Posts Tagged ‘fairness’


While Amazon let it slip last week that its Prime program—the annual membership that offers discount pricing and free 2-day shipping—now tops 100 million members, there’s another number people might be curious about: the company’s average annual wage, which Amazon revealed in compliance with a new regulation that asks companies to show a comparison between an average worker’s wage and the salary of their CEO.

Amazon has reported an average compensation for its varied, mostly warehouse (and now, with Whole Foods, grocery store), workers at $28,446 a year. The federal government defines its poverty guideline for a family of four to be $25,100. So, Amazon’s average wage falls easily within 150 percent of the poverty line—and stands at about one-half of the median household income in the United States.

No wonder, then, that Amazon is owned and run by literally the richest man in the world, Jeff Bezos. While he technically “made” only $1.7 million last year, he’s worth $127 billion.* So it means on paper, Bezos makes $59 for every dollar an average employee earns, which is actually a smaller ratio than the average of 271 to 1 for the largest 350 U.S. corporations (pdf).

While Amazon may not have been thrilled by being forced to reveal this not-so-flattering wage comparison, they do have one thing going for them: the only private employer bigger than the e-commerce giant is their retail competitor Walmart, whose workers average only $19,177 per year, putting them far under the federal poverty guidelines. Moreover, the ratio to average-worker pay of Walmart CEO Doug McMillon, who took in $22.8 million last year, was an astounding 1,188 to 1.

And the extraordinary numbers continue, across the economy. Royal Caribbean Cruises: 728-1. Regeneron Pharmaceuticals: 215-1. Netflix: 133-1. Live Nation Entertainment: 2,893-1. Honeywell International: 333-1. Fidelity National Information Services: 654-1. UnitedHealth Group: 298-1. And on and on.

Each such ratio indicates the obscene level of inequality in the United States, based on the amount of surplus pumped out of workers and distributed to those who run American corporations on behalf of their boards of directors.

While the figures of CEO-to-average-worker-pay are being reported in the business press, they have not been widely discussed in the media or by the nation’s politicians. It should come as no surprise, then, that Americans underestimate—by a wide margin—the degree of inequality in the United States.


In a 2014 study, Sorapop Kiatpongsan and Michael Norton asked about 55,000 people around the globe, including 1,581 participants in the United States, how much money they thought corporate CEOs made compared with unskilled factory workers.** Then they asked how much more pay they thought CEOs should make. American respondents guessed that executives out-earned factory workers roughly 30-to-1—just about what that ratio was in the 1960s and exponentially lower than the actual estimate at the time of 354-to-1. They believed the ideal ratio should be about 7-to-1.

As it turns out, Americans didn’t answer the survey much differently from participants in other countries. Australians believed that roughly 8-to-1 would be a good ratio; the French settled on about 7-to-1; and the Germans settled on around 6-to-1. In every country, the CEO pay-gap ratio was far greater than people assumed. And though they didn’t concur on precisely what would be fair, both conservatives and liberals around the world also concurred that the pay gap should be smaller. People also agreed across income and education levels, as well as across age groups.

Why should this matter?

Because representations of the economy that minimize the existence of inequality or the problems associated with inequality are bound to reinforce the systematic misperceptions found by Norton and others.

That’s exactly what much mainstream economics accomplishes. It deflects attention from the existence of inequality (e.g., by focusing on growth, output, and the price level versus distribution) and from the economic and social problems created by inequality (by attributing the growing gap between the haves and have-nots to forces like globalization and technological change that are beyond our control or invoking more education as the only solution).

Mainstream economics therefore forms part of what others (such as Vladimir Gimpelson and Daniel Treisman) refer to as “ideology,” “which may predispose people to ‘see’ the level of inequality that their beliefs and values convince them must exist.” And the strength of mainstream economics in the United States—in colleges and universities as well as in the media, think tanks, and in government—and around the world is one of the main reasons Americans, like people in other countries, tend not to see the existing degree of inequality.

On the other hand, the ideology of mainstream economics is never complete. That’s why Americans and citizens around the globe do see that the degree of inequality created by existing economic arrangements is fundamentally unfair.

It’s that sense of unfairness, which is only partially masked by mainstream economics, that can serve as the basis for a radical rethinking and reimagining of contemporary economic and social institutions.


*Bezos [ht: sm] received a hostile reception from workers when he arrived in Berlin to pick up an innovation award last Tuesday. As Frank Bsirske, the head of the Verdi trade union, explained: “We have a boss who wants to impose American working conditions on the world and take us back to the 19th century.” Meanwhile, back in the United States, Amazon reported that its profits more than doubled to $1.6 billion in the first quarter of 2018, sending shares of its stock soaring to an all-time high.

**This is the second high-profile paper in which Norton discovered that Americans have a notion of economic fairness that is strikingly more equal than the current reality, and more equal even than their own underestimate of the degree of inequality.


For over a century, the most effective way to stop attempts to reduce healthcare disparities in the United States has been to invoke the fear of “socialized medicine.” As a result, Americans have ended up with socialized inequality in their healthcare system.

And they know it.

