Poverty and Inequality
Question 3
- a)
Piketty disbelieves the conventional theory when it comes to the earnings of the top 1% of labor income earners because it does not conform to the essence of the marginal product of labor (Piketty & Goldhammer, 2014). The conventional theory asserts that the output realized from workers’ effort determines the wages. Firms will examine their wage rate and increase it accordingly depending on the marginal revenue productivity theory. Consequently, in allocating wages, the effect of every portfolio to the generation of revenue is considered to ensure fairness in the wage structure (Piketty & Goldhammer, 2014). According to Piketty, this has not been the case. He uses empirical data on the trends of wealth and income as represented in the Kuznets curve for shares of both the top 1%- and 10%-income earners (Piketty & Goldhammer, 2014). The data shows extremely high share values for the period before the First World War, then drops thereafter until the 1970/80s. From the 1980s, the salaries of the top 1% begin to rise sharply while those of the other 99% fails to change (Piketty & Goldhammer, 2014). Piketty argues that this increase in salaries is not uniform as expected of the conventional theory, hence his reason for disproving it.
- b)
Piketty’s supermanagers theory deviates from the conventional theory by indicating that rather than create fairness in the wage structure and promote equality in income, the conventional theory has resulted in the existence of top executives that earn extremely higher salaries. The proposal that the supermanagers theory makes as a cure for this anomaly in the conventional theory is to increase taxes in the upper wage structure (Piketty & Goldhammer, 2014). This will reduce the net salaries that the top executives earn. Piketty’s proposal does not propose relief to the higher population of workers earning low wages. Companies can increase the gross salaries that they pay to the top executives to offset the net effect of the income tax on the top earners (Piketty & Goldhammer, 2014). This would mean that equality in the wage structure is still not achieved. The approach that the conventional theory would take in this case is to revise the wage structure and provide wages according to the marginal productivity of each employee (Hudson & Tribe, 2016). The difference in the two theories is both on the proposed solutions and on the applicability of the wage structure.
- c)
The supermanagers’ theory is not a convincing account of rising labor income inequality. There are insightful comments that the theory makes on the excessive executive compensation, such as the fact that the vast majority of the top 0.1% of the top earners in the global economy between 2000 and 2010 were top managers (Piketty & Goldhammer, 2014). Other groups of earners within the top earners’ bracket were artists, actors, and athletes. Piketty also mentions that this latter group only accounts for 5% of the entire top earners. Given these statistics, Piketty argues that income inequality in the United States is not a result of an increase in the number of superstars, but because of the existence of supermanagers who are highly paid (Piketty & Goldhammer, 2014). The reason that Piketty provides for the explosion in compensation of top employees is variations in the marginal tax rate. The marginal tax rate refers to the tax that is paid by people and businesses on their next dollar of income. The effect of this is that as the income of individuals increases, so does the marginal tax rate (Piketty & Goldhammer, 2014). In the United States and other economies, the marginal tax rate is rarely revised, and the United States has not revised its marginal tax rate for decades. This means that the net tax that people pay varies depending on the ability of a person’s income to offset the net effect of the tax. The tax brackets that were placed for top earners are not as effective in ensuring tax equity.
However, Piketty’s explanation fails to consider the changes in organizational culture in most companies. The shareholders often decide the salaries of the top executives, and in most cases, the proposals are that the top executives must have part of their salaries come from shares allocated to them from the company. The aim of this culture by companies is to provide motivation to top executives since the level of their net salaries will depend on the performance of the company (Hudson & Tribe, 2016). Consequently, top executives will earn more than other employees within the company. It is, therefore, not factual to equate the rising income inequality in companies on the way that they pay their top executives and their junior employees to the marginal tax rate. In contrast to Piketty’s increase of tax for the top earners as the most probable solution, the correct mechanism as a countermeasure to the situation would be to change the present culture of remuneration for top executives. This can be done by eliminating the intellectual foundations of wage increases by rejecting the popular shareholder value theory (Hudson & Tribe, 2016). The shareholder value theory implies that the correct measure of success in a company is the extent by which its shareholders are enriched (Hudson & Tribe, 2016). Most companies have used this theory to pay top executives exorbitant wages to motivate them to deliver success to shareholders.
Question 4
- a)
In a monopsony, when companies get more rents that come in the form of excess profits, the sharing of the rent within the firm might vary. For instance, the intra-firm rent-sharing might feature top executives allocating themselves a higher share of the rents and not considering lower employees (Manning, 2013). This action is compounded by the structure of the company on the portfolio that should allocate capital. Where the allocation of capital is left to corporate managers, then they are likely to increase their wages during rent-sharing as opposed to investment managers whose approach to rent-sharing is to disgorge the cash outwards in the form of shares and stocks (Manning, 2013). Monopsony is created in intra-firm rent-sharing, where the increase in wages is not uniform and favors one wage bracket over the other. The reverse of this situation, which is when a company does not get rents because of losses, the allocation of salary increase will be uneven. Management will focus on the group of employees that have alternative work sources in the labor market and increase their wages to retain them in the company (Manning, 2013). The job descriptions that do not have competitive wages in the market will not have their salaries increased. This creates an intra-firm monopsony.
- b)
Monopsony in inter-firms can create inequality where one firm witness an increase in revenue, unlike its competitors. Given the increase in its profits, the company can then increase the wages of its workers to higher levels than those of competitors in the sector (Manning, 2013). The effect is one company paying higher salaries for its workers than the salaries paid to workers of other companies in the same portfolios. The resultant effect is inter-firms earning inequality, and empowerment of the firm with higher earnings to attract talented and skillful employees than the rivals (Manning, 2013). This creates a situation where one company becomes the only attraction of employees in the labor market, hence the existence of monopsony.
- c)
In the ‘Fissured Workplace,’ monopsony is created when a single company becomes the sole employer of a certain set of employees (Manning, 2013). For instance, when one company is the one providing janitorial services, it means that employees who seek to work in such a company will only be employed by the one company providing those services (Manning, 2013). The situation occurs when labor is outsourced to a single firm in an area.
References
Hudson, P., & Tribe, K. (2016). The contradictions of capital in the twenty-first century: The
Piketty opportunity. Newcastle: Agenda
Manning, A. (2013). Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton,
N.J: Princeton University Press
Piketty, T., & Goldhammer, A. (2014). Capital in the twenty-first century. Cambridge
Massachusetts: The Belknap Press of Harvard University Press