Two studies released in the past few weeks are busting long-held myths about what makes our economy grow.
The first came in June from three professors: Michael J. Cooper of the University of Utah, Huseyin Gulen of Purdue, and P. Raghavendra Rau of the University of Cambridge. They looked at the long-term performance of 1,500 businesses and found that higher CEO pay has a negative effect on a company’s performance.
Using data from 1994 to 2013, the professors saw that companies in the top 10 percent of CEO pay produced “negative abnormal returns” (lower shareholder returns than other firms in their industry) or around -8 percent over three years. The higher the pay got, the more pronounced the effect: the top 5 percent of highest paid CEOs steered their companies to a 15 percent worse performance.
In a word, overconfidence. CEOs who get paid huge amounts tend to think less critically about their decisions. “They ignore dis-confirming information and just think that they’re right,” says Cooper. That tends to result in over-investing—investing too much and investing in bad projects that don’t yield positive returns for investors.”
The second came this week from the Center for Economic and Policy Research, which compared employment growth between states and found that those states that raised their minimum wage levels experienced higher growth than those that didn’t.
Of the 13 states where the minimum wage went up on January 1, 2014 (either because of legislative action, referendum, or cost-of-living adjustments), all but one had positive employment growth, and nine of them had growth higher than the median. “The average change in employment for the 13 states that increased their minimum wage is +0.99% while the remaining states have an average employment change of +0.68%,” wrote CEPR.
“While this kind of simple exercise can’t establish causality, it does provide evidence against theoretical negative employment effects of minimum-wage increases,” writes Ben Wolcott of CEPR.
In other words, it doesn’t prove raising the minimum wage always creates a certain number of jobs within 6 months, but it does add to the pile of evidence showing that raising the minimum wage doesn’t negatively affect employment.
And CEPR isn’t the only group that reached these conclusions. An analysis by banking giant Goldman Sachs (!) also found the states that raised their minimum wages doing better than those that didn’t.
Taken together, these studies back up what working people already know: higher wages add to a virtuous cycle that benefits both workers and businesses, and that exorbitant CEO pay does nothing for the broader economy other than line the pockets of an increasingly small and powerful group of uber-wealthy individuals.
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