According to a new study by Joachim O. Hero, Alan M. Zaslavsky, and Robert J. Blendon published in Health Affairs (unfortunately behind a paywall), 67 percent of respondents in the health module of the General Social Survey believed that “many” people in the United States do not have access to the health care they need. This is over 10 percentage points higher than the level in any other country, and over twice the median country rate of 31 percent. And even though only 54 percent of respondents viewed income-based differences in the quality of health care that people have access to as unfair (much lower than the median country rate of 68 percent), the majority of respondents—54 percent of those who viewed income-related disparities as fair and 73 percent of the respondents who viewed such disparities as unfair expressed their support for major health system reform.


And reform is, of course, necessary.

The United States has the third-highest disparity—behind only Chile and Portugal—at 25.9 percentage points.* Among US respondents, 38.2 percent in the bottom income tertile reported fair or poor health, compared to 21.4 percent in the middle tertile, and 12.3 percent in the top tertile.

While many countries exhibited consistent disparities in health care across measures of access and care satisfaction, most had mixed or negligible disparities in all measures. The United States stands out by exhibiting large disparities in most measures, making it unique among high-income countries. In fact, the United States had the second-largest disparity in people forgoing needed medical treatment because they could not pay for it, at 16.5 percentage points (behind only the Philippines), and the third-highest disparity in people believing they would get the best treatment available in their country if they were seriously ill, at 15.5 percentage points (behind only Chile and Bulgaria).

We often forget that the Affordable Care Act, in addition to extending health insurance, bolstered efforts to address socialized inequality in a number of other ways, including improved standards for data collection, support for disparities research, provisions to support diversity in the health care workforce, and the funding of demonstration programs aimed at reducing health disparities.

According to the authors of the study,

Eliminating these efforts without providing clear alternatives would risk taking a step backward in an area where the United States is in sore need of improvement, and in a political environment where solutions with broad support are increasingly hard to find.


*Disparity is defined by the authors as the percentage-point difference between respondents in the top and bottom income tertiles.


I find myself thinking more these days about the fairness of Social Security and other government retirement benefits.

One reason, of course, is because I’m getting close to retirement age—and, as I discover each time I raise the issue with students, young people don’t think about it much.* Another reason is because Social Security (in addition to Medicare, Disability, and other programs) is the way the United States creates a collective bond between current and former workers, by using a portion of the surplus produced by current workers to provide a safety net for workers who have retired.

That represents a kind of social fairness—that people who have spent a large portion of their lives working (most people need 40 credits, based on years of work and earnings, to qualify for full Social Security benefits) are eligible for government retirement benefits provided by current workers. Another aspect of that fairness is the system should and does redistribute from those with high lifetime incomes to those with lower lifetime incomes. While that makes the actual “rates of return” unequal across groups, it’s designed to provide a floor for the poorest workers in society.

Many people consider the U.S. Social Security system fair on those two grounds. That’s true even though some people, by random draw, may live longer than others. However, as Alan J. Auerbach et al. (pdf [ht: lw]) report, that fairness may be put into question if there are identifiable groups that vary in life expectancy, “as this introduces a non-random aspect to the inequality.”

Here’s the problem: retirement benefits in the United States are increasingly unequally distributed on a non-random basis. As I’ve written about many different times (e.g., here, here, and here), there’s a gap in life expectancies between those at the bottom and top of the distribution of income. And the gap has been growing over time.


That result is confirmed by Alan J. Auerbach et al.: for the male birth cohort of 1930, life expectancy at age 50 rises from 26.6 to 31.7—a difference of 5.1 years. For the 1960 cohort, the lowest quintile has a slightly lower life expectancy than the 1930 cohort but then rises a level of 12.7 years higher for the top quintile, “indicating a very large increase in the dispersion.”


Not surprisingly (since benefits rise with earnings), Social Security benefits also rise with income quintiles. Thus, for example, for men in the 1930 cohort, workers in the lowest quintile can expect to receive, on average, $126 thousand in benefits over the rest of their lives (discounted to age 50), while workers in the top quintile can expect to receive $229 thousand, or 82 percent more than the lowest income workers.

What is particularly troubling is how the results change when we move to the 1960 cohort. The additional 6-8 years of life expectancy for the top three quintiles lead to large increases in expected Social Security benefits, with benefits for the top quintile reaching $295 thousand. The difference between the highest and lowest quintiles is then expected to be $173 thousand, or 142 percent of the lowest income workers’ benefit.

According to the authors of the study,

These results suggest that Social Security is becoming significantly less progressive over time due to the widening gap in life expectancy.

Not only does the growing gap in life expectancies undermine the basic fairness of the Social Security system. It calls into question capitalism itself.


*For understandable reasons. I certainly didn’t think about retirement at that age. (I barely thought about getting a job. I just presumed I would—and would be able to—at some point.) However, when students are induced to do think about retirement, as I’ve written before, most take it for granted that Social Security is doomed. While they expect to pay into Social Security, they don’t expect to receive any Social Security benefits when they retire. Then, of course, I explain to them that making only one change—raising the taxable earnings base—would eliminate the projected deficit and keep Social Security solvent forever.


