Income inequality has been in the news lately, notably with Barack Obama’s pitch to raise the minimum wage. The statistics are kind of ugly. Some people get paid a fortune while most of us do not.
People can differ when comparing wages across fields. In October I was at Korean BBQ restaurant in Manhattan sitting across from Venus Williams. One of my companions said later “I don’t see why she gets paid so much to hit a tennis ball. My friend is a cancer researcher doing much more worthwhile work and he doesn’t get paid a lot.” My response was that people dropped dead every day from cancer and therefore his friend wasn’t doing an obviously great job. Venus Williams, by contrast, inspired tens of millions of people all over the planet as to what were the limits of human capabilities.
What about within a field, though? I have taken over all of the shopping and cooking in our apartment since our baby was born (1.5 weeks ago). In addition to making the inconvenience of pregnancy and the pain of childbirth seem insignificant, the results of my kitchen experiments I am sure are convincing the rest of the household that the chef of a Michelin-starred restaurant should be earning at least 100X what I might earn in the same field.
Consider also writing. In theory this is something that nearly 100 percent of Americans learn how to do. Yet some people cannot put together a single grammatical sentence while others can write a complete bestselling novel. It doesn’t seem unreasonable that the minimum wage is too high for a writer whose work is disorganized and needs thousands of dollars worth of copy-editing and at the same time that Stephen King might earn $20 million per year (source: Forbes).
In fact, considered in this light we would expect tremendous income inequality in any field except those where productivity is fixed (assembly line) or irrelevant (government).
So why are we continually surprised and, in some cases offended, that people earn different amounts? Is it because of people who get ahead seemingly unjustly, e.g., Bob Nardelli collecting hundreds of millions from Home Depot shareholders while earning a place in the “Worst American CEOs of All Time”? Aside from my friend, who is more passionate about cancer researcher compensation, most Americans seem to think that it is fair for sports stars to earn a lot. Is that because, absent doping, it is obvious that the sports star reached the top through fair competition?
[Separately, it might be worth looking at what politicians are proposing. As a remedy for income inequality, Obama suggests in his December 4, 2013 speech "strong application of anti-discrimination laws" and cites the figures that "women still make 77 cents on the dollar compared to men." Given that government and government contracting is now nearly 50 percent of the economy, how can this be the result of sex discrimination unless the government itself is discriminating? Does it make sense for the CEO of the largest employer in the United States to say "Employers nationwide have to stop discriminating"? Why hasn't the government snapped up all of these highly qualified underpaid women (this would roughly double their compensation (see this study))?
Obama's next solution is "immigration reform" but immigration is a huge contributor to income inequality since a person who is new to the U.S. and may not speak English is going to earn less than a native-born citizen.
Obama then decries "disparities in education" but generally politicians like Obama fight against school vouchers that would allow poorer Americans to send their children to the private schools that are favored by wealthier Americans. Obama says that "obesity" among the poor contributes to income inequality but the New York Times reports that the USDA encourages industrial food companies to cram more cheese into everything. Why wouldn't Obama use his executive authority to shut this down instead of decrying obesity? Obama attacks "absent fathers" without mentioning that a lot of state governments encourage this by making divorce and child support lawsuits highly lucrative for mothers (see "Child Support Guidelines: The Good, the Bad, and the Ugly" by Brinig and Allen for how some states encourage divorce). Obama complains about "isolation from community groups" without mentioning that higher tax rates and a bigger government will necessarily crowd out community groups. When the government is providing housing, food, health care, etc. to the poor there is less of a role for a community group to play. (This may be why Bill Gates and Warren Buffett, for example, concentrate their charitable efforts outside the U.S.)
Obama argues that a higher minimum wage will not eliminate jobs or raise costs to consumers. It will be truly a free lunch. But maybe there is a third possible consequence: it will eliminate poorly skilled Americans from the work force in favor of additional immigrants. As I noted an August 2010 posting, the cost of a poorly skilled person in a factory or office is now much higher than it was. Add that to a high minimum wage and an employer will simply fire poorly skilled Americans and learn more heavily on the H-1B program. So there can be the same number of jobs and roughly the same costs to consumers, as President Obama says, but more Americans on Welfare and more immigrants working.
Obama says "I challenged CEOs from some of America’s best companies to give these [long-term unemployed] Americans a fair shot.” Yet, as noted above, Obama himself is the CEO of America’s largest employer. Why doesn’t he hire these folks? The government spends huge quantities of taxpayer dollars recruiting young people fresh out of college. Why not shut that down and hire folks who just graduated from 99 weeks of Xbox? The government provides excellent jobs in air traffic control (more than $200,000 per year in total comp) and trains people for those jobs. Currently the government discriminates against anyone over age 30 by flatly refusing to hire them (FAA policy). Obama could adjust this regulation to allow 35-year-olds who’ve been unemployed for at least two years to apply.]