Wages of the Top 10% SHOULD Be Growing Faster Than Others

Today’s WSJ carries an article on page 2 with the headline, Wage Divide Grows Wider.  I don’t want to beat a dead horse, but it’s clear this horse ain’t dead yet.  Here’s what the headline should have said:  Wages Continue Growing.

WSJ reports that new Labor Department figures show wages of the top 10% of earners grew faster (7%) than wages of the bottom 90% (2.5%) between mid-2009 and the first quarter of 2012.  This is exactly what one would expect in a healthy, market-based economy.  The important question is whether the wages of ALL workers are growing. 

In a free market, workers are paid according to their contribution to their employer.  Those who are most productive are paid more than the others.  Over time the relative rates of change in wages among the most productive workers and the others will ALWAYS favor the most productive workers – it is a mathematical certainty.

Consider the following example.  Suppose an economy has total wages of $1,000 in year one, which is split equally among 10 workers, because each worker is just as productive as the next.  In year one, each worker earns $100.  Now suppose that over several years, one worker’s productivity improves such that the total wage pool grows to $1,060, and that worker is awarded one-half of the improvement in wages, so that her wages are now $130.  This leaves $930 available for the other nine workers, whose productivity has remained constant.  These workers will now receive their equal share of the $930, or $103.33.  Over the period, the wages of the most valuable worker have increased by 30%, while those of the other workers have grown by “only” 3.3%. 

What conclusions can be drawn from this little economy?  Well, first, the entire economy is better off than before – it now has more money to split among the same ten workers.  Second, every individual worker is better off than before, even those in the slightly less fortunate 90%.

The second point is worth elaboration.  The other nine workers, despite having added nothing – zero – to the incremental growth of the economy, have still enjoyed an increase in wages.  This increase is totally attributable to the single employee who worked a little harder and added more value than they did.  This is definitely a “rising tide lifts all boats” economy rather than the “trickle down” economy that is described by many on the left.  These workers got something for nothing!  Russian oligarchs would consider this downright stupid, but this is the way a free market economy works.

And yet these workers, the top 10%, are the target of criticism and ridicule because they earn more than the rest of us.  What a crazy notion of fairness.  Taxing them more, as the administration would like to do, taking a greater share of their productivity, and redistributing it to those who are not contributing to productivity growth in some cockeyed notion of fairness is either lunacy or intellectual dishonesty.

Of course, my example is only mathematical.  How does inflation affect this wage dynamic?  If our economy is, in fact, not providing an improving living for all citizens, it is a sign we are not managing it properly, that we have distorted the free market to the extent it cannot function as it should.  Fortunately, and despite some monumental economic mistakes of the past few years, it appears we are still on the right path.  Wages of all workers are growing, if too slowly.

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