Is it any surprise, as Christina Starman, Mark Sheskin, and Paul Bloom argue, that fairness is not the same thing as equality?

There is immense concern about economic inequality, both among the scholarly community and in the general public, and many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness.

Still, I think, many people today are bothered by both—economic unfairness and grotesque levels of economic inequality.

Let me explain. As I have written before, I’m not particularly convinced of the idea being promoted by Starman et al. and by other evolutionary psychologists that fairness is part of humans’ biological inheritance. Instead, I’m more inclined to look in the direction of history and society.

Fairness is, I think, a concept that is part of bourgeois society, which is created and disseminated in a wide variety of discourses and sites, including economics. (To be clear, there may be other notions of fairness in human history, outside and beyond bourgeois society. My point is only that capitalism has its own particular notions of fairness, and they’re the ones that motivate our current “fairness instinct.”)

Fairness is an important part of the self-justification of bourgeois society. For example, market outcomes are considered fair because sovereign individuals are free to engage in voluntary transactions, which result in equal exchanges. That’s an idea that is created and reproduced throughout contemporary society, especially in mainstream economics.

So, yes, individuals within contemporary capitalism are constituted, at least in part, by certain notions of fairness, which they express in a wide variety of contexts, from participating in the ultimatum game to making a distinction between “takers” and “makers.”

By the same token, it’s not particularly shocking that those same individuals agree there should be some degree of inequality in economic outcomes. That’s also part of capitalism’s self-justification, that “fair” processes will produce unequal results. So, people seem to agree, not everyone can or should receive the same income or have the same wealth. We have different abilities, needs, desires, and circumstances, so the discourse goes, resulting in—perhaps even requiring—different amounts of income and wealth.


But then, of course, income inequalities have become so obscene—so unjustified by any conceivable differences in abilities, needs, desires, and circumstances—that, in the name of fairness, people demand more equality.

That’s how I think we need to reconcile the ideas of fairness and equality—not, as Starman et al. would have it, that people are bothered by fairness but not by inequality, but instead that bourgeois notions of fairness are so challenged and disrupted by existing levels of inequality people demand perhaps not perfect but certainly much more equality than exists today.

The real question is not whether there’s a “universal moral concern with fairness.” Instead, it’s whether the existing system can deliver on its promise to create fair (and, with them, more equal) outcomes—or, alternatively, whether it’s necessary to imagine and create a different set of economic and social institutions, which will actually fulfill that promise of fairness and at the same time deliver much more equality than exists in the United States today.

Leftists versus Liberals

Special mention

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According to the norms of both neoclassical economic theory and capitalism itself, workers’ wages should increase at roughly the same rate as their productivity.* Clearly, in recent years they have not.

The chart above, which was produced by B. Ravikumar and Lin Shao for the Federal Reserve Bank of St. Louis, shows that labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. In fact, real labor compensation per hour in the nonfarm business sector was 0.5 percent lower 20 quarters after the start of the recovery, while labor productivity had increased by 6 percent.

Clearly, the gap between worker compensation and productivity has grown during the current recovery.


But the authors go even further, showing that the gap in the United States between compensation to workers and their productivity has been growing for decades.

labor productivity has been growing at a higher rate than labor compensation for more than 40 years. As Figure 3 shows, labor productivity in 2016:Q1 is 3.8 times as high as that in 1950:Q1; labor compensation, on the other hand, is only 2.7 times as high. In other words, the gap between labor productivity and compensation has been widening for the past four decades. The slower growth in labor compensation relative to labor productivity during the recovery from the two most recent recessions is part of this long-term trend. (reference omitted)

The data in Figure 3 show that the productivity-compensation gap—defined as labor productivity divided by labor compensation—has been increasing on average by approximately 0.9 percent per year since 1970:Q1. Based on this long-term trend, the gap would have been 51 percent higher in 2016:Q1 compared with 1970:Q1; in the data, the gap is actually 47 percent higher.

The fact is, labor compensation has failed to keep up with labor productivity after the Great Recession. But, as it turns out, there’s nothing unique about this period. The gap has been growing for more than four decades in the United States.**

Clearly, the recent and long-term trends of productivity and labor compensation challenge the norms of neoclassical economics and of capitalism itself. But we are also seeing the growth of another gap—between the promises of both neoclassical theory and capitalism and the reality workers have faced for decades now.


*Neoclassical economics—in particular, the marginal productivity theory of distribution—is based on the idea that the factors of production (land, labor, capital, and so on) receive in the form of income what they contribute to production. So, for example, as labor productivity increases, real wages should also rise. Similarly, capitalism is based on the idea of “just deserts.” That idea—that everyone gets what they deserve—is essential to the very idea of fairness or justice in the way the economy is currently organized.

**The authors’ analysis is based on the gap between labor compensation and productivity. If we look at real wages (as in the chart below) instead of compensation (which includes benefits, and therefore the portion of the surplus employers distribute to pension plans, healthcare insurers, and others), the gap is even larger.


According to my calculations from Fed data, since 1979, productivity has grown by 60 percent while real wages have increased by less than 5 percent.