Monday, November 2, 2015

As Bad as You Think Inequality Is, It's Worse!

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Please take a moment to write down the answers to two basic questions:

  • How much do you think the CEO of a large corporation makes in a year, on average?
  • How much do you think an entry-level factory worker earns in a year, on average?
Your answers allow for the construction of an important statistic about inequality – the wage-gap ratio.

For example, let's say your answer is that the typical CEO makes about $500,000 per year, while the factory worker earns about $25,000 per year. That gives us a wage-gap ratio of 20 to 1 – that is, for every one dollar earned by the worker, the CEO earns $20 (500,000/25,000 = 20/1).

If you said $1 million for the CEO and $25,000 for the factory worker, then the ratio jumps to 40 to 1.

What ratio did you come up with?

How Americans view the wage gap

These same two questions were asked of more than 50,000 people around the world, of whom 1,581 were Americans of all stripes. (The data comes from the International Social Survey Programme: Social Inequality IV-ISSP 2009 on the website Gesis.)

It turns out that the median American response – that is, the response that is exactly in the middle of survey results from Americans – estimated that a CEO of a large company earned about $900,000 per year and that the average factory worker earned about $25,000. That makes for a wage-gap ratio of 36 to 1.

But how close are these estimates to reality? Not very.

The chart below gives us a pretty good estimate of the growing gap between total compensation for the top 100 CEOs and the pay of a typical worker. (The number for workers’ pay was derived by using the average wages of production or nonsupervisory workers, which includes workers in the service sector as well as other private industry sectors.)

In 1970, for every dollar earned by the average worker, the top 100 CEOs earned on average $45.  By 2013 the ratio had jumped to $829 to $1, which is 20 times greater that what the typical American in the survey guessed.

More amazing still is that on average Americans think CEOs of large companies receive about $900,000 per year in compensation, when in reality they receive nearly $30,000,000.

It's as if our perception of the income gap was frozen in 1970. We just have not caught up with the realities of runaway inequality.

What do we think the wage gap should be?

Let's try these two questions again. But this time, let's come up with what we think should be the fair and just compensation for CEOs of large corporations and for unskilled factory workers.

  • How much do you think the CEO of a large corporation should earn per year?
  • How much do you think an entry-level factory worker should earn per year?
Please take a moment to jot down your answers.

Now let's go back to the survey information to see how the typical American answered these same questions.

This time it turns out that Americans’ median response – the one smack in the middle of all the responses – is that a CEO of a large corporation should earn about $200,000 a year and that an unskilled factory worker should earn about $30,000. This produces a wage-gap ratio of about 7 to 1.

Let's pause for a moment to consider how jarring this result is. The actual wage gap between a CEO and the average unskilled worker is about 830 to 1. Yet Americans believe it should be only 7 to 1. This is an enormous difference.

It suggests that if the typical American knew the real numbers, they would be outraged by this glaring example of runaway inequality.

Do our estimates vary by political affiliation or educational level?

The survey also asks questions about political affiliation so that we can see whether those who call themselves "Strong Democrats" have significantly different beliefs than those who call themselves "Strong Republicans." We can also see how the responses vary between people who didn't finish high school and those who have graduate degrees.

Remarkably, the responses hardly vary at all.  All of us, on the right and the left – high school dropouts and PhDs  – have two things in common: 1) We all grossly underestimate the size of the wage gap; and 2) We all want a much, much smaller wage gap.

As the chart above shows, Strong Democrats estimate that the actual ratio between the pay of a CEO of a large corporation and an unskilled factory worker was about 36 to 1. Strong Republicans said it was 40 to 1. Not much of a difference.

When it comes to offering opinions about what the wage gap should be, the Strong Democrats thought 5 to 1 was about right, while the Strong Republicans thought it should be about 12 to 1. The two political extremes obviously are far closer to each other than to the current reality of 829 to 1.

And how much did the responses vary based on people’s educational attainment? Again, not much. Those who didn't finish high school thought the actual gap was 60 to 1, while those with graduate degrees thought it was about 40 to 1 (both compared to the reality of 829 to 1).

Those who didn't complete high school thought the ideal pay gap should be about 5 to 1, while those with graduate degrees thought it should be 12 to 1. These ratios are identical to those offered by the Strong Democrats and Strong Republicans.

When it comes to our ignorance of the pay gap, there are no blue states, no red states; only misinformed states of mind.

Why are we so blind to runaway economic inequality?

