Would you rather work for Apple?

 

Apple Corp. Headquarters

The common wisdom in American political debate is that CEOs make hundreds of times more than their workers --  331 times according to the AFL-CIO ($11.7 million for the CEO vs. $35,293 for the average worker). And that this inequality is due to evil, greedy, capitalist CEOs being awarded outsized compensation packages by their cronies on boards of directors.

But there are a couple of things going on here which may require a re-think.

There is one small issue with the $11.7 million comparison. One must cherry-pick the CEOs to get such enormous earnings (the AFL-CIO selected the 350 most highly paid CEOs to get this number). If we use Bureau of Labor Statistics data for all firms, the average earnings of all CEOs (approx. 250,000 of them) is about $175,000. This is a ratio of roughly five times the average worker, a number that more closely tracks the truth of mid-sized manufacturing firms and plumbing supply businesses and the majority of Americans.

But there has indisputably been a growing inequity in wages of the middle class vs. the top one percent. Comparing the thirty year period from 1982 to 2012, we see the middle of the income distribution increase by 20 percent. But in the same period, the top one percent of workers saw their incomes rise by 94 percent.

Many attribute this growing divide to the growth of CEO and executive compensation.

But in a recent study, “Firming Up Inequality,” four economists from the University of Minnesota, Stanford University, and the Social Security Administration offer an explanation that is breathtaking in its simplicity.

The mistake we are making, they say, is to compare CEO pay to all American workers. Instead, they suggest comparing CEO pay only to the firm that each CEO heads. For instance, the income of Craig Manear, CEO of Home Depot, should be compared only to Home Depot workers. And the compensation of Tim Cook, CEO of Apple, contrasted only with his Apple colleagues.

Working from a Social Security Administration dataset, they were able to track the total compensation of all workers, and, more importantly, tie them to the companies for whom they toiled.

Contrary to the common assertion of growing inequality, the authors state that “we find strong evidence that within-firm pay inequality has remained mostly flat over the past three decades.”

Mostly flat? How to explain this?

First, the study does recognize that inequality has increased (20 percent vs. 94 percent income growth as stated earlier). But they show that this disparity occurs between companies, not between all executives versus all workers.

Here is an example. Say it is the year 1920. You work for a struggling buggy manufacturer while your brother is employed by a burgeoning Ford Motor Company. He makes more than you do.

Ford is taking the transportation market by storm and buggies are quickly becoming a curiosity. The average earnings of all employees at Ford is greater than those at your buggy company because Ford is making massive profits. A new technology is driving an increase in wage inequality, not between CEOs and workers, but between Ford workers and buggy makers.

In our current era, the past 30 years have seen an enormous growth in high technology firms. There is a new, information  economy and an old economy. Information economy firms, in aggregate, are growing rapidly and generating lots of profit. Old economy firms are plodding along, growth and profits humble. Compensation at the new economy firms is much greater than at the old economy firms. The average Apple employee makes much more than the average Pep Boys worker, especially when considering stock options. And this gap has been growing for three decades.

In this coming political season, which will be rife with populist cries for income equality, keep one simple question in mind.

In order to achieve it, would you be willing to give up your iPhone and say goodbye to Google?