Who's over or underpaid?

Published: September 30th 2011
By Toby Sanger
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We all know that the wages and compensation individuals receive in private competitive markets reflects their productivity, unless pesky unions and government regulations get in the way -- because Economics 101 (and Michael Hlinka) have told us so.

Corporate CEOs are worth every penny their "independent compensation committees" award in compensation and stock options them because they are "creating value" and hedge fund operators are worth the billions they made helping the world learn about the impact of financial crises. Meanwhile, minimum wage workers, union members and public sector workers must all be overpaid because regulations, unions with their monopsony power, accommodating politicians and labour laws have all interfered with the magic of the market.

That's why politicians such Tim Hudak and his confreres want to contract out public services, restrict the powers of arbitrators and weaken labour laws.

The conviction that wages in private markets reflect their marginal productivity is usually just taken as a matter of ideological economic faith: there have been surprising few empirical studies done testing this. Efficiency economic theories actually suggest that wage structures are likely to be overly compressed.

A study just published by the Institute for the Study of Labor -- Are Occupations Paid What They Are Worth? -- that actually examines wages by occupation with productivity data using matched panel data from Belgium, finds the opposite. Instead, they found:

"a clear pattern of significant overpayment at the top ('Managers', 'Professionals'), and underpayment at the bottom of the occupational hierarchy ('Service and sales workers', 'Craft and related trades workers', 'Plant and machine operators', 'Elementary occupations')."

Armine has written recently about how even the IMF, Conference Board are now showing concern about the negative impacts of growing income inequality on a macro economic level. This study shows there's no justification for it on a micro-economic level either.

This article was first posted on The Progressive Economics Forum.