’s a comparison of total CEO compensation to cash wages only for mostly part-time workers. But you would never know that from the AFL-CIO’s website because the details are never explained, and I guess nobody ever bothered to check the bogus math.
2. Confiscation and Redistribution of CEO Pay. And what’s the whole point of the AFL-CIO’s annual CEO-to-worker pay ratio? The sub-title of the AFL-CIO’s Executive Paywatch website pretty much sums it up: “High paid CEOs and the low wage economy.” The AFL-CIO’s message seems to be that if CEOs weren’t being so generously compensated then the rank-and-file workers would be doing much better. For example:
America is supposed to be the land of opportunity, a country where hard work and playing by the rules would provide working families a middle-class standard of living. But in recent decades, corporate CEOs have been taking a greater share of the economic pie while workers’ wages have stagnated.
The AFL-CIO has completely fallen here for the zero-sum, fixed pie fallacy, one of the most common economic mistakes that falsely assumes that one party can gain only at the expense of another. But let’s assume that there is a “fixed pie of wages” and do some redistribution of CEO compensation to see how that would affect average rank-and-file worker pay.
According to the AFL-CIO, “In 2014, CEOs of the S&P 500 Index companies received, on average, $13.5 million in total compensation according to the AFL-CIO’s analysis of available data.” Note that the exact number of companies is not mentioned, but let’s assume that $13.5 million is the average for all S&P 500 CEOs. As a group, those 500 CEOs received $6.75 billion in compensation last year. If the AFL-CIO could confiscate that entire amount and redistribute $6.75 billion to the current 97,923,000 rank-and-file workers what would they get? An annual increase in pay of $69 for each worker before taxes, or about $1.33 more per week and less than 4 cents per hour. In other words, complete confiscation and redistribution of CEO pay would make almost no difference for the average rank-and-file worker.
The AFL-CIO also compares the starting wage at Walmart of $9 per hour to the $9,323 hourly compensation of Walmart CEO Doug McMillon (based on $19.4 million in annual compensation and a completely unrealistic assumption of a 40-hour workweek for McMillon – what S&P 500 CEO works 40 hour per week?). Walmart has an estimated 600,000 part-time employees in the US, and if McMillon’s compensation were confiscated and distributed to the part-time associates, they would each get about $32 per year extra before tax, or about 62 cents per week and an hourly increase in wages of only 2 cents (assuming a 30-hour week). Again almost no difference at all.
Bottom Line: There might be a number of economic reasons that real wages have stagnated for some rank-and-file workers, but high or rising CEO compensation for some S&P 500 CEOs is completely unrelated (orthogonal) to the starting wages at Walmart for unskilled workers and the average hourly pay of most part-time rank-and-file workers. And here’s something the AFL-CIO won’t report — the average hourly pay for rank-and-file workers increased by 1.9% in 2014, which is almost 50% greater than the 1.3% increase in the average annual salary for all 21,000 CEOs last year (see details here).
The nearly 400-to-1 ratio for CEO-to-worker pay reported by the AFL-CIO for 2014 gets my “Biggest Blindly Accepted Statistical Falsehood of the Year Award.” Well no it’s actually a tie with the gender wage gap myth and the perpetual and incessantly repeated “77 cents on the dollar” statistical falsehood. What’s disappointing is that much of the media seem to blindly accept both of these statistical falsehoods without ever questioning the sloppy and shady methodologies that are used to perpetuate these statistical myths. One exception is this excellent article by IBD’s John Merline (“Do CEOs Make 300 Times What Workers Get? Not Even Close“) who concludes:
What’s not understandable is why the mainstream press keeps repeating the massively inflated 300-to-1 number without noting the statistical legerdemain that produced it.
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Here’s Robert Samuelson writing in today’s Investor’s Business Daily:
To be clear: China’s currency manipulation has been real and harmful to U.S.-based firms and workers. By a variety of estimates, Chinese exports have probably cost 2 million or more American jobs since 2000.
That’s only part of the story, here’s my contribution to telling the rest:
To be clear: China’s currency manipulation has been real and
harmfulbeneficial to U.S.-based firms and workersconsumers who have purchased China’s products at reduced prices thanks to China’s policy of strengthening the dollar. By a variety of estimates, Chinese exports have probably cost 2 million or more American jobs since 2000saved American businesses and consumers billions of dollars and helped create millions of American jobs.
