Friday, June 15, 2007

Google's Success = Income Inequality, So What?

Increased income inequality, in and of itself, is neither positive nor negative. What matters is why inequality has increased.

A quarter of the increased income inequality since 1976--and almost all of the increase in inequality among the top earners--is a direct result of the increased use of performance pay by American companies. Inequality is rising because hard workers are being increasingly rewarded for their higher productivity.

In an economy where most wealth is not inherited but earned, increased inequality can be beneficial. Consider the impact of Google, Inc. The company's founders, Larry Page and Sergey Brin, are now worth more than $16 billion each. Their financial success has made America a demonstrably less equal country, and most Americans are better off for it. Google's various services allow tens of millions of Americans to quickly find what they want on the Internet, conveniently get directions to where they need to go, and use a quality e-mail server--all for free. Page and Brin became wealthy--and increased inequality--by improving the lives of others.

Performance pay increases wage inequality for two reasons. First, such jobs usually pay more than jobs without performance pay. Performance pay makes workers more productive, allowing employers to increase pay. However, higher wages for these workers, but not others, increases inequality.

Second, performance pay increases inequality directly because it means the workers who produce more, earn more. Imagine two car repair shops: The first pays employees a flat $15 per hour wage for installing replacement windshields; the second pays employees $20 for each windshield they install. There will be very little inequality in the first company since every worker earns the same wage. The second company pays more to diligent or talented employees because they install more windshields. Performance pay rewards productive workers more than less productive workers, meaning higher inequality.

Read more here.

2 Comments:

At 6/16/2007 1:10 AM, Anonymous Ian Random said...

YEAH!!!!!!!!!!!!!!!!!!!!!!
Finally, someone says it. That's generally how I can tell a lefty from a righty. The lefties usual go on to say how bad this is because it makes us more like some evil third world country, rather than notice something called the middle class which often isn't present in those same pathetic third world country.

 
At 1/01/2008 3:15 AM, Anonymous Anonymous said...

You can always find some random anecdote you backup just about any argument.

I would say that a lot of the new wealth being created in America was created by making society as a whole worse off.

The financial services industry in particular, from the S&L bailout, dot.com bust, sub-prime mortgage blowup. Not to mention the new face of American capitalism: Private Equity whose only game is to "improve the balance sheet" by laying off most of the workers.

Google is the exception, most of the new rich have made their fortunes by distruction not creation.

 

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