Income Distribution
Income distribution, the apportionment of total national income among all the individuals and families in a country, is an issue closely tied to the way business operates within a society. In any market economy, it is business that generates most personal income, not only through wages and benefits but through interest, dividends, and stock appreciation as well. Therefore the distribution of income is a central concern of business ethics, for evaluating both the fairness of particular business practices and the overall contribution of business to the well-being of society.
Income distribution is generally measured in one of two ways. The simpler way is to divide a society’s total income into segments, such as tenths or fifths, based on either per capita or family income. These slices can then be compared with one another at either a given point in time or over an extended period. Thus one can compare, for example, how much income growth the top 10% experienced over a decade compared with the bottom 60%. A more mathematically sophisticated measure is the Gini coefficient, which gives a single number indicating the income distribution of an entire society. This coefficient ranges from 0 (perfect equality) to 1 (all income is received by a single individual), and it is especially useful for comparing distributions between nations.
The social and economic significance of income distribution depends on its interaction with other trends regarding a particular society, especially changes in the absolute level of average or median income. Increasing disparity is less significant in an environment in which most individuals are experiencing growing incomes compared with a situation where median income stagnates or even declines since the latter situation is more likely to weaken social solidarity and political unity. Over the past generation, the United States has experienced this second, more contentious, set of circumstances. According to the Census Bureau, the Gini coefficient for the United States, which held fairly stable at about 0.40 between 1967 and 1977, has risen steadily since then and hit 0.46 in 2000. Furthermore, figures compiled by the World Bank put American society at the high end of income inequality among industrialized nations. U.S. income is more unevenly distributed than income in Japan, Korea, Taiwan, Australia, Canada, all of Europe (including Turkey), and India, though it does remain a more equal distribution than in China, Hong Kong, and Singapore and a number of poorer countries.
This rising inequality in income distribution in the United States coincides with the nation’s weakest generation of average income growth. Until the mid-1970s average compensation tended to track increases in productivity over time. During the postwar generation between 1947 and 1973, for example, both productivity and average family income grew 103% in inflationadjusted dollars. In contrast, between 1973 and 2003, productivity grew 71%, while family income increased only 22%. Furthermore, according to figures compiled by the Department of Labor, average hourly compensation (adjusted for inflation) has actually declined slightly since 1973 for the four fifths of the population not working in professional or managerial occupations.
Some have argued that tracking compensation over time produces unduly pessimistic results because income numbers do not adequately capture the improved quality of life that comes from innovation. This argument, however, fails to recognize how important innovation has been throughout almost all of American history and how it has traditionally occurred side by side with wage increases. The postwar generation not only doubled its pay but also saw the introduction of television, transistors, commercial jets, home air conditioning, plastics, new medical treatments, and a variety of other product breakthroughs. It would be difficult to argue that a business sector that generates new products but does not share the financial gains from productivity improvements with most of its employees contributes as much to society as a business sector that does both. The issue of fairness in income distribution has been highlighted in recent years by the well-publicized relative rise in executive compensation in the United States. In 1978, the average CEO earned about 35 times the salary of the average worker. This ratio doubled by 1989, just as the bull market started on Wall Street, and then hit 300:1 in 2000, as the market peaked. It has since come down to 185:1 in 2003, but this ratio remains more than five times what it was a generation ago, a period when American business was the envy of world.
A number of factors have been offered for this divergence in income. These include the following: increasing returns to certain kinds of vital technical and professional knowledge, weakening of union power to organize workers or bargain effectively, subcontracting work to less generous employers, movement (or even the threat of movement) of manufacturing overseas, declining value of the minimum wage, less generous benefits for workers and retirees, and a growing reluctance by employees to demand a raise in an era in which downsizing has become routine. Others put the responsibility on new ways of compensating executives through stock options and other means that tend to reward short-term cost cutting, including the cost of labor. While all of these explanations appear to be somewhat plausible, researchers find that none of these, alone, can explain either the timing or magnitude in this sea change in American income distribution, suggesting that a number of factors share responsibility for this change.
Whatever the precise causes, some people find this trend problematic from an ethical perspective. Income divergence raises important questions about fairness and organizational commitment when the benefits of success predominantly accrue to a few. For ethicists influenced by Rawls, such a trend threatens to violate his rule of fairness—that gains to the productive few should not be at the expense of the least fortunate. Libertarians, on the other hand, would be more cautious about making assumptions regarding the ethical implications of increasing income inequality. Unless inequality is generated by coercion or fraud, or by favoritism on the part of government toward one group at the expense of another, libertarians view fluctuations in the relative fortunes of different individuals as a normal part of the operation of markets as the demand for various skills, experiences, and professions shifts over time. Nonetheless, many business ethicists have argued for two decades that corporate executives need to honor and preserve implicit social contracts and, following Kant, to treat employees as stakeholders having ends of their own. Implementing such advice requires grappling with the reality of a diverging distribution of income.
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