Abstract
The edited volume, Debating Equal Pay for All, features many proposals to address pay inequality and these can be broken down into essentially two types. The first type of proposal calls for equal pay and this has two versions: unconditional and conditional. The unconditional version calls for paying everybody, including those who do not work, the same annual compensation. By contrast, the conditional version of equal pay calls for everybody earning the same hourly rate, but this would only apply to those who work. The second category of proposals do not call for equal pay, instead these proposals aim to moderate, but not eliminate, pay inequality. This second category includes everything from universal basic income, mandatory pay ratios between executives and entry level employees, to job guarantee programs. Advocates of proposals in the second category largely dismiss the idea of equal pay as either having serious economic problems or believe it to be too politically or socially extreme. I begin with a review of the challenges facing the equal pay proposals and consider the extent to which proponents of equal pay were able to overcome those challenges. I then turn to discuss the merits of the more moderate proposals featured in this volume.
In the second chapter, Thomas Mulligan describes the fundamental problems with equal pay proposals to devastating effect. He points out that unconditional equal pay would “eradicate almost any incentive to work” (ch.2, p.31).” He elaborates “under EPI, Jones’s income is independent of his labor/leisure choice! If he works 120 hours a week, or 60 hours a week, or not at all, it does not matter—Jones ‘earns’ the same income” (ch.2, p.31). Mulligan notes that people might work out of boredom or an intrinsic desire in some cases, but that all incentive factors to work would be eliminated. Additionally, Mulligan appeals to considerations of fairness and argues that most people “believe that factors like effort and contribution matter from the point of view of justice,” but under unconditional equal pay, these fairness considerations are not factored into compensation (ch.2, p. 32).
While Mulligan focuses his attention on unconditional equal pay, his criticisms still apply, though less powerfully, against conditional equal pay as well. It’s true that if everybody earns the same hourly rate for working, then people still have an incentive to work and are rewarded for contributing something to the economy. However, both of Mulligan’s arguments can still be applied to human capital investment. According to conditional equal pay, doctors, plumbers, engineers, and lawyers would be paid the same as office clerks and cashiers. The incentive to undergo the difficult training necessary to become a member of these professions is therefore significantly curtailed. Similarly, it is unfair for someone who puts in exceptional effort on their 8 hour shift to be paid the same as someone who works just hard enough to keep their job. Hence, both equal pay proposals, unconditional and conditional, suffer from incentive problems and fairness concerns.
In chapter 6, Zwolinski adds to the critique by arguing that equal pay proposals would erode the “information-conveying role of prices in the labor market, resulting in disastrous misallocations of labor and dire consequences for human welfare” (ch.6, p.85). Zwolinski captures a subtle point about the role that wages play in the market economy that is often missed. Wages not only create incentives, but also provide valuable information. He remarks, “A ‘wage’ is simply another term for the price of labor, and like all prices in a market economy, wages convey important information to market participants about relative supply and demand” (ch.6, p.88). These prices provide information about where resources are most needed. For example, if the wage of nurses rapidly increases because employers are competing over the limited supply of nurses, this sends a signal that there are not enough trained nurses. The increased wage is both an information signal about the need for more nurses, as well as an incentive for more people to become nurses. If the wage for nurses cannot increase, then it would be very difficult to determine whether there are too many nurses, too few, or the right amount, given society’s needs. Capping wages at a particular level limits both the incentive as well as the informational power that wages provide.
In summation, there are roughly three fundamental challenges to equal pay: (1) incentive problems, (2) information problems and (3) fairness concerns. The question is whether proponents of equal pay can rise to the challenge in giving plausible arguments that either rebut these objections or show that equal pay proposals offer advantages strong enough to overpower the force of these objections. Unfortunately, many of the proponents of equal pay in this volume do not take seriously the economic concerns nor understand the background context for why these concerns might be important. For example, one author dismisses the moral relevance of economic growth, saying “constant economic growth, in the most common understanding of the term, is, for many reasons, simply not an overall good thing in the long run, for anyone” (ch.17, p.278). This is a very strong claim, especially given that much of the economics literature in the last 50 years has emphasized the importance of growth in improving quality of life and alleviating extreme poverty.(Roemer and Gugerty, 1997) Strong claims are welcome, even encouraged, but they require strong arguments, and while the author briefly mentioned that growth could have negative environmental impacts, no substantive argument was offered for how this nullified all of the gains from poverty alleviation. An opportunity was missed to explore the trade-offs between economic growth and environmental considerations. Unfortunately, these missed opportunities were too common in many of the chapters promoting equal pay.
