Editore"s Note
Tilting at Windmills

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July 18, 2004
By: Kevin Drum

WORKING CLASS WOES PART 1....The New York Times reports that the working class isn't doing too well these days:

On Friday, the Bureau of Labor Statistics reported that hourly earnings of production workers - nonmanagement workers ranging from nurses and teachers to hamburger flippers and assembly-line workers - fell 1.1 percent in June, after accounting for inflation....In June, production workers took home $525.84 a week, on average. After accounting for inflation, this is about $8 less than they were pocketing last January, and is the lowest level of weekly pay since October 2001.

...."There's a bit of a dichotomy," said Ethan S. Harris, chief economist at Lehman Brothers. "Joe Six-Pack is under a lot of pressure. He got a lousy raise; he's paying more for gasoline and milk. He's not doing that great. But proprietors' income is up. Profits are up. Home values are up. Middle-income and upper-income people are looking pretty good."

....Their woes are a product of supply and demand for labor. From 1996 through 2000 when employers were hiring hand over fist, real hourly wages of ordinary workers rose by 7.5 percent.

Supply and demand. Yes indeed. The labor market is a slave to supply and demand just like any other market, right?

Odd, then, that CEO pay rose 27% in 2003, isn't it? Did the supply of CEOs shrink last year? Did demand skyrocket?

What's more, compared to average workers, who remain stuck in the invisible grip of Adam Smith, CEO pay has increased about 3x since 1990 and about 7x since 1980.

Is this the free market at work? That's what I'm told. So I have a contest in mind: a prize for the least laughable explanation for why CEO pay has gone up 7x since 1980 based on supply and demand. At a minimum, winning entries should explain the following:

  • Why the supply of CEOs has decreased.

  • Why the demand for CEOs has increased.

  • Why the elasticity of the CEO demand curve is apparently steeper than for any other commodity on the planet.

Please keep your entries under 100,000 words, and restrict your econometrics to fields no more complex than differential topology.

Grand prize to be announced at a future date.

UPDATE: Angry Bear's submission is here. Sadly, he doesn't even try to defend the supply/demand theory, so the judges have been forced to disqualify him.

Kevin Drum 3:49 PM Permalink | Trackbacks

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