Work, Productivity & Pay
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Work, Productivity and Pay

Wanjiru Njoya, PhD (Cantab.) MA (Oxon.) LLM (Hull) LLB (Nairobi) PCAP (Exeter)
​Fellow of the UK Higher Education Academy

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Large firms, wages and productivity

30/5/2017

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Income inequality is widely considered to be one of the most pressing social problems of our time. There is an intuitive sense that the economic pie ought to be carved up in a fairer way, coupled with the assumption that less for some will result in more for others. Thus we see a tension between  distributive concerns and the productivity goals of corporate law.

​In recent years, public debates about income inequality have emphasized the incidence of ‘high pay’ and specifically high executive pay in large corporations. Everyone who reads the newspapers knows that the wage gap is (apparently) rising. This is bad news for those who are already worried about inequality - they are afraid that if things become too unequal eventually we will end up in French Revolution conditions.
 
The obvious culprits in this situation are large firms, primarily because they employ so many people. Global giants like WalMart and McDonald’s have millions of workers. Even a more modest firm like Amazon has tens of thousands of workers in each country where it operates. Many people want to work for these firms because they like the wages on offer, but the reality is that however good their wage is it won't be as good as the CEO's wage. So there's some inequality right there and the inequality is growing. In observing all this, should we focus exclusively on inequality, or should we also look at the other side of things and ask whether these firms are productive?

​Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution...The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.

Robert Lucas. The Industrial Revolution.
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Some commentators see much to celebrate in the new economy, on the basis that the rising tide raises all boats. From that perspective corporations should be encouraged to do more of what they do best: innovation and profit-making. Conversely, other commentators point out that increased productivity and economic growth is pointless if it is simply creating an ‘economy of exclusion’, where some people get on and others are left behind. 

​Piketty’s Capital is perhaps the best known example of a study directly implicating the corporation and executive pay in contributing to growing income inequality. Atkinson's Inequality is another excellent example of an economic study that considers inequality to be of overriding normative concern. Yet even scholars who are not wedded to egalitarianism may yet arrive at similar policy conclusions about the importance of reducing inequality by taking an instrumental view focusing on the negative effects of inequality on productivity. While Piketty or Atkinson are concerned about ‘fairness’ in an egalitarian sense, instrumental studies of inequality focus on how it affects productivity. One need not be an egalitarian to appreciate that there are clear implications for perceptions of fairness amongst workers, which in turn impacts upon loyalty and trust in the workplace and ultimately on productivity and economic growth. Rising income inequality is also thought to represent a key structural determinant of macroeconomic instability such as that seen after the last global financial crisis, suggesting that there are systemic reasons to be concerned about it. The focus then is on factors such as barriers to market participation and exclusion of the low-waged from labour markets.

In this context the theory has gained increasing credence that one of the ways to reduce income inequality is to constrain wages at the top. Given the public attention currently focused on executive pay in large corporations, rules of corporate governance designed to constrain executive pay therefore have a direct bearing on concerns about income inequality and fair wage policies. There is already a well-established framework of corporate and securities regulations targeting various perceived abuses in executive compensation. Yet rising incomes at the top of the wage bracket have proved to be remarkably resistant to regulation, partly due to the unreliability of shareholder monitoring as a mechanism of pay regulation.

Therefore we still have no better alternative to the factor pricing theory of distribution, in which labour and capital are priced by the market according to demand and supply. 

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