In other words Jensen and Murphy, writing at a time when executive pay was still low by today’s standards, believed that social norms, in the form of the outrage constraint, were holding executive paychecks down. Of course they saw this as a bad thing, not a good thing. They dismissed concerns about executive self-dealing, placing “looting” and “captive” in scare quotes. But their implicit explanation of trends in executive pay was the same as that of critics of high pay. Executive pay, they pointed out, had actually fallen in real terms between the late 1930s and the early 1980s, even as companies grew much bigger. The reason, they asserted, was public pressure. So they were arguing that social and political considerations, not narrowly economic forces, led to the sharp reduction in income differences between workers and bosses in the postwar era.
Today the idea that huge paychecks are part of a beneficial system in which executives are given an incentive to perform well has become something of a sick joke. A 2001 article in Fortune, “The Great CEO Pay Heist,”[14] encapsulated the cynicism: “You might have expected it to go like this: The stock isn’t moving, so the CEO shouldn’t be rewarded. But it was actually the opposite: The stock isn’t moving, so we’ve got to find some other basis for rewarding the CEO.” And the article quoted a somewhat repentant Michael Jensen: “I’ve generally worried these guys weren’t getting paid enough. But now even I’m troubled.”[15] But no matter: The doctrine that greed is good did its work, by helping to change social and political norms. Paychecks that would have made front-page news and created a furor a generation ago hardly rate mention today.
Not surprisingly, executive pay in European countries—which haven’t experienced the same change in norms and institutions—has lagged far behind. The CEO of BP, based in the United Kingdom, is paid less than half as much as the CEO of Chevron, a company half BP’s size, but based in America. As a European pay consultant put it, “There is no shame factor in the U.S. In Europe, there is more of a concern about the social impact.”[16]
To be fair, CEOs aren’t the only members of the economic elite who have seen their incomes soar since the 1970s. Some economists have long argued that certain kinds of technological change, such as the rise of the mass media, may be producing large salary gaps between people who seem, on the surface, to have similar qualifications.[17] Indeed the rise of the mass media may help explain why celebrities of various types make so much more than they used to. And it’s possible to argue that in a vague way technology may help explain why income gaps have widened among lawyers and other professionals: Maybe fax machines and the Internet let the top guns take on more of the work requiring that extra something, while less talented professionals are left with the routine drudge work. Still, the example of CEO pay shows how changes in institutions and norms can lead to rising inequality—and as we’ve already seen, international comparisons suggest that institutions, not technology, are at the heart of the changes over the past thirty years.
Since the 1970s norms and institutions in the United States have changed in ways that either encouraged or permitted sharply higher inequality. Where, however, did the change in norms and institutions come from? The answer appears to be politics.
Consider, for example, the fate of the unions. Unions were once an important factor limiting income inequality, both because of their direct effect in raising their members’ wages and because the union pattern of wage settlements—which consistently raised the wages of less-well-paid workers more—was, in the fifties and sixties, reflected in the labor market as a whole. The decline of the unions has removed that moderating influence. But why did unions decline?
The conventional answer is that the decline of unions is a result of the changing structure of the workforce. According to this view, the American economy used to be dominated by manufacturing, which was also where the most powerful unions were—think of the UAW and the Steelworkers. Now we’re mostly a service economy, partly because of technological change, partly because we’re importing so many manufactured goods. Surely, then, deindustrialization must explain the decline of unions.
Except that it turns out that it doesn’t. Manufacturing has declined in importance, but most of the decline in union membership comes from a collapse of unionization within manufacturing, from 39 percent of workers in 1973 to 13 percent in 2005. Also, there’s no economic law saying that unionization has to be restricted to manufacturing. On the contrary, a company like Wal-Mart, which doesn’t face foreign competition, should be an even better target for unionization than are manufacturing companies. Think how that would change the shape of the U.S. economy: If Wal-Mart employees were part of a union that could demand higher wages and better benefits, retail prices might be slightly higher, but the retail giant wouldn’t go out of business—and the American middle class would have several hundred thousand additional members. Imagine extending that story to other retail giants, or better yet to the service sector as a whole, and you can get a sense of how the Great Compression happened under FDR.
Why, then, isn’t Wal-Mart unionized? Why, in general, did the union movement lose ground in manufacturing while failing to gain members in the rising service industries? The answer is simple and brutaclass="underline" Business interests, which seemed to have reached an accommodation with the labor movement in the 1960s, went on the offensive against unions beginning in the 1970s. And we’re not talking about gentle persuasion, we’re talking about hardball tactics, often including the illegal firing of workers who tried to organize or supported union activity. During the late seventies and early eighties at least one in every twenty workers who voted for a union was illegally fired; some estimates put the number as high as one in eight.
The collapse of the U.S. union movement that took place beginning in the 1970s has no counterpart in any other Western nation. Table 5 shows a stark comparison between the United States and Canada. In the 1960s the U.S. workforce was, if anything, slightly more unionized than Canada’s workforce. By the end of the 1990s, however, U.S. unions had been all but driven out of the private sector, while Canada’s union movement was essentially intact. The difference, of course, was politics: America’s political climate turned favorable to union busting, while Canada’s didn’t.
I described in chapter 6 the centrality of antiunionism to Barry Goldwater’s rise, and the way opposition to unions played a key role in the consolidation of movement conservatism’s business base. By the second half of the 1970s, movement conservatives had enough political clout that businesses felt empowered to take on unions.
| Table 5. Percentage of Unionized Wage and Salary Workers | ||
|---|---|---|
| United States | Canada | |
| 1960 | 30.4 | 32.3 |
| 1999 | 13.5 | 32.6 |
Source: David Card, Thomas Lemieux, and W. Craig Riddell, Unionization and Wage Inequality: A Comparitive Study of the U.S., the U.K., and Canada (National Bureau of Economic Research working paper no. 9473, Jan. 2003).
14.
http://money.cnn.com/magazines/ fortune/fortune_archive/ 2001/06/25/305448 /index.htm.
16.
“U.S.-Style Pay Deals for Chiefs Become All the Rage in Europe,”
17.
Sherwin Rosen, “The Economics of Superstars,”