Monthly Archives: November 2019

Symposium on the Politics of Labour Market Inequality

Silja Häusermann, David Rueda and I launched a symposium debate in Political Science Research Methods on the Politics of Labour Market Inequality. We discuss the relevance of research on labour market stratification, segmentation, insider-outsider theories and dualization for broader discussions in political science: mobilization, voting behaviour and public policy making.

Please find the introduction to the symposium here. We have contributions from Marius Busemeyer and myself on conceptual stretching in the literature on dualization (link), Georg Picot and Paul Marx (link) on the conceptualization of insiders vs. outsiders, and Tim Vlandas on the empirical veracity of different measurements (link). Silja Häusermann (link) and Hanna Schwander (link)  discuss the political implications of labour market inequality, whereas Philipp Rehm looks at the broader picture of welfare state change.

 

 

Leave a comment

Filed under Uncategorized

New Paper with @reniracorinne on CEO Pay and the Role of Redistributive Institutions

The wonderful @reniracorinne and I have written an article in Socio-Economic Review. Find a short (policy) summary here. Here is the link to the article.

 

If governments want to target the inflation of CEO Pay, they should also address pay inequality among managers.

Introduction

Since the 1980s, there have been numerous scandals about the excessive growth of top executive compensation (TEC). Enron is just a very prominent example in recent years. As a reaction, governments have experimented with regulating TEC in several ways: The Clinton administration put a cap on TEC tax deductibility; both the Obama administration and the EU imposed a pay cap for firms in the need of a bailout after the Global Financial Crisis. Some countries have even tried to go further. For instance, there was a referendum in Switzerland to limit CEO pay to workers by a ratio of 12:1 (in most countries the actual ratio is much higher). The referendum failed.

These initiatives have become salient at a time of general increases in top income shares and growing overall inequality. Prominent economists have argued that TEC inflation significantly contributes to the growing income inequality by driving up the income at the top (Sabadish and Mishel 2012; Atkinson, Piketty, and Saez 2011; Piketty 2014). This can ultimately damage the legitimacy of democracies (Przeworski 2016).

However, governments’ attempts to regulate or even control TEC lead to very different outcomes across countries. While in some countries (e.g. X) the rise of TEC has been relatively moderate, in others (e.g. the U.S. or X?) TEC galloped away. The academic literature has targeted these cross-country differences and has given reasons why some governments are more successful in halting excessive wage growth for top managers: cooperation with strong trade unions, high tax rates on corporate and personal income, shareholder protection laws etc.

The importance of redistributive institutions

We argue, however, that one important aspect of such attempts is often overlooked: how do such attempts deal with the heterogeneity among managers and the income inequality among CEOs? We do know that there are huge differences between managers belonging, say, to the top 10, 1 and 0.1 percent respectively. However, the literature disagrees to which extent this inequality is due to inequalities between managers, between firms, or entire sectors. As an example for the latter, finance and real estate are often mentioned as those which have seen the highest growth in TEC. Therefore, there is a clear case of heterogeneity and inequality among managers, but not all government initiatives reflect this.

Just looking at the four main institutions mentioned (unions, corporate income tax, personal income tax and shareholder protection). Only two of these are robust to the problem at which level the heterogeneity arises (individual, firm or sector), and only these tackle inequality directly, because they are (potentially) redistributive: first, cooperation with unions, because, on average, (centralized) unions tend to care about wage inequality within firms and among individuals ; and second, personal income taxation, because this happens at the individual level (regardless to which firm or sector a manager belongs) and managers face a progressive tax rate. Neither (most) corporate taxation nor shareholder protection exhibits these features. They target the average manager, no matter who this is and in what type of firm or sector he or she works.

This leads to a simple prediction. While all four types of interventions might dampen average TEC, only personal income taxation and the role of unions also matters for inequality among managers. To show this we look at the effect of all four types for firms of different sizes, in terms of market valuation. This follows a large literature on the growing disparities between small and large cap firms

(Edmans, Gabaix, and Jenter 2017). If our argument about the power of redistributive institutions is correct, we should not only look at the direct (aggregate) impact of institutions on TEC, but also at the gap between very large firms (in market value) and the rest.

