What if we doubled the minimum wage?
by Marshall Brain
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Today's thought question is a simple one: What would happen if we doubled the minimum wage?
Trillions of dollars flow through large American corporations, and executives are making remarkable amounts of money. Executive pay has risen by a factor of 10 in the last 20 years and shows no signs of slowing down [ref, ref, ref]. Meanwhile, the wages of rank and file employees are stagnant. Given all the money available, why is it that companies like Wal-Mart, Home Depot and McDonald's pay their employees so little and give them so few benefits?
Imagine a hypothetical company with 20,100 employees. At the top are 100 executives who pay themselves an average of $4 million per year. The other 20,000 employees make minimum wage -- $5.15 per hour -- for 2,000 hours per year of work. Those executive numbers sound top-heavy, but today they are not. Executive pay truly has been rising at a spectacular rate. For example, when Enron collapsed it had about 20,000 employees. According to the book Pipe Dreams by Robert Bryce:
So in our hypothetical company, we have 100 executives making $400 million per year. We have 20,000 employees making about $200 million per year. If we simply cut the average executive pay from $4 million per year to $2 million per year, we can double the pay of rank and file employees in this company. Could the executives manage to survive on $2 million rather than $4 million? Yes, they could. They could also survive on $1 million a year, or $500,000. Their pay is completely arbitrary. It has risen by a factor on 10 in the last 20 years -- In 1980, these same executives would have been making $400,000 instead of $4 million. A common complaint about doubling the minimum wage is that it is "inflationary." The point of this example is to show that employee wages can be doubled without raising prices at all. Executives are now redistributing wealth from employees to themselves at such a remarkable rate that employee wages have fallen considerably. Simply by reversing this concentration of wealth, employee wages can rise to reasonable levels without changing consumer prices. A Real Company Wal-Mart is the largest employer in the United States and provides a real-world example of the situation. Wal-Mart has 1.3 million "associates". A large portion of these associates are paid hourly, at close to minimum wage. [ref] The next time you go to a Wal-Mart store, talk to the associates. When I go to the Wal-Mart store closest to me in Cary, NC, I am greeted at the door by a friendly person who is at least 50 years old. The associates who work at Wal-Mart are not kids -- they are adults. They have families. They are good, hard-working people from all backgrounds. For the sake of this discussion, assume that Wal-Mart pays one million of its rank and file associates $7.50 an hour right now. These are the employees who work in the stores, stock the shelves, man the cash registers, sweep the floors and so on. Let's say that we changed the following:
Would this cripple the company? To answer that question, you can look at Wal-Mart's financial statements on a site like http://finance.yahoo.com. Here are the quarterly numbers reported by Wal-Mart for 2002:
Quarterly financial results for Wal-Mart [ref]
There are two ways to look at that $4 billion quarterly increase in associate pay:
Let's split the difference. Wal-Mart raises its prices by 3.5 percent, and executive pay and perks are reduced by $2 billion. That means that the price of a can of Chunky Soup at Wal-Mart goes from $1.49 per can to $1.54 per can. Would anyone really care? Several major grocery store chains routinely charge $1.99 or more for a can of Chunky Soup and no one appears to care at all. [a survey of the four major grocery chains in Raleigh, North Carolina found the price of a can of Chunky soup ranging from $1.99 to $2.50 per can. At Target the price was $1.69 per can. At Wal-Mart the price was $1.49 per can.] Now imagine that we did the same thing across the board, doubling the wages at McDonald's, Target, Home Depot, Toys "R" s, etc., etc. If a $500 tax rebate stimulates the economy, imagine what an extra $700 per month plus health benefits plus paid vacation for millions of employees would do for the economy, and for the spirit of our nation. The Rich Club Why are executives making millions of dollars in America while rank and file employee wages push toward minimum wage and no benefits? Why have executive salaries risen by a factor of 10 in the last 20 years while employee wages are stagnant? Why has the real value of the minimum wage been falling? The average CEO of a large corporation now makes between $10 million and $20 million per year. That same trend is increasing all executive compensation. [ref] [ref] Every day, you participate in this concentration of wealth. You wake up in the morning to the sound of your GE clock radio. If you go to the Executive Paywatch system and look it up, you will find that the CEO of GE is concentrating wealth as best he can:
You have only been up an hour, and you have already touched products that send billions of dollars to these CEOs and their executive teams annually. But what choice do you have? You need a clock radio, and you are going to buy it from a corporation. You need a toilet, you need a refrigerator, you need a computer and you need gas in the car. All of the corporations have CEOs, and these CEOs have decided amongst themselves that they will each make tens of millions of dollars every year. Twenty years ago they made a tenth of that -- their salaries are rising that fast.
