The “Paid-What-You’re-Worth” Myth

March 13, 2014. Robert Reich. New York Times and robertreich.org

It’s often assumed that people are paid what they’re worth. According to this logic, minimum wage workers aren’t worth more than the $7.25 an hour they now receive. If they were worth more, they’d earn more. Any attempt to force employers to pay them more will only kill jobs.

According to this same logic, CEOs of big companies are worth their giant compensation packages, now averaging 300 times pay of the typical American worker. They must be worth it or they wouldn’t be paid this much. Any attempt to limit their pay is fruitless because their pay will only take some other form.

Fifty years ago, when General Motors was the largest employer in America, the typical GM worker got paid $35 an hour in today’s dollars. Today, America’s largest employer is Walmart, and the typical Walmart workers earns $8.80 an hour.  [GM workers were paid that much because they had a strong union.  Back then over 33% of workers were in unions that raised wages and benefits for all, not just the union workers.  But Walmart workers can’t get a better deal — less than 7% of workers are unionized.]

The result has been a race to the bottom.

Today’s CEOs who rake in 300 times the pay of average workers aren’t “worth” it. [They’re paid that much because they appoint the boards that decide executive pay].

If you still believe people are paid what they’re worth, take a look at Wall Street bonuses. Last year’s average bonus was up 15% over the year before, to more than $164,000. It was the largest average Wall Street bonus since the 2008 financial crisis and the third highest on record, according to New York’s state comptroller. Remember, we’re talking bonuses, above and beyond salaries.

Wall Street paid out a whopping $26.7 billion in bonuses last year. [And guess what — You’re paying their bonuses and salaries!]

[Why? How? The money you’ve parked in small banks earns less than big banks because they’re perceived as being more risky and less likely to get bailed out than the huge “too big to fail” banks in the next financial crash.  So large banks can borrow money at a lower rate and at the same time charge you high interest, making money both coming and going].

How large is this hidden subsidy? [Enough to add up to $83 billion a year at the 10 biggest Wall Street banks].  Without the subsidy, no [$26.7 billion in bonus].

[Most of the $83 billion ($64 billion) goes to the top 5 banks — JPMorgan, Bank of America, Citigroup, Wells Fargo. and Goldman Sachs. [$64 Billion is roughly equals their annual profits — so no subsidy and both bonuses and profits disappear].

Wall Street bankers [didn’t work] harder or were more clever or insightful than most other Americans.

And why, exactly, do these institutions continue to have such privileges? Why hasn’t Congress used the antitrust laws to cut them down to size so they’re not too big to fail, or at least taxed away their hidden subsidy (which, after all, results from their taxpayer-financed bailout)? 

Perhaps it’s because Wall Street also accounts for a large proportion of campaign donations to major candidates for Congress and the presidency of both parties.

America’s low-wage workers … can’t afford to make major campaign contributions and they have no political clout.

According to the Institute for Policy Studies, the $26.7 billion of bonuses Wall Street banks paid out last year would be enough to more than double the pay of every one of America’s 1,085,000 full-time minimum wage workers. 

The remainder of the $83 billion of hidden subsidy going to those same banks would almost be enough to double what the government now provides low-wage workers in the form of wage subsidies under the Earned Income Tax Credit.

But I don’t expect Congress to make these sorts of adjustments any time soon.

The “paid-what-your-worth” argument is fundamentally misleading because it ignores power, overlooks institutions, and disregards politics. As such, it lures the unsuspecting into thinking nothing whatever should be done to change what people are paid, because nothing can be done.

Don’t buy it.