The Price of Everything (19 page)

Unions, once tools to obtain higher wages from employers, have lost power. Private-sector workers represented by unions make about 21 percent more than those who are not, a premium that is worth about $148 per week. Union contracts remain useful in recessions—when employers look for easy places to cut costs. But unions are dying off as unionized firms shrink or go out of business while new arrivals resist them tooth and nail. Over the past thirty years, the share of workers in the private sector covered by collective labor agreements plummeted from almost 21 percent to 7 percent.

Until the 1970s, Detroit’s Big Three carmakers made nine out of ten cars and light trucks sold in the United States. General Motors was known as Generous Motors. By 2009, the Big Three’s share of the American market was about 45 percent. General Motors and Chrysler went bankrupt, rescued by a government bailout. The United States still has an auto industry, but most of it grows in non-union shops outside Michigan. In 1999, about 38 percent of the nation’s autoworkers were covered by union contracts. In 2008 only 25 percent were. This emergent auto industry is unlikely to provide the generous pay and benefit packages that union shops once did.

The American labor market is about as ruthless as it gets for a rich industrial nation. Western European social democracies have many rules mandating minimum holidays and maximum working hours. Higher minimum wages and tax rates on high incomes favor more homogeneous wages. The American workplace, by contrast, is mostly about free competition—unblemished by government interference. The job market is structured with one objective in mind: to reward success. It has led to an enormous pay gap between the best and the rest.

In 1989, the San Francisco Giants, the most expensive team in Major League Baseball, paid a median salary of $535,000, more than five times the median wage at the Baltimore Orioles, the cheapest club at the time. Big as it seems, the gap is small by current standards. In 2009, the New York Yankees paid a median wage of $5.2 million, nearly twelve times more than the Oakland Athletics at the bottom.

A similar dynamic is on display in the corporate suite. In 1977, an elite chief executive working at one of America’s top one hundred companies cost about 50 times the wage of its average worker. Three decades later, the nation’s best-paid CEOs made about 1,100 times the pay of an average worker on the production line. This change has separated the megarich from the simply very rich. A study of pay in the 1970s found that executives in the top 10 percent made about twice as much as those in the middle of the pack. By the early 2000s, the top suits made more than 4 times the pay of the executives in the middle.

An elegant economic proposition takes a stab at explaining this phenomenon. In 1981 the University of Chicago economist Sherwin Rosen published an article titled “The Economics of Superstars.” In a nutshell, Rosen argued that technological progress would allow the best performers in a given field to serve a bigger market and thus reap a greater share of its revenues. But it would also reduce the spoils available to the less gifted in the business.

The reasoning fits smoothly with the income dynamics of pop stars. The music industry has been shaken by several technological disruptions since the 1980s. First MTV put music on television. Then Napster took it to the Internet. Apple allowed fans to buy single songs and take them with them. Each of these breakthroughs allowed the very top acts to reach a larger fan base, and thus take a bigger share of consumers’ music budget and attention. In 1982, the top 1 percent of pop stars took 26 percent of concert ticket revenue. By 2003 they were raking in 56 percent of the concert pie.

Superstar effects go a long way to explain the pay of Tom Cruise, which grew from $75,000 in
Risky Business
to somewhere between $75 million and $92 million for
Mission: Impossible II
. They apply to European soccer, where the top twenty teams reaped revenues of €3.9 billion in 2009, more than 25 percent of the combined revenues of all European soccer leagues. Brazil’s Pelé, the greatest soccer player of all time, made his World Cup debut in Sweden in 1958 when he was only seventeen. He became an instant star, coveted by every team on the planet. By 1960, his team, Santos, reportedly paid him $150,000 a year—about $1.1 million in today’s money. These days that would amount to middling pay. The top-paid player of the 2009-2010 season, Portuguese forward Cristiano Ronaldo, made €13 million playing for the Spanish team Real Madrid. Including sponsorships, the highest-earning player today is David Beckham, the brilliant English midfielder who made $33 million from endorsements in 2009, on top of $7 million in salary from the Los Angeles Galaxy and AC Milan.

Pelé was not held back by the quality of his game, but by his small revenue base. He might be the greatest of all time, but few people could pay to experience his greatness. In 1958 there were about 350,000 TV sets in Brazil, for a population of about 70 million. The first television satellite, Telstar I, wasn’t launched until July of 1962, too late for Pelé’s World Cup debut. By contrast, the 2010 FIFA World Cup in South Africa, in which Cristiano Ronaldo played for Portugal, was broadcast in more than two hundred countries. Adding up the audiences of each game around the world, tens of billions of pairs of eyes watched the tournament—more than the world population. Cristiano Ronaldo is not better then Pelé. He makes more money because his talent is broadcast to more people.

Rosen’s logic has been invoked to explain executive pay too. As American companies, banks, and mutual funds have grown in size, it has become crucial for them to put at the helm the “best” possible executive or banker or fund manager. This has set off an enormous competition in the market for managerial talent, pushing the prices of top executives way above the wages of anybody else. Xavier Gabaix and Augustin Landier of New York University published a study in 2006 estimating that the sixfold rise in the pay of chief executive officers in the United States between 1980 and 2003 was due entirely to the sixfold rise in the market size of large American companies.

