Income Inequality and Redistributive Policies Essay Example for Free

Income Inequality and Redistributive Policies Essay This paper discusses the factors that determine the increase in pay gap between top executives and the average worker. Income inequality has continued to be an economic issue in the United States. The changes in income inequality in the United States have been researched and well documented. The findings reveal an alarming state of affairs concerning income inequality in the country. Most labor economic policies have started to focus on the income inequalities in the country. One of the programs that target this issue is redistribution. For Redistributive Policies to work, it is important to know the factors that contribute to the increase in income gap between the executives and the average workers. Its significance in labor economic policies is vast because of its requirement for mobility as well as heterogeneity in the labor market. It is important to know how the factors established play part in income determination (Piketty Saez, 2003). As will be revealed in the paper, these factors do exist and play a major part in income inequality. Literature analysis The main concepts in the topic of discussion need to be defined. Income is defined as the total of all income components that are showed on tax returns. Income comprises of salaries and wages, pensions, gains from business dealings, capital incomes, rents, and realized capital profits. Income is thus defined as the market income prior to reduction of income taxes. Income is very different from wealth, and the main focus of the paper is income (Piketty Saez, 2003). Available literature defines income inequality in a manner that is completely different from the commonly known inequality, that is, poverty and unfairness. Income inequality refers to the unequal distribution of income among players in a specific economy. This could be income distribution in a particular nation or at the global level. Income inequality metrics seek to give a system of gauging dispersion of income. Income inequality in the economy of the United States is evident in different categories of people. There is income inequality between the executives and the average workers, as in the focus of this paper; there is inequality between men and women and inequality between whites and blacks. Income inequality between the executives and the average workers in the United States is an issue that needs to be handled with the seriousness it deserves. One of the efforts to achieve this is income redistribution (Piketty Saez, 2003). Income redistribution is the reassignment of income from some people to others. Studies reveal that there is concentration of income among the executives, that is, this group tends to earn more that the average workers. Therefore the distribution in this case is from the executives to the average workers. There have been many debates as to the rationale behind redistribution. It is clear that with the increase in income inequality something needs to be done (Piketty Saez, 2003). This will be discussed in a later part of the paper. Statistics to reveal income inequality It is evident from statistics that there is rampant income inequality in the United States. Following the reason of the hard work principle, current executives must work more that the average workers. They also work harder than they used to work forty years ago. As a result, their pay is expected to be higher than that of the average workers and also that it was forty years ago. In the year 2000, the average Chief Executive Officer salary was more than 500 times the salary of the average worker. This is a tremendous increase for in the year 1960 the salary of a Chief Executive Officer was only 40 times that of an average worker (Chingos, 2004). For many other reasons other than hard work, the salary of the executives went up tremendously than corporate gains, while that of the average worker increased in proportion to the rate of inflation. While the salaries of the average workers remained more or less constant they continued working hard as indicated from the results in productivity. The economic inequalities between the executives and the average workers can be observed from a broader scale, as indicated in the rise in pay between income quintiles. Between the year 1979 and 2001, the pay of the top quintile went up by 53 percent, while the pay of the lowest quintile increased by a mere 3 percent (Bebchuk Grinstein, 2005). This is the phenomenon that has marked the economy of the United States; the top quintile though earning more is the one that receives higher pay that the lowest quintile despite the fact that it is the one that earns the least (Kopczuk, Saez Song, 2009). Quite a number of the people who belong to the lowest quintile are the poor. Close to 13% of the United States public, which are about 37 million people are poor. More than a third of this group is, which is about 13 million are young people. Trends in the income, wealth and poverty statistics show an increasing gap among classes. The wealthy are getting wealthier, with the poor becoming poorer. There is an increasing gap between the pay of the executives and that of the average workers and there is no sign that this will change in the near future. This is an argument brought up by the Institute for Policy Studies that has been studying executive income since the year 1994 (Kopczuk, Saez Song, 2009). In the year 2007, the mean ratio between the pay for the Chief Executive Officer and the average worker was 344:1. There was a slight decrease in the average ratio to 319:1. There is a probability that the average ratio will continue to rise. The current estimate is almost hitting 400:1. If there is no remedy in place, there rate will continue to go up with a huge stock option gains by the executive. This is a worrisome state of affairs that should be handled immediately by public policies (Kopczuk, Saez Song, 2009). The public outcry about the income of the executives seems to have gone down in the recent past as a result of rallying of the broader capital market. The focus has shifted from the income to other matters like public health. Cavanagh, who is the director of the Institute for Policy Studies, argues that the income inequality between the directors and the average workers in the United States is a serious matter. He claims that the gap is still very wide, in fact wider than in most other nations worldwide (Chingos, 2004). This is considered a problem in a country that is supposed to be an example of a democracy in the world. The director