MP: We should think of China’s currency manipulation as a form of foreign aid, and to the direct advantage of millions of U.S. consumers, especially low-income groups, and to the direct advantage of thousands of American companies buying inputs from China. As I concluded before in The American in 2011 (“Why We Should Thank the Chinese Currency Manipulators“): If you wouldn’t object to China sending products to the United States for free, then on what basis would you object to currency “manipulation” that allows you to purchase undervalued Chinese imports at a huge discount and at a great bargain?
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In his recent Forbes article, John Tamny makes some excellent points about “surging lifestyle equality” in America (aka “rising wealth inequality”) and how the Clintons’ wealth results from the political ability to influence the direction of economic resources created in the private sector, but get expropriated by the federal government. Here’s a shortened version of John’s article:
The ‘wealth inequality’ decried by clueless economists and opportunistic politicians has been mis-named. What’s a pejorative is unrelentingly beautiful. The “rising wealth inequality” that reduces economists, pundits and politicians to puddles of emotion should be properly renamed “surging lifestyle equality” with an eye on calming their rage. Put more simply, the inequality that horrifies self-proclaimed deep thinkers is the wondrous process whereby entrepreneurs turn the former luxuries of the rich into everyday items. To be blunt, a world without wealth inequality would be one marked by excessive deprivation.
All of which brings us to the latest news about Bill and Hillary Clinton. According to numerous media accounts the formidable political couple has earned at least $30 million in speaking fees since 2014. The Clintons are maybe who President Obama had in mind when he famously said “You didn’t build that.”
The Clintons are extraordinarily rich not because Bill discovered a cure for cancer, or because Hillary has a knack for resuscitating companies that are on the proverbial deathbed, because both are expert as Ford, Rockefeller and Steve Jobs were at mass producing former baubles of the rich, or even because they were born well. No, the Clintons are rich for having been wise enough to make a profession of politics in what is the richest, most innovative country on earth. Without a hint of hyperbole, the wealth they enjoy is a function of their pull within a federal government that is empowered to tax away trillions on an annual basis. The Clintons are posh and supercilious, but their grand posture is directly attributable to the political class’s ability to plunder the actual wealth of America’s truly productive.
The Clinton’s millions are the result of government force, and those millions rob inequality of its life-enhancing beauty. While rising wealth inequality in the world of free markets is once again a sign of entrepreneurs shrinking the lifestyle gap, Clinton-style inequality is rooted in the political ability to influence the direction of economic resources created by others, but that were expropriated by the federal government.
Hillary Clinton’s decision to make her presidential campaign about the alleged horrors of inequality despite her and Bill’s many millions has her being labeled by many as a hypocrite. What’s most bothersome is that Hillary would bash the very inequality that has made it possible for her and Bill to be prominent global figures, and by extension wildly rich global figures. If not for the immense taxable wealth in the U.S., and the Clintons’ ability to influence its direction around the world, very few would give them the time of day.
In short, the Clintons are nothing without the wealth inequality they claim to disdain. It’s the sole source of their power. The swagger of the world’s foremost political couple was taken from someone else.
Related: According to Bill Gates, “A person making $40,000 a year is better off now than someone making an equivalent salary decades ago because inventions like the Internet boost the quality of life. It’s not quite as negative a picture as a pure GDP look would give you. It doesn’t mean we shouldn’t worry about middle class incomes, but the comparisons overstate the lack of progress.” As a reader commented, Gates must be reading CD!
The only way AFL-CIO can report 400-to-1 ‘CEO-to-worker pay’ ratio is to ignore CEOs of medium, small companies
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As I reported recently on CD, there are a number of statistical problems with the methodology used by the AFL-CIO to calculate its annual “CEO-to-worker pay” ratio, which was 373-to-1 in 2014, up from 331-to-1 in 2013. Obviously, as a federation of 56 trade unions representing 12.5 million active and retired union workers, the AFL-CIO has an incentive to report the highest possible “CEO-to-worker pay” ratio. How to do that? Very easy: a) report the very highest possible estimate of CEO pay available and b) report the very lowest possible estimate of worker pay.
