Income (inequality) as a small percentage of the total compensation package

The blog post isn't particularly robustly argued but the germ of the idea in the headline is intriguing. Compensating Differentials Likely Temper Any Growth in Income Inequality by John O. McGinnis.

Some predicates. For all that there is a swell of Social Justice Warrior concern about rising income inequality around the world, from an economic and even from a sociological perspective, it is unclear whether there is any there there. In other words, empirically, other than at extreme levels, it is unclear whether there is any negative consequence to increasing income inequality, particularly if all incomes are rising. There is also the paradox that while income inequality is rising within countries around the world, global inequality is falling rapidly.

All of which is to say that there is a lot of complexity and little clarity around the issue of income inequality. This is partly why it is so easy to see concern for income inequality as just another manifestation of the age old strain of totalitarianism which isn't so much interested in human welfare as it is interested in exercising power over others by, for example, punishing with higher taxes, and/or forcing income redistribution, all for the ostensible greater good.

McGinnis's core point in his headline is an interesting one. We receive compensation in many forms. There is certainly current income. Then there are other things such as deferred compensation (pensions); ownership (shares); status; experience; travel; learning; security; adventure; connections, flexibility; engagement, teamwork; accomplishment; service; etc. Among these elements, the ranking of each, the prioritization; the relative valuation and the different acceptable trade-offs are all going to vary significantly between individuals.

Some value flexibility of working conditions more than the compensation, some the status more than the security, some the intellectual stimulation more than the working conditions, etc. So how do you make comparisons across individuals to assess how well people are doing in their life choices given which forms of compensation they most value? This is something of the dilemma confronted by the economist Claudia Goldin who has discovered that men and women are paid the same for equal work under equal conditions. The issue for Dr. Goldin is that women value other attributes such as job flexibility greater than they do income maximization, thus leading to aggregate income differentials. It is not that people are being discriminated against, it is that they are valuing different forms of compensation differently from one another.

What McGinnis opens up is a second front on the income inequality hysteria. If we acknowledge that people have different life goals and value different forms of compensation differently, then on what basis is it relevant to privilege a single measure (current income) over all the others (future income, job security, job flexibility, status, etc.)?

There is no basis. Just because income is the easiest among these things to measure doesn't mean that it is the most important. That goes back to the old joke about the drunk looking for his lost car keys under the streetlamp not because that is where he believes he dropped them but because that is the only place where there is light to see.

This issue of defining exactly what constitutes income and how to measure it sets up a Hayekian Problem of Knowledge. You want everyone to be able to maximize their total compensation, given their life goals, values and circumstances. But not being able to define, measure or know the actual life goals, ranking of goals, relative prioritization of goals, and specific trade-offs, there is no one that can actually perform that calculus save the person themselves and even they may not get it right. So if you are a planner, or a Social Justice Warrior wanting to ensure that there is societal optimization and that there is fairness in total compensation, how do you, how can you determine that? You can't. The exercise is an exercise in futility.

It is analogous to the concern about assessing Life Outcomes. We can measure income, we can measure morbidity, we can measure mortality, we can measure longevity, we can measure education attainment. We can measure wealth accumulation. These are all important elements of a good life. But are they a complete or even a sufficient list? No. There are all sorts of other elements, of differing importance to different people under different circumstances, that go into the calculus of good Life Outcomes. Not only is there a Problem of Knowledge issue, there is also Solon's ancient counsel: "Count no man happy until he be dead." We can't know if you have made good decisions about optimizing your desired Life Outcomes until you are dead because the calculus can change so radically right up to that moment.

We can ensure that the laws are prudently formulated. We can ensure that legal justice is impartially administered. We can create systems of government with good checks-and-balances. We can structure the economy to maximize the potential of all parties to engage themselves productively. Beyond that we are limited. There is no feasible way to be respectful of different peoples different life goals, values, priorities, and trade-offs, whether it be in terms of income or in terms of Life Outcomes and ensure that there are centrally imposed (or mob imposed) "fair" outcomes. It is not that it is hard. It is that it is impossible.