The Minimum Wage and Executive Compensation

Republicans have stymied recent efforts by Democrats to increase the nation’s minimum wage above $7.25 per hour by claiming that the resultant higher payroll costs would increase the unemployment rate. They are supported by the fast food industry, which employees a large number of minimum wage workers. There’s even an industry sponsored website devoted to opposing minimum wage hikes. But the vast majority of economic research that’s been done on the potential effects of increasing the minimum wage show the primary result would be to put more money into the hands of lower wage earners, thereby stimulating the economy through increased consumer spending.

History proves that doom and gloom warnings about the effects of a minimum wage increase are overblown. In 1980, when Republican President Ronald Reagan began to implement his destructive trickle-down economics, the federal minimum wage was $3.10 per hour, the equivalent of $8.46 per hour in 2012 inflation-adjusted dollars. Since 2009 the federal hourly minimum wage has been just $7.25, which means its real value has decreased by more than 15% since Reagan took office. So if American businesses could afford to pay a minimum hourly wage in 1980 that was effectively higher than it is today, then why would it cause big problems to raise the current minimum wage, especially considering the increased productivity of modern workers?

Even voters in a conservative, Republican-controlled state like Arizona have recognized that recent increases in the federal minimum wage haven’t been adequate. In 2006 they passed Proposition 202 by a wide margin, which established a state minimum wage above the federal minimum, with annual cost of living increases. It was set at $8.05 per hour in 2015, about 11% higher than the current federal minimum.

At the same time that the value of the minimum wage has been decreasing, corporate executive (CEO) compensation in the U.S. has been dramatically increasing. Since 1978, CEO compensation has increased by 997%, while typical worker pay has increased by only 10.9%.

ceo versus worker pay
Economic Policy Institute

There are, of course, many corporate executives that don’t feel entitled to exorbitant salaries and hold the conventional belief that most profits should be reinvested in their companies. But according to SEC filings reviewed by the AFL-CIO, the chief executives of the nation’s largest companies averaged a record $12.3 million in annual compensation in 2012 – or more than 354 times the average worker. Even if you disagree with the AFL-CIO’s methodology, there are numerous other reports, like the ones done by Equilar and USA Today, which document the enormous recent increases in executive compensation.

Rising Income Inequality in the U.S.

This diversion of profits to corporate executives is a major contributor to the rising income inequality in the U.S. A Democratic-controlled Congress recognized this serious problem in 2010 when it passed the Dodd–Frank Wall Street Reform and Consumer Protection Act in response to financial meltdown of 2008. Dodd-Frank included a provision requiring large public companies to reveal their CEO-to-worker pay ratios. The idea was they would be less likely to give their executives excessive compensation if the amounts had to be made public. But the implementation of this part of the law has faced stiff opposition from the business community. It was only after Obama’s reelection in 2012 that the Securities and Exchange Commission (SEC) finally issued draft rules about how the ratios will be calculated and reported. The SEC’s decision to issue the draft rules passed by a slim majority of just 3 to 2, with the two Republican commissioners voting against it. They called the rules mere political showmanship meant to publicly “shame” CEOs. The final rules will not be go into effect until 2017.

Corporations are defending the recent enormous increases in executive compensation by claiming they must pay top dollar in order to get the best talent. But it’s difficult to believe there aren’t any talented people who would be willing and able to manage a large company for less than $12 million a year. It’s also difficult to believe that any CEO adds that much value to a company.

Raising the federal minimum wage wouldn’t, of course, be a panacea, as the Labor Department reported that only 4.3% of all hourly workers only in the U.S. earned the minimum wage or less in 2013. But it would it stimulate the economy by putting more spending power in the hands of the affected workers, and would also serve to create a general upwards pressure on all wages. The bottom line is that Republican opposition to a minimum wage increase is hypocritical as long as they continue to accept and defend excessive corporate executive compensation.

Update

In November of 2016 Arizona voters overwhelmingly approved Proposition 206 to raise the state’s minimum wage.

In July 2017 the Economic Policy Institute released a follow up study that showed CEO pay remained very high compared to other workers.

They also released an economic snapshot (below) regarding the federal minimum wage.


Liked this post? Follow this blog to get more. 

Leave a Reply

Your email address will not be published. Required fields are marked *