🔒Private sector not to blame for income inequality

The income inequality issue has advanced to the top of the public agenda, and for good reason. It is an important and bona fide issue — at least when it is framed as a dearth of equitably available middle class employment opportunities. The issue is not legitimate when framed in more radical dress as equal pay regardless of effort or qualifications, though this version has its advocates too.

Regardless of how the issue is framed the misleading part of the discussion is the reflexive presumption that the business sector bears responsibility for the problem simply because its members refuse to pay at levels sufficient to alleviate income disparities. Based on this slender reed, equality advocates urge the use of “coercive” means to compel the sector to adopt more egalitarian practices.

However, the problem is actually a consequence of the government's addiction to regulatory excesses that hamper growth and job creation — but convincing people to put the blame where it belongs (excess regulation) is difficult and perhaps quixotic. Nevertheless, I will try to do this by sticking my lance into the belly of the coercive solutions being used to twist the arm of the business sector to expose the erroneous thinking behind them.

First, minimum wage statutes can be used to compel business to pay more. Connecticut's minimum wage of $9.15 will rise to $10.10 in 2017, and some cities in the country have raised their minimum to $15. A variation, which did not make it into law in the 2015 Connecticut legislative session, would have imposed a $1 per hour penalty on large employers paying less than $15 per hour to reimburse the state for the public benefits low-wage earners receive.

I have no issue with minimum wage statutes generally, but the public should not be conned into thinking that the problem can be fixed with statutes that compel wage levels. Earlier this year, the Pew Charitable Trust published its analysis of what middle class means on a state-by-state basis, and in Connecticut the lower end is $44,732 per annum and the upper end is $134,196. We need jobs that pay upwards of $25 to $30 per hour to make a serious dent in the problem, and statutes will never get us there because the law is not powerful enough to bend market forces to its will. If it was, we could set the minimum at $100,000 per annum and all enjoy the ensuing prosperity.

Second, enormous media and related pressure is placed on the business sector. The Securities Exchange Commission recently adopted a rule requiring public companies to disclose the ratio of the annual compensation of all employees to the annual compensation of the CEO. An Aug. 11 Wall Street Journal op-ed accurately characterized this as an attempt to “embarrass companies about income inequality.” There is also the “fight for 15” movement, which uses public pressure to drive up wages for fast food workers.

However, if we parse through recent news stories the evidence suggests that changes brought on by this pressure are tripping over their unintended (but foreseeable) consequences. An Aug. 6 story in Bloomberg Business (“Unintended Consequences of Wal-Mart's Raise: Unhappy Workers”) notes that Wal-Mart's decision to increase the minimum wage it pays newer workers to make them equal with senior employees upset the senior employees — who felt entitled to more because of their longevity. Wal-Mart clearly should have raised everyone's wages in lock step to avoid this problem, but on a deeper level the case demonstrates a basic facet of human nature — equality for its own sake is a non-starter because people rightfully expect to be treated better if they have greater longevity or work harder. Human nature cannot be changed by public pressure, or by legislation or regulation for that matter.

Another example is Gravity Payments, the credit card processing firm in Seattle. It took a deep dive into these waters when its co-owner/ CEO Dan Price decided to pay all employees $70,000 per year (Price included). While his leap of faith brought praise and headlines, more fundamental questions lurk below the surface: Will radically egalitarian compensation practices help or hurt the long-term competitive prospects of the business? Would a more traditional merit-based policy contribute to greater growth and jobs for more people?

A story in the Aug. 2 New York Times noted that two of Gravity's most valuable employees quit because “it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises,” and because “people who were just clocking in and clocking out were making the same.” Price has been sued by his brother and co-founder/owner with sufficient reason — he owes fiduciary duties of prudence to his brother and his jump into these waters seems as reckless as it is popular among equality advocates.

Finally, it is not the purpose of the business sector to guarantee a middle-class living, to act as an instrument of government policymakers, or to save the government from its failure to create fertile soil for business to grow. Its purpose is to create and sell goods and services honestly and profitably and to create value and fair employment opportunities in the process. It is the only sector of our economy that does this, and the other two sectors (governmental and nonprofit) live off its success and suffer with its failures.

John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own.