The pattern follows the same Darwinian logic of elephant-seal sex. Elephant-seal cows consistently favor big bulls that can wallop rivals into submission. This happens despite the fact that the heavier they become the easier it is for sharks and orcas to eat them. Corporations deploy pay packages to attract talent as elephant seals deploy fat to attract mates. And yet humongous compensation plans are unlikely to produce benefits to shareholders. Fat paychecks have been found to encourage fraud—tempting executives loaded with stock options to do anything to increase the price of their companies’ shares. They have also been found to encourage excessive risk taking.

And it is doubtful that this strategy benefits society at large. Over the past fifteen years, the top 1 percent of American families raked in half the entire increase in the nation’s income. In 1980, they took home about a tenth of it. Today, they get to take home almost a quarter. That amounts to very few elephant seals eating all the fish.

The biggest seals work for banks. Banks pay enormous bonuses to draw the brightest MBAs or quantum physicists. These bright financiers, in turn, invent the fancy new products that make banking one of the most profitable endeavors in the world.

Remember the eighties? Gordon Gekko sashayed across the silver screen. Ivan Boesky was jailed for insider trading. Michael Milken peddled junk bonds. In 1987 financial firms amassed a little less than a fifth of the profits of all American corporations. Wall Street bonuses totaled $2.6 billion—about $15,600 for each man and woman working there. Today, this looks like a piddling sum. By 2007 finance accounted for a full third of the profits of the nation’s private sector. In 2007 Wall Street bonuses hit a record $32.9 billion, $177,000 per worker.

It goes without saying that this type of pay is not the norm across industries. In America’s rural economy, far from the steroid-laced streets of Lower Manhattan, remuneration is less about incentives than about keeping workers alive. In the spring of 2009, the average wage of fieldworkers on American farms was $9.99 an hour.

Among other tactics to ensure cheap labor, farmers regularly lobby Uncle Sam. They asked the government to open the door to farmworkers from Mexico as far back as World War I. They did it again in the 1940s, when the Bracero program was launched to replace the American men who had been shipped off to World War II. The program survived until 1964, a tribute to the lobbying power of growers. But when it ended and farmworkers’ wages started to rise, farmers replaced them with something cheaper.

Farmers today estimate that about 70 percent of the million or so hired workers tilling fields and picking crops are illegal immigrants. In 2006, as the United States Congress debated an overhaul of immigration law, I met Faylene Whitaker, a farmer who grew tobacco, tomatoes, and other crops in the Piedmont area of North Carolina. Whitaker was concerned about the high cost of employing immigrant workers through the prevailing legal channels and wanted a better deal. “We would rather use legal workers,” she said. But “if we don’t get a reasonable guest worker program, we are going to hire illegals.” The visa set a minimum wage by comparison with other farm wages in the area. At the time it was about to rise to about $8.51 an hour from $8.24. Illegal workers, by contrast, could be had for less than $6.50.

 

 

ILLEGAL IMMIGRANTS, OF
course, want the $6.50-an-hour jobs. That’s why they risk life and limb to come across the border to get them, evading Border Patrol agents, criminal gangs, and snakes. These are the best jobs many poor Mexicans can aspire to. They are a path to relative prosperity, compared with the deep poverty of their villages and neighborhoods. Migrants’ comparative good fortune—loudly displayed each time they return home with spare dollars in their pockets—spurs their younger brothers, sisters, and cousins to make the voyage as soon as they come of age. They want to be rich like them.

This is exactly what is supposed to happen. Like differences in other prices, pay disparities steer resources—in this case people—to where they would be most productively employed. Some of the hardest-working Mexicans are drawn by the relative prosperity they can achieve north of the border. Similar drives motivate the 11 million immigrants living in Germany, 7 million in Saudi Arabia, and about 6.5 million each in France, Britain, and Spain.

The inequality that has spurred such vast movements of people is an inevitable and, indeed, necessary feature of a capitalist economy. In poor economies, fast economic growth increases inequality as some workers profit from new opportunities and others do not. The share of national income accruing to the top 1 percent of the Chinese population more than doubled between 1986 and 2003, to almost 6 percent. Inequality, in turn, can spur economic growth, drawing people to accumulate human capital and become more productive. It draws the best and brightest to the most lucrative lines of work, where the most profitable companies hire them.

But for all its incentive power, is the vast income gap between financiers and farmworkers useful in any way? The United States grew rapidly over the past three decades. Gross domestic product per person increased about 69 percent since 1980, as inequality soared to levels not seen since the 1920s. Yet it also grew fast—83 percent—between 1951 and 1980, when inequality measured as the share of national income going to the very top of the population declined.

One study concluded that each percentage-point increase in the share of national income channeled to the top 10 percent of Americans since 1960 led to an increase of 0.12 percentage points in the annual rate of economic growth. But even at this higher rate, it took thirteen years for the bottom 90 percent of Americans to recover the share of income they had sacrificed to speed up the economy.

The United States remains the rich country with the most skewed income distribution. According to the OECD, earnings of the richest 10 percent of Americans are 6 times those of the 10 percent at the bottom of the pile. That compares with a ratio of 4.2 in Britain and 2.8 in Sweden.