This is happening for a simple reason. CEOs, executives and board members are all interconnected with one another. The CEO and executives of one company serve on the boards of directors of others. This executive network has an unexpected consequence because it means that the members of the network all have a vested interest in helping each other. The network of wealthy individuals forms a tightly interwoven "rich club," where all of the members have relationships with everyone else in one way or another. This rich club is where exploding executive salaries come from. Here is how the system works. Let's say you are a wealthy individual. You are the CEO of a company, and you sit on three other boards of directors in other corporations. When your salary comes up for a vote at the next board meeting, the board is going to be generous. Why? Because all board members know that when their salaries come up for review, they want you (and the other people in the room) to be generous as well. The rich club creates a gigantic, "I'll scratch your back if you'll scratch mine" web that is working across thousands of people who are all interrelated by their interlocking relationships. It doesn't really matter what the CEO is asking for:
For example, Jack Welch (former CEO of GE), whose recent divorce made public his "perks-for-life retirement deal" from GE, was found to be receiving a $9 million annual pension, a $15 million Manhattan penthouse plus use of corporate jets, helicopters and limos. "After [Welch] cut his deal with GE six years ago, compensation pros were quick to dig his new contract out of SEC documents shareholders rarely scrutinize. Soon CEOs were waving Welch's deal in front of their own boards, demanding similar treatment, pay consultants and corporate directors tell NEWSWEEK. While no CEO admits to mimicking Welch's contract, the executive elite began getting similar deals. IBM's then CEO Lou Gerstner renegotiated his contract to extend his perks for 20 years after retirement. Larry Bossidy, the former Honeywell CEO, cut a perks-for-life deal, which he says is much less generous than Welch's. Emerson Electric's former CEO Charles Knight-who approved Gerstner's deal as an IBM director-got his perks extended 15 years beyond retirement. 'Jack's contract became the gold standard,' says one pay consultant." [ref] Another example comes from Enron. One particularly obscene expenditure by Enron was the purchase of its seventh private jet. Enron's Gulfstream V cost $41.6 million and was purchased in early 2001. At the time, Enron was reporting losses approaching $500 million per quarter. The plane was not necessary -- the company already had six jets. The Gulfstream V, however, has the ability to fly without refueling to Europe, making it an executive status symbol. So the board of directors approved the purchase and Enron bought the plane as the company sped down the tracks toward bankruptcy. The fact that the company was already losing $500 million that quarter did not stop it from wasting another $41 million more on the jet. [ref] Why would Enron's board of directors do that? The board of directors is supposed to be looking after the best interests of the corporation as a whole. But each board member, like most people, is most of all looking after his/her own best interests. His/her own best interests are to say yes to almost anything another executive wants, because then those executives will say yes to the board member when he/she asks for something. In addition, someone who says "no" a lot is not going to last very long in the rich club. This is a system that guarantees that the rich will get richer and richer. Everyone in charge of approving salary increases has a big incentive to say yes to every request. This system explains why executive pay has risen by a factor of 10 in the last 20 years. All the members of the rich club help each other to keep the network running. Even better, the members of the rich club don't have to pay for any of it -- consumers pick up the tab through higher prices, or employees through lower wages. The kind of networking seen in the rich club starts in college. Places like Harvard and Yale bond alumni together into cohesive groups that do each other favors. For example, a graduate from Harvard can call any other Harvard graduate, and the fact that they both went to Harvard virtually guarantees that the called party will pick up the phone and listen to the pitch. Yale graduates are issued a leather-bound alumni directory at graduation to help the process along. "These alumni can provide access to hard-won interviews, 'lobby' for worthy students, and provide as well hands-on information about career opportunities, job openings within the industry, and advice about interviewing (such as commenting on a firm's corporate culture)…. According to London Business School, the typical MBA graduate changes jobs within 24 months. Thus, the alumni network becomes vital in isolating those firms looking to replace senior managers or otherwise hiring mid-career MBA grads." [ref] This kind of networking is also hereditary. Any private college will accept almost all "legacies". If your mother or father went to Harvard, you are likely to get into Harvard automatically through the legacy system. That plugs you right into the rich club. It is affirmative action for rich people. The three problems with this system are obvious:
Points of Wealth When the CEO is making 1,000 or 2,000 times more than most of the employees in the company, there is no way for rational people to justify the imbalance. For example, at a fast food restaurant like McDonald's you have thousands and thousands of people working for minimum wage. Standing on their backs is a small group of people making hundreds or thousands of times more than minimum wage. The CEO is making $15 million a year. There are thousands of executives making millions more. There are key shareholders who make immense amounts of money from the stock dividends. Let's call these people Points of Wealth. The problem with Points of Wealth is that their wealth gives them far more power and influence than a normal person has. Our political and legal systems have aligned themselves with the interests of these well-off individuals in a way that the founding fathers of the United States would find impossible to imagine. Through campaign contributions, $1,000-a-plate fundraising dinners, expensive lawyers and lobbyists, a person of wealth in the United States can gain direct access to the political and legal systems. These systems then respond to their requests, changing laws and policies to benefit the wealthy. The interests and needs of the non-wealthy are abandoned in the process. The question to ask ourselves is this: What is the advantage to society in creating these Points of Wealth? Does anyone benefit from the process? If you have hundreds of thousands of people working for minimum wage at McDonald's and a small group of executives siphoning immense salaries off of their diligence, is anyone better off? Yes, the handful of executives -- the top 10% of the U.S. population -- are better off. They live in god-like opulence. But the other 90% -- do the citizens of the United States gain any benefit from having these super-rich individuals corrupting the political and legal systems with the power that their wealth brings while rank and file employees live in near poverty? I would like to suggest that the answer to this question is, "no". I would like to suggest that it is time for We, The People, to recognize what is happening and demand an equitable distribution of the wealth of this nation. The United States is looking more and more like a third world nation in many respects. We have an immensely wealthy and powerful elite class and tens of millions of people living in or near poverty. One way to handle the current imbalance would be to double or triple the minimum wage. However, in an economy where the number of employees is shrinking because of automation and robots, this approach has problems. We could also institute a maximum wage. Another way is to heavily tax executives and shareholders. In other words, we actively reverse the concentration of wealth in this nation, instead of letting it accelerate. Those taxes would not go to the government, but instead flow to every American citizen through a central account. In this way, every citizen shares in the wealth of the nation.
© Copyright 2003 by Marshall Brain. All rights reserved. |