Nevertheless, several equal pay proponents raised powerful ethical concerns about unequal compensation. One such example occurs in chapter 16 where Daniel Pointon and Matthew Sinnicks draw on research in psychology showing that people are often susceptible to the “just world fallacy,” in which individuals often impart praise or blame on others for random events that they endure (ch.16, p.259). For example, one study revealed that people often believed that the winner of a purely random lottery deserved the reward more than those who lost (ch.16, p.259). Pointon and Sinnicks argue that this psychological tendency makes it easier for people to justify their positions of relative advantage, even when they’re undeserved. They argue that in a world where people were paid more equally, we would also be better positioned to see others as relational equals, and not as subordinates. While the authors admit that there are strong considerations against equal pay, they are right to identify how equalizing pay could have a positive impact on our attitudes and evaluations of others. This chapter is worthy of making the syllabus in any standard business ethics course. Additionally, this chapter merits consideration by compensation professionals for its insights into how wages of highly paid individuals might be artificially inflated.
Another intriguing idea comes from the opening chapter where Anders Ortenblad contends that we may “get better leaders if leadership positions [did] not automatically come… with higher pay” (ch.1, p.2). The notion that high compensation might get in the way of other important motivations is an attractive idea and one that could have substantive real world implications for decision makers at the highest levels. (Sandel 2012) This idea is taken further in chapter 15 where Jean-Phillipe Deranty argues that “superior achievement [can be] rewarded in other ways, through awards, prizes, honorary titles and so on” (ch.15, p. 250–251). Peter Dorey in chapter 8 offers a compelling example from higher education in how it is often the “prestige or challenge, and the potential to ‘make a difference,’ rather than a huge salary” which motivates people to take high level opportunities (ch.8, p. 125). It might be worthwhile considering in what circumstances managers and directors could deliberately decide not to pay an extremely high level of compensation to attract candidates who are intrinsically motivated in performing the job in question. Such a practice already occurs in the non-profit space, but may also plausibly apply to high level leadership positions in other domains, notably healthcare and academia.
Unlike proponents of equal pay proposals, proponents of more moderate reforms tended to take the economic considerations more seriously. Korey Schaff’s chapter 11 possesses the virtue of having first understood and explained the economic origins of wage inequality. He decomposes compensation into “contributory” and “compensatory” factors where contributory refers to the productive contribution of the worker and compensatory refers to the attractiveness or unattractiveness of the work itself (ch.11, p.170). The author does a good job describing the market factors that drive wage inequality between high and low skilled workers. Additionally, Schaff takes seriously the economic trade-offs that come with a scheme of equalizing pay, notably how it would “diminish opportunities for skilled workers and reduce demand for improving [one’s own] social capital in terms of education and training” (ch.11, p.177). He concludes by arguing for a living wage which balances considerations of equity and efficiency, though he does not reckon with objections that such a proposal will likely increase unemployment in many sectors, and thus may diminish its effectiveness in reducing inequality.
In chapter 8, the author Peter Dorey proposes a very intriguing idea of a pay ratio, “whereby the highest paid did not receive a salary of” more than 20 times that of the lowest compensated employee (ch.8, p.126). Unlike the idea of a salary cap or an equal pay proposal, the ratio proposal means that firms can set their own rates and that firms can still “increase the salaries of their senior staff, provided that the 20:1 ratio was adhered to” (ch.8, p. 127). This proposal has the purported advantages of lowering equality while still allowing significant flexibility for creating incentives. Unfortunately, the author did not consider the possibility of unintended consequences, such that pay ratios might encourage firms to automate jobs or to let go of workers at the lowest end of the payscale in order to permit the raising of executive pay. A universal pay ratio is probably too blunt an instrument for the purposes of law and public policy, as there is likely no optimal one-size fit for all industries. However, within particular industries and for certain organizations, such a pay ratio could make for a good general operating standard to discourage the perverse incentives of executives and senior managers to introduce additional management layers as a justification for boosting executive pay.
The volume concludes with a riveting chapter written by Rohan Grey, which interestingly melds Keynesian, Marxist, and Minskian ideas into a combination of surprisingly plausible labor market policies. The author rejects equal pay proposals on unemployment grounds and efficiency concerns. Instead, the author proposes an array of coordinated workforce development plans and wage benchmarks with the goal of completely eliminating unemployment. He advocates for a jobs guarantee program on grounds that it will move the economy to the production possibilities frontier. This is a very alluring idea, though it makes two questionable assumptions. First, it assumes that the government can achieve full employment without creating significant labor market distortions, and second, it assumes that government actors have the relevant knowledge to set optimal wages for the jobs guarantee program. Although the chapter makes too many heterodox assumptions, the proposals still merit attention.
Ultimately, equal pay proponents failed to address the challenges laid out by Zwolinski, Mulligan, Grey, and others. However, proponents of equal pay did succeed in emphasizing the social considerations and drawing attention to the non-pecuniary motivations that people have in making career decisions. The chapters that advocated proposals moderating pay were considerably more plausible, although in turn, often forgettable. The quality of the work in this volume is highly variable, but there are individual chapters with novel and interesting ideas that merit further consideration by business ethicists, HR specialists, and compensation professionals.