Minnesota’s Economic News — W/E 9/24/21
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I had to check my calendar on Monday when I read an article titled ‘Minnesota’s richest CEOs make way more than their workers (and you)‘. Was it April 1st?
Alas, there is still much winter to come, it was just another day at City Pages.
The article starts by noting, approvingly, the recent decision by the Minnesota Supreme Court to uphold Minneapolis’ $15 an hour minimum wage law. I’ve written previously in support of the authority for localities to set their own minimum wage rates – or none – whilst opposing such laws themselves.
But City Pages goes on to say:
That means a lot for a city beset with soaring rents and scarce housing, and where about 20 percent of residents live in poverty.
Then the article goes off the deep end.
So, that’s the 20 percent. How about the 1 percent?
The Minnesota Reformer did the tedious and depressing work of sorting through Minnesota’s Fortune 500 companies and figuring out how much CEOs made last year compared to their average workers. Guess what? They make a lot more.
It goes on to list various Minnesota based CEOs, their pay packets, and the pay of their median employee. The entirely unsurprising finding is that CEOs make a lot more money than the average employee.
What we are not told is why that matters (neither are we told why it matters that CHS has “mostly white guys in charge“). Sure, these folks earn a lot of money and the amount they earn has increased in recent years. But a 2008 paper by economists Xavier Gabaix and Augustin Landier found that:
…the sixfold increase of U.S. CEO pay between 1980 and 2003 can be fully attributed to the sixfold increase in market capitalization of large companies during that period.
A 2012 study by economist Steven N. Kaplan found that:
While average CEO pay increased substantially through the 1990s, it has declined since then. CEO pay levels relative to other highly paid groups today are comparable to their average levels in the early 1990s although they remain above their long-term historical average. The ratio of large-company CEO pay to firm market value is roughly similar to its level in the late-1970s and lower than its pre-1960s levels. These patterns suggest that similar forces, likely technology and scale, have played a meaningful role in driving CEO pay and the pay of others with top incomes. With regard to performance, CEOs are paid for performance and penalized for poor performance. Finally, boards do monitor CEOs. The rate of CEO turnover has increased in the 2000s compared to the 1980s and 1990s, and is significantly tied to poor stock performance. While corporate governance failures and pay outliers as well as the very high average pay levels relative to the typical household undoubtedly have contributed to the common perceptions, a meaningful part of CEO pay appears to be market determined and boards do appear to monitor their CEOs. Consistent with that, top executive pay policies at over 98% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd-Frank mandated Say-On-Pay votes in 2011.
There is no consideration of any of this in the article.
But only now do we reach the summit of silliness:
Feel free to celebrate Minnesota’s victory in the battle for minimum wage. Then consider whether it’s time to start talking about a maximum one.
OK, lets consider it.
OK, I’m done considering it. No, it isn’t time for the government to start dictating what people can earn. Such an idea is not only economically illiterate, it is also noxiously illiberal (in the economic sense).
John Phelan is an economist at the Center of the American Experiment.