Is the Wage Gap a Red Herring?

The release yesterday by the Labor Department of data showing that the top 10% of wage earners experienced a 7% growth in their wage levels during the last 11 quarters while those in the bottom 10% experienced only a 2.5% growth in wages has generated a firestorm of controversy centered on the proposition that income inequality needs to be reversed. The data play into the hands of the Obama administration and its quest for a higher tax rate to be imposed on the “wealthy.”

Income inequality is an unintended consequence, and in fact a good unintended consequence, of America's movement away from a manufacturing-based economy to become a knowledge and service-based economy. Pining back to the good old days in the 1950s when CEO compensation was closer to the wages of the worker on the factory floor ignores the technological and scientific progress our society has achieved in the past half-century. The $1 billion transaction between Facebook and Instagram, a less than two year old company with 10 employees, is representative of the huge values that CEOs can bring to companies in the modern world. Each of the two founders of Instagram will become centimillionaires as a result of the transaction. Facebook is paying this exorbitant sum because it views the creators of Instagram are worth every penny. Likewise people whose lives are saved by skilled surgeons, shareholders of successful corporations, and others directly or indirectly paying top dollars for highly skilled providers don't object because they think top talent is worth every penny. This is where the wage gap comes from: top performers demand top salaries. No one objected to the Denver Broncos paying Peyton Manning $96 million to play football for five years why then do they object when a doctor who went to school for over 20 years and who graduated with $400,000 in debt earns a lot more than the lowest paid worker?

  

Unintended consequences crop up everywhere. Sometimes they crop up mysteriously and we don't even recognize them when they occur. That a widening wage gap is an unintended consequence of an economy transitioning to a modern platform may surprise some but it has been documented before. An early discussion of this phenomenon can be found in The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us by Robert H. Frank and Philip J. Cook. It is a great book worth reading at a time like this.

Harlan Platt's blog can be found that harlanplatt.com.

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