"Paid-what-you’re-worth" Is a Dangerous Myth
A fundamentally misleading meritocracy myth.
By Robert Reich
March 22, 2014 "Information
Clearing House -
often assumed that people are paid what they’re
worth. According to this logic, minimum wage
workers aren’t worth more than the $7.25 an hour
they now receive. If they were worth more,
they’d earn more. Any attempt to force employers
to pay them more will only kill jobs.
to this same logic, CEOs of big companies are
worth their giant compensation packages, now
averaging 300 times pay of the typical American
worker. They must be worth it or they wouldn’t
be paid this much. Any attempt to limit their
pay is fruitless because their pay will only
take some other form.
"Paid-what-you’re-worth" is a dangerous myth.
years ago, when General Motors was the largest
employer in America, the typical GM worker got
paid $35 an hour in today’s dollars. Today,
America’s largest employer is Walmart, and the
typical Walmart workers earns $8.80 an hour.
this mean the typical GM employee a half-century
ago was worth four times what today’s typical
Walmart employee is worth? Not at all. Yes, that
GM worker helped produce cars rather than retail
sales. But he wasn’t much better educated or
even that much more productive. He often hadn’t
graduated from high school. And he worked on a
slow-moving assembly line. Today’s Walmart
worker is surrounded by digital gadgets — mobile
inventory controls, instant checkout devices,
retail search engines — making him or her quite
real difference is the GM worker a half-century
ago had a strong union behind him that summoned
the collective bargaining power of all
autoworkers to get a substantial share of
company revenues for its members. And because
more than a third of workers across America
belonged to a labor union, the bargains those
unions struck with employers raised the wages
and benefits of non-unionized workers as well.
Non-union firms knew they’d be unionized if they
didn’t come close to matching the union
Walmart workers don’t have a union to negotiate
a better deal. They’re on their own. And because
fewer than 7 percent of today’s private-sector
workers are unionized, non-union employers
across America don’t have to match union
contracts. This puts unionized firms at a
competitive disadvantage. The result has been a
race to the bottom.
same token, today’s CEOs don’t rake in 300 times
the pay of average workers because they’re
“worth” it. They get these humongous pay
packages because they appoint the compensation
committees on their boards that decide executive
pay. Or their boards don’t want to be seen by
investors as having hired a “second-string” CEO
who’s paid less than the CEOs of their major
competitors. Either way, the result has been a
race to the top.
still believe people are paid what they’re
worth, take a look at Wall Street bonuses. Last
year’s average bonus was up 15 percent over the
year before, to more than $164,000. It was the
largest average Wall Street bonus since the 2008
financial crisis and the third highest on
according to New York’s state comptroller.
Remember, we’re talking bonuses, above and
told, the Street paid out a whopping $26.7
billion in bonuses last year.
Wall Street bankers really worth it? Not if you
figure in the hidden subsidy flowing to the big
Wall Street banks that ever since the bailout of
2008 have been considered too big to fail.
who park their savings in these banks accept a
lower interest rate on deposits or loans than
they require from America’s smaller banks.
That’s because smaller banks are riskier places
to park money. Unlike the big banks, the smaller
ones won’t be bailed out if they get into
hidden subsidy gives Wall Street banks a
competitive advantage over the smaller banks,
which means Wall Street makes more money. And as
their profits grow, the big banks keep getting
large is this hidden subsidy? Two researchers,
Kenichi Ueda of the International Monetary Fund
and Beatrice Weder di Mauro of the University of
have calculated it’s about eight tenths of a
may not sound like much but multiply it by the
total amount of money parked in the ten biggest
Wall Street banks and you get a huge amount —
$83 billion a year.
that the Street paid out $26.7 billion in
bonuses last year. You don’t have to be a rocket
scientist or even a Wall Street banker to see
that the hidden subsidy the Wall Street banks
enjoy because they’re too big to fail is about
three times what Wall Street paid out in
the subsidy, no bonus pool.
way, the lion’s share of that subsidy ($64
billion a year) goes to the top five banks —
JPMorgan, Bank of America, Citigroup, Wells
Fargo. and Goldman Sachs. This amount just about
equals these banks’ typical annual profits. In
other words, take away the subsidy and not only
does the bonus pool disappear, but so do all the
reason Wall Street bankers got fat paychecks
plus a total of $26.7 billion in bonuses last
year wasn’t because they worked so much harder
or were so much more clever or insightful than
most other Americans. They cleaned up because
they happen to work in institutions — big Wall
Street banks — that hold a privileged place in
the American political economy.
why, exactly, do these institutions continue to
have such privileges? Why hasn’t Congress used
the antitrust laws to cut them down to size so
they’re not too big to fail, or at least taxed
away their hidden subsidy (which, after all,
results from their taxpayer-financed bailout)?
it’s because Wall Street also accounts for a
large proportion of campaign donations to major
candidates for Congress and the presidency of
America’s low-wage workers don’t have privileged
positions. They work very hard — many holding
down two or more jobs. But they can’t afford to
make major campaign contributions and they have
no political clout.
According to the
Institute for Policy Studies, the $26.7
billion of bonuses Wall Street banks paid out
last year would be enough to more than double
the pay of every one of America’s 1,085,000
full-time minimum wage workers.
remainder of the $83 billion of hidden subsidy
going to those same banks would almost be enough
to double what the government now provides
low-wage workers in the form of wage subsidies
under the Earned Income Tax Credit.
don’t expect Congress to make these sorts of
adjustments any time soon.
“paid-what-your-worth” argument is fundamentally
misleading because it ignores power, overlooks
institutions, and disregards politics. As such,
it lures the unsuspecting into thinking nothing
whatever should be done to change what people
are paid, because nothing can be done.