The Marx Ratio: Not Clear Karl Would be Happy

Neil Irwin had an interesting Upshot piece in the New York Times that takes advantage of new data on the median worker’s pay at major corporations. The piece calculates the “Marx ratio” which is the ratio of profits per worker to the median worker’s pay. It shows this number for each of the companies who have released data on their ratio of CEO pay to median worker’s pay, as required by a provision of the Dodd-Frank financial reform act.

It’s not clear exactly what this ratio is giving us. Suppose that a major manufacturer has subsidiaries in China and other low-wage countries that do most of its work. In this case, the median worker could be someone in one of these countries, giving it a low, median wage. However, it also has lots of workers (it’s likely they employ more workers per unit of output in low wage Bangladesh than in the United States) so it may have low profits per worker.

Now suppose the company contracts out its manufacturing work in low-wage countries so that the people who work in these countries are no longer on the companies payroll. This will raise the median wage by getting rid of many of the company’s lowest-paid workers. It will also raise per worker profits since it has fewer workers, but its profits will be pretty much unchanged.

There is a similar problem domestically. A company that contracts out its custodial staff, cafeteria workers, and other lower-paid workers will have higher median pay than an otherwise identical company that has many of these workers on the company’s payroll. A better measure of the profits the company makes on its workers would not be sensitive to this sort of maneuver.

Of course, the main point of the new requirement was to call attention to how high CEO pay is relative to the pay of ordinary workers. This is arguably justified if the CEO is extremely innovative and able to produce large returns to shareholders. However, there is good evidence that CEO pay bears little relationship to their value to shareholders.

In that case, the tens of millions earned by CEOs is not reflecting their contribution to the company or the economy, but rather their insider contacts that allow them to secure and hold positions. This has a corrupting impact on incomes throughout the economy since it raises the pay for both the second- and third-tier executives, as well as setting a higher benchmark for pay in the non-profit sector and government.

And, as economists and fans of arithmetic everywhere know, more money for those at the top means less money for everyone else.

This column originally appeared in Beat the Press.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.