 

We test this idea with a new dataset on TEC for X countries over X years. The Figure demonstrates our main findings. All four interventions affect the average level of TEC, but corporate income taxation and shareholder protection have a stronger (more visible) effect on the  average level of TEC (as seen by the range on the y axis). However, only personal income taxation and the strength of unions affect small and large cap firms differently. In both cases, the redistributive effect sets in, i.e. very big firms see more of a depression in TEC. In other words, only these two types of interventions target the relative differences among managers.

 

 

graph_blogpost_renira_article

 

 

 

 

 

 

 

 

 

 

 

 

Consequences

Inequality is back on the political agenda, and TEC is an important driving force of overall inequality. Governments differ very much in their capacity (and political will) to influence TEC. We argue that redistributive institutions still play a significant role, but somewhat underappreciated role in moderating TEC in 21st century capitalism. The strength of trade unions and personal income tax rate in particular, matter precisely because they address the individual heterogeneity in pay among managers (as well as firms and sectors) directly. They are particularly relevant for “large-cap” firms. Other means, such as corporate income taxation and or regulation, do this much less. If inequality among managers is a key driving force for a general rise in TEC as diPrete et al. (2010) argue, initiatives that strengthen such redistributive institutions are an important and robust strategy for governments to respond to rising inequality.

 

References

Atkinson, Anthony B, Thomas Piketty, and Emmanuel Saez. 2011. “Top Incomes in the Long Run of History.” Journal of Economic Literature 49: 3-71. https://doi.org/10.1257/jel.49.1.3.

DiPrete, Thomas A., Gregory M. Eirich, and Matthew Pittinsky. 2010. “Compensation Benchmarking, Leapfrogs, and the Surge in Executive Pay.” American Journal of Sociology 115: 1671-1712. https://doi.org/10.1086/652297.

Edmans, Alex, Xavier Gabaix, and Dirk Jenter. 2017. “Executive Compensation: A Survey of Theory and Evidence.” SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2992287.

Hassel, Anke. 2009. “Policies and Politics in Social Pacts in Europe.” European Journal of Industrial Relations 15: 7-26. https://doi.org/10.1177/0959680108100163.

Oswald, Andrew J. 1985. “The Economic Theory of Trade Unions: An Introductory Survey.” The Scandinavian Journal of Economics 87: 160. https://doi.org/10.2307/3439820.

Piketty, Thomas. 2014. “Capital in the Twenty-First Century.” 685.

Przeworski, Adam. 2016. “Democracy: A Never-Ending Quest.” Annu. Rev. Polit. Sci 19: 1-12. https://doi.org/10.1146/annurev-polisci-021113-122919.

Sabadish, Natalie, and Lawrence Mishel. 2012. “CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality | Economic Policy Institute.”

Shin, Taekjin. 2014. “Explaining Pay Disparities between Top Executives and Nonexecutive Employees: A Relative Bargaining Power Approach.” Social Forces 92 (4): 1339-1372. https://doi.org/10.1093/sf/sou004. https://academic.oup.com/sf/article-pdf/92/4/1339/17164390/sou004.pdf.

—. 2016. “Fair Play or Power Play? Pay Equity, Managerial Power and Compensation Adjustment for CEOs.” Jorunal of Management 42 (2): 419-448.

Streeck, Woflgang. 2001. The Transformation of Corporate Organization in Europe: An Overview. Cologne.

Leave a comment

Filed under Uncategorized

New comment on #dualization and stratification in labour markets out

Marius Busemeyer and I wrote a comment published in Political Science Research Methods (link) on the scholarly debates about dualization and insider-outsider problems in labour markets. We make the point that the discussion sometimes conflates the microlevel (How has labour market stratification changed in recent years and to what effect?) and the macrolevel (How do changes in regulation, social benefits and taxation benefit or hurt different segments in the labour market differently?). We argue that it is still to be seen whether contemporary process are best characterised by dualization or (partial) liberalization. This difference is crucial for the future evolution of welfare states.

https://www.cambridge.org/core/journals/political-science-research-and-methods/article/dualization-stratification-liberalization-or-what-an-attempt-to-clarify-the-conceptual-underpinnings-of-the-dualization-debate/C20383B2A41D6C45EA3D32234174256D?utm_source=Twitter&utm_medium=Social&utm_campaign=ram&hootPostID=8ff7413058879ab85f9e2bbd7d5bcba3

It’s part of a symposium on the politics of new labour divides coming out soon…

 

Leave a comment

Filed under Uncategorized