Most of us have no idea that our golden land of opportunity is the runaway leader among developed nations when it comes to inequality (see chart below). Of course, this runs completely counter to the American Dream, that persistent belief that America is the fairest nation of them all– the most just and upwardly mobile country in history.

That core belief about America’s superiority seems to make it hard for us to take in this contradictory information. As social scientists have established, we tend to tune out information that challenges our deep-seated beliefs. In this case, absorbing this new data is just too jarring to our long-held sense of national identity.

Our misreading of inequality also may be a legacy of the post-World War II economic boom. During that time, our working class had the highest global standard of living in the world, with ever increasing yearly real wages.

From the New Deal through  the Cold War (1933-1990), it was American policy to boost job and income levels as much as possible to make sure our workers and middle class were “the envy of the world.” That’s a half century of rising prosperity for working people. Also during this period, income taxes on the wealthy were extremely high, more than 90 percent for people at the highest income bracket during World War II and the 1950s. As a result, the top one percent, while living extremely well, saw their share of total U.S. wealth decline.

So it’s little wonder that the massive baby boom generation grew up with both the ideal and the reality of relative equality – at least for Caucasians. Of course, there were wealthy people all over America even then, but life was getting better and better for the vast majority of Americans.

It’s seems we’re still living with this cultural hangover, clinging to a societal self-image from yesteryear.

Although runaway inequality is our new economic reality, many of us still look in the mirror and see the fairest of them all looking back at us.

Both political parties refuse to address inequality

Perhaps the biggest reason we are so misinformed is that it is not in the interests of our political parties for us to see the truth. Neither political party has addressed rising inequality in a meaningful way. Yes, the Democrats tend to support modest rises in the minimum wage that do make a difference to those stuck in the lowest-paying jobs. But they won't go near the revolutionary idea of placing a legal limit on what the CEO/worker pay gap should be. (Might the Sanders revolt change the Democrats?)

Why don’t our politicians propose to limit the CEO/worker pay gap to, let’s say, 12 to 1, a ratio that that even Strong Republicans and the well-educated think would be fair and just?

Perhaps because they live in fear of a different revolution – a massive revolt from their elite corporate donors, who wouldn't dream of earning so little. In fact, the elite establishment – in finance, the corporate world, the higher levels of government, academia and the media – have no intention of limiting their incomes, no matter what the public believes to be just and fair.

Here lies the very essence of class struggle between the 99 percent and 1 percent, and neither party wants any part of it.

What will it take to wake us up to inequality?

The good news is that Americans of all genders, shades, incomes, education levels and politics think on average that the wage gap should be about 7 to 1, not 829 to one. That's a pretty good place to start. Imagine if the only real economic debate was between the Strong Democrats who thought a fair wage gap should be 5 to 1 versus the Strong Republicans who thought it should be 12 to 1. A broad movement for economic justice should be able to build on this shared sense of basic fairness. It’s light years ahead of what elites expect and feel is their due.

For about six months, Occupy Wall Street touched this nerve and put inequality on the agenda. "We are the 99 percent" became the national anthem for many Americans. For the first time in a generation, the country was talking about the gap between super-rich financiers and the rest of us.

Roughly at the same time, the Tea Party emerged with a different message. They also sensed that something was profoundly wrong. But for them the problem was (and is) big government, not inequality. They  and their political allies tend to blame inequality on low-income families themselves (the “takers”), while heaping praise on the wealthy (the "makers”).

Others, including some liberals, blame inequality on new technologies that require skills workers don’t have. The implication is that those on the bottom could close the wage gap if  they could just get that college degree or advanced skill. This self-help message resonates with most Americans, and access to (free, high-quality) education would certainly help.

But it will take a different kind of education to reduce the wage gap.  We no longer have 900 Occupy encampments around the world to remind everyone that inequality is our new way of life. But each day millions of Americans face the stark reality of trying to survive on low pay and porous benefits, and pressure for increasing wages and benefits is growing. And so is the level of anger and frustration.

We need to relearn the skills of building a mass movement. That includes educating ourselves about the realities of growing economic inequality. Only then can we break through the faulty self-image of America that is crippling us.

Spread the word: We are the most unequal society in the developed world, and we can change that.

Les Leopold is the director of the Labor Institute in New York. His latest book is Runaway Inequality: An Activist's Guide to Economic Justice [3] (Chelsea Green, 2015). For bulk orders contact him at [4].

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