OmCheeto said:
Though starting from scratch, looking at the Jobs case study would probably be a waste of time. Unless of course, my sales reach into the tens of billions of dollars.
The Steve Jobs example is so useful precisely because it is a real-life case study in how things go based on choice of Chief Executive starting from a relatively consistent capital base. Apple's virtually overnight change in corporate well-being followed Jobs' return as its head, not some sudden influx of new capital, patents, or products. It's more complicated than that, of course, but its a useful point.
If too many people perceive that it's ok to cheat, then we'll just end up like Greece.
Agreed. It is the widespread pervasiveness of nonsense beliefs like "executives don't create value" which empowers government to meddle and intervene in the private sector beyond its classical and economically appropriate mandate of correcting for externalities and asymmetries. This creates dirty incentives for companies like GE: they start making what the government wants them to make, not what the market wants.
Believe it or not- the need to earn/support your family can be awfully compelling.
Again, this is an emotional appeal devoid of reason. Does the labor consumer have less an incentive to "support his family" than the supplier? What's with the liberal penchant to dehumanize one side of an argument, and then make it some kind of war between the frail and human and abuse-prone victim on one side and the inhuman, villainous construct on the other?
There is no labor market asymmetry of any kind, either in mainstream economic theory or in observed economic data. Economists observe that wage rates in competitive labor markets behave exactly as one would anticipate, controlling for external factors (wage laws, structural factors, etcetera). So-called "collective bargaining" is code for labor market monopolization and collusion, conduct which is highly illegal in every other American market. The reason is it is anti-competitive. The bargainers monopolize the labor supply, then dictate terms ex-post to firms (the so-called hostage problem). This results in a higher price, lower consumption, and lower productivity. Again, this is the theory, and it is supported by the data. The most stark example would be the US iron and steel industry in the '70s and '80s. When the unionized industry was opened up to foreign competition (specifically from Brazil) over the cries of foul from labor and the left, productivity doubled virtually overnight.
Read the article, it references all sorts of productivity vs. wage increase studies.
From what flawed conceptual understanding of economics does it follow that productivity increases should be associated with wage increases?
Typically, productivity growth is fueled by external threats, ie new competition or otherwise diminished market position. Given that, one should not be surprised to see no immediate reflection of productivity changes in the wage rates. In the long run, total growth (in wages and elsewhere) is driven
entirely by productivity gains, however - see the Solow growth model.
Productivity is a measure of short-run production per employee, while wage measures short-run cost per employee. Firms have an incentive to maximize productivity above the wage rate to create surplus - this is value added to the firm by the new hire. If there is perfect correlation between productivity and wage, there is no incentive to hire, as the firm generates no new value by adding the employee. Indeed, this is why in introductory micro courses one learns that the solution to the firms labor optimization problem is to stop hiring when marginal productivity equals the wage rate.
In the long-run, the increased productivity of the average worker will create additional demand for labor. This puts upward pressure on prices,
unless additional supply is willing & able to go to work at the existing wage. Given the lack of labor shortage in the United States over the past decade, it should come as no surprise, then, that productivity improvements haven't resulted in wage inflation. We only observe inflation in the price of any good - including labor - when there is a supply shortage relative to demand, which is only possible at or near full employment. The economy is obviously not operating at or near this point.
These are obviously extreme examples- but they run in the opposite direction your theory would suggest.
These firms are now
bankrupt, by your own admission. A firm goes bankrupt when and only when it is unable to attract and retain sufficient operating capital to continue production.
Ergo, by definition, these cases
support the theory. Clearly, AIG and Borders made
bad investment decisions. Markets are efficient, but individuals are not. This would be like citing high bankruptcy rates in the United States relative to India as evidence that the Indians should be a lot wealthier than we are. Of course, they are not, and the opposite is true: high bankruptcy rates are a symptom of high capital mobility and are regarded as a positive economic indicator.
You are describing how things are supposed to work. Unfortunately, reality is more messy than first-year business school.
Using the data I happened to have available (Bloomberg data on 209 CEO salary's from 1990), the simplest case regression shows for a 1% change in a firms return on equity, we observe an increase of approximately $18,000 in CEO salary. Which came first, the salary or the delta ROE? Can't say. But the data is conclusive, at least in this case (and I promise it was chosen arbitrarily): higher CEO salary is positively correlated with better business performance.
This was done in Stata 11.
