Minimum Wage and CEO Pay
By Arnold Kling
Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren’t these issues raised in relation to executive compensation?
I think that the conventional wisdom is that inflation is determined primarily by monetary policy. I do not think that contemporary economists would be inclined to blame inflation on increases in the minimum wage. The entire “cost-push” model of inflation has fallen out of favor.
Most economists continue to believe that a higher minimum wage reduces employment. It is a straightforward consequence of the laws of supply and demand.
CEO compensation does not affect inflation or unemployment, because CEO compensation is not artificially set above market-clearing levels. That is, CEO compensation is set by the consent of shareholders, whether that consent is granted in wisdom or folly. In theory, shareholders set compensation so that they maximize the quality of management relative to what they spend. In theory, CEO compensation serves to provide the incentive for the best CEO’s to go to the companies where they can make the most difference, rather than wasting their talents on companies that cannot afford to pay them the highest compensation.
Personally, I believe that if CEO’s were paid less, then the quality of management would decline very little, if at all. From a shareholder’s perspective, I think I would be willing to lower CEO pay and risk losing the CEO of a company to a higher bidder.
I suspect that there is an opportunity for shareholders to increase profits by implementing stronger corporate governance that limits CEO compensation. However, the cost of establishing such stronger corporate governance might very well exceed the benefits.
For Discussion. How would you answer Brazeau’s question?