1. Lowest Worker Pay. Even though the AFL-CIO represents union members, it uses average worker pay for all workers, not just union members. For example, to get a 331-to-1 CEO-to-worker pay ratio in 2013, it compared the total compensation of 350 of the highest paid CEOs in the S&P 500 ($11.7 million) to average annual worker pay of $35,239. To calculate that average worker pay, the AFL-CIO used the average hourly wage of $20.14 in 2013 for production and nonsupervisory workers and the average workweek of 33.7 hours for those workers: $20.14 per hour x 33.7 hours per week x 52 weeks = $35,239 annual worker pay. And as I reported here, the AFL-CIO is actually reporting the annual cash wages for part-time workers, not full-time workers (less than 35 hours per week is part-time according to the BLS).
If the AFL-CIO had used the average annual pay for all full-time private workers of $44,617 in 2013, the CEO-to-worker pay ratio would have decreased by about 21% from 331-to-1 to 262-to-1, and if it had used the average annual union pay of $49,400, the ratio would have fallen further to 237-to-1, a decrease of 28.4%.
2. Highest CEO Pay. As I also pointed out in my previous post, the AFL-CIO compares total CEO compensation (base pay plus bonuses, profit-sharing, stock or option awards, etc.) to the average cash wages of workers, and not total worker compensation (including fringe benefits, profit-sharing, retirement/pension, etc.). That comparison of CEO compensation to worker cash pay is another method used by the AFL-CIO to report the highest possible CEO-to-worker pay ratio. Another tactic used by the AFL-CIO is to use only a very small sub-set of only the very highest paid CEOs.
For example, in 2013 the AFL-CIO included only 350 of the highest paid CEOs among the S&P 500 companies, and it reported the average CEO compensation, not the median CEO compensation – another tactic used to report the highest possible CEO pay number. As the chart above shows, the median CEO compensation for all S&P 500 companies in 2013 was $10.1 million (according to Equilar’s “2014 CEO Pay Strategies Report“), which was $1.6 million (and 13.7%) lower than the AFL-CIO’s reported $11.7 million CEO average compensation. Using the median compensation for all S&P 500 CEOs reduces the AFL-CIO’s ratio by more than 13% from 331-to-1 to 287-to-1.
Further, to report the highest possible CEO pay, the AFL-CIO considers only the CEOs of large-cap S&P 500 companies, which are America’s 500 largest, well-established companies with market capitalizations above $5.3 billion. Ignored by the AFL-CIO are the CEOs of America’s S&P 400 Mid-Cap companies (market capitalization of $1.5 billion to $5.9 billion) and 600 S&P Small-Cap companies (market capitalization of $400 million to $1.8 billion). The chart above shows the median CEO salaries and the CEO-to-worker pay ratios for those two groups: $4.9 million median salary and CEO-to-worker pay ratio of 139.5-to-1 (99.4-to-1 for union workers) for the S&P MidCap 400 companies and $2.7 million median salary and ratio of 76.7-to-1 for the S&P SmallCap 600 companies (54.7-to-1 for union workers).
For all 1,500 companies in the S&P 1500 (includes the S&P 500, S&P MidCap 400 and S&P 600 Small Cap indexes) the median CEO salary in 2013 was $4.96 million, and the CEO-to-worker pay ratio was 140-to-1, less than half of the AFL-CIO’s reported ratio of 331-to-1. For the AFL-CIO’s membership, the CEO-to-union worker pay ratio for the S&P 1500 would be only about 100-to-1.
Bottom Line: As the chart above shows, the CEOs of America’s largest companies in the S&P 500 get paid about twice as much on average ($10.1 million) as the CEOs of mid-size companies ($4.91 million), the CEOs of mid-size companies get paid about twice as much as CEOs of small-cap companies ($2.7 million). By only considering a sample of large-cap S&P 500 companies (and not all 500 companies), while ignoring the CEOs of mid-size and small-cap companies, the AFL-CIO can greatly exaggerate its annual CEO-to-worker pay ratio. As I’ve reported previously, if the AFL-CIO considered the average pay of all 21,550 chief executives running companies in America ($216,100 in 2014), the CEO-to-worker pay ratio in 2014 would be 6-to-1 (and 4.3-to-1 for union workers). The only way the AFL-CIO can get an inflated CEO-to-worker pay ratio of almost 400-to-1 (for 2014) is to engage in questionable methodology that compares the average (not the median) total compensation of a tiny group of the country’s very highest-paid CEOs who head America’s largest companies to the cash wages of about 100 million mostly part-time workers. While that shady methodology does generate a lot of sensationalized media attention, it also creates a pretty high “statistical misrepresentation-to-truth ratio.“