- - Thursday, February 19, 2015

ANALYSIS/OPINION:

In an interview with BuzzFeed last week, President Obama invoked the CEO pay gap — the disparity between top executives and employee staff compensation — to publicly shame companies like Staples for appearing to circumvent the Affordable Care Act’s 30-hour workweek mandate. “I haven’t looked at Staples stock lately or what the compensation of the CEO is, but I suspect that they could well afford to treat their workers favorably,” he said.

Invoking the CEO pay gap has become a staple (pun intended) talking point for the president and his allies, but it doesn’t pass the economic literacy smell test.

The pay-gap talking point is flawed on many counts, foremost among them being that it is a moot point: Even if a CEO’s compensation could be redistributed, it would have almost zero impact on employee compensation given that the companies in question typically employ huge numbers of people.

Take the president’s example of Staples. Its CEO Ronald Sargent earns $10.8 million in compensation. But the company also employs approximately 83,000 people. Even if the CEO took a 100 percent pay cut and distributed it evenly among his employees to fund health care plans, they’d only score an additional 36 cents a day to put toward their monthly premiums.

Despite its flaws, the tortured pay-gap math has been put forward by Obama acolytes at the AFL-CIO and MoveOn.org to support a new argument for raising the minimum wage.

Using the president’s logic, they claim that companies such as McDonald’s could afford to pay higher wages because CEOs are highly paid — “taking a greater share of the economic pie” in AFL-CIO-speak. Again though, these companies typically employ a ton of people, greatly diminishing the potential gains from redistribution.

For instance, McDonald’s and its franchisees employ about 1.8 million people worldwide. If its CEO’s $9.5 million compensation package for 2014 were redistributed evenly among them, it would raise everyone’s salary by less than a penny an hour, assuming the average employee works 25 hours per week.

Perhaps it is too much to ask for the president to understand how wages are set in a free economy: Shareholders determine CEO pay based on expected return; customers determine employee pay based on what they are willing to pay for company goods and services. Wage controls by fiat have a bleak history, something we would expect the president to know.

Yet he has consistently pushed to increase the minimum wage, claiming: “There’s no solid evidence that a higher minimum wage costs jobs.” This contradicts not only the majority of credible economic research on the issue, but also the nonpartisan Congressional Budget Office, which predicts that 500,000 jobs could be lost if the wage were raised to $10.10. Does any serious economist think that the government telling any business to raise salaries by 40 percent would not have some serious negative consequences?

These lost jobs disproportionately come at the expense of young and low-skilled employees, whose labor is worth the least and are most expendable when costs need to be cut. A new study by the Federal Reserve Bank of New York indicates just how important such early work experience is, concluding: “Across the board, the bulk of earnings growth happens during the first decade.”

This study adds to a growing body of research that points to devastating and persistent impacts from early career unemployment. Last summer, the Employment Policies Institute, which my company manages, released a report by economists from the University of Virginia and Middle Tennessee State University that found clear evidence that part-time work by young adults translates into higher annual earnings throughout one’s career.

This wage premium is often attributed to young employees being exposed to an “invisible curriculum” — time management, organizational skills and interpersonal interactions — that plays a significant role in career development and marketability.

With teen unemployment rates at 16 percent nationally and at 30 percent among young African-Americans, the president should be focusing on policies that stimulate economic growth and not erect additional barriers to employment. Given the president’s BuzzFeed level of economic literacy, that’s unlikely to occur anytime soon.

Richard Berman is president of Berman and Co., a public affairs firm in Washington.


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