argues that going back only one generation in the United States, the average ratio in the income between the two groups was 30:1. Based on the factors that are discussed later in the paper, it is not possible for the executives to earn the same amount of income as the average workers. Nevertheless a ratio of more than 300:1 is an exaggeration that should be carefully taken care of. The United States seems to be owned by just a few individuals in the top quintile, with the majority living in poverty. The country seems to be experienced very high rate of income and wealth inequality. The wall street journal reported that the average Chief Executive Officer of a sizeable company earns more than 10 million dollars per annum. This is a vast amount as compared to the 10,000 dollars per annum earned by an average worker (Kopczuk, Saez Song, 2009). Factors that determine the increase in income inequality It is a societal feature that people tend to earn differently. The positions held by people determine the kind of payment they receive due to the fact that they tend to hold varying responsibilities. The importance and complexity of the executive position means that they will obviously receive higher pay that the average workers. For the purpose of providing enough motivation for a wider range of occupation to be occupied, with motivated servants, the society requires to offer varying rewards (Chingos, 2004). Partisan politics The executives are the decision makers in any organization. As a result it is expected that they will always make decisions that are in their favor. Incestuous corporate boards of directors on regular bases approve compensation benefits to the CEOs and other top authorities that are unreasonable. While seated in the board, they only think of their own interests without caring about the hardworking average worker. The average workers have no one to defend their interests and as a result their pay rise increase slowly and after a very long time. This is what has led to the widening in the gap in the gap between the incomes of the two groups. Research reveals that, it is possible for the salary of an average worker to remain constant without increase for a decade (Chingos, 2004). Basic salary While job evaluation is used as the basis for determining pay increase for the workers, this is usually not the case with the executives. The pay increase and compensation for the executives is usually determined by the compensation committee. This is a committee that includes a number or all the members of the board within the organization. The decisions of the pay rise and compensation for the executives has nothing to do with the reports from job evaluation. It is also independent of the data on payment within similar organizations. This therefore means that there is no standard in pay and compensation of executives. There are also no standard rules to govern income and compensation for executives. Basically, income for executives is set to compete with pays of other executives in the market. As a result, the payment is always higher as compared to the salaries of the other workers in the organization. Recent researches reveal that the incomes for the executives within all companies are on the increase. A study of 100 major companies in the united states done by Mercer Human Resource Consulting reveled that the mean sum direct compensation for the CEOs in the studies companies was 4, 419, 300 dollars in the year 2004 (Bebchuk Grinstein, 2005). Executive benefits and privileges In the United States, executives are paid their basic salaries plus other benefits. This is what is together known as the Total Cash Compensation. The executives may also be compensated for their efforts with cash plus shares in the organization, which are most of the times subject to vesting limitations. This is what it means to be provided with long-term incentive. After the expiration of the time referred by the vesting restrictions, the shares are transferred. Vesting can be on the basis of performance, time or both performance and time. The incentives are provided to the executives as a way of motivating them to put more effort in running the company. These are some of the benefits that are not available to the average worker, therefore explaining the difference in their income (Bebchuk Grinstein, 2005). Benefits for the executives are obviously different from those offered to the average workers. The executives are the ones who receive higher fringe benefits, insurance and pension schemes. Most of the executives negotiate high packages during the time of employment. This is mostly tied to their education level, skills and experience. In this case, they are able to collect a lot of money from the company regardless of their performance. Executive privileges are special benefits that they receive. These perquisites are mostly paid to the executives and the top managers of the organization. These may be items like vehicles, membership to clubs, special parking among other amenities. It is common for the United States executives to get perks as part of their overall compensation (Chingos, 2004). Executive bonuses In the basic salary of the executives, most of their pay is not constant, they payment may be entitled to a compensation that varies with their level of performance. The intention of this compensation is a motivating factor for the executives to perform better. For example, there can be a reward for achievement of a particular target. One of the most common variable pay is what is known as executive bonus. This is a kind of compensation that is paid on achievement of some short-term objectives. The compensation is on the bases of any number of performance results. The compensation can be based on the judgment of the board or the amounts of profits or market share gained by the business. Nearly all the companies in the United States offer compensation or bonuses to their executives. This is a benefit that is not enjoyed by average workers in these companies. The Mercer research reveals that the executives of the 100 companies had a mean bonus of 1. 4 million dollars in the year 2004. This bonus is equivalent to 141% of their annual basic salary. This indicates that the bonuses are higher that the pay they receive as a basic salary. In other words, even if the ratio of the basic salary of the executives to that of the average worker was low, the bonuses accounts for the increased level of the income inequality among the two groups. It is evident that with this kind of income, there is no way the income inequality between the two groups can be avoided (Chingos, 2004).