Sunday, April 20, 2014

Defining Income

Recent discussions of income inequality are based upon some kind of implicit definition of what is meant by income.  You often hear that worker income has declined in real terms over the past couple of decades.  Is that true?  Well, it depends upon how you define income.

Increasingly workers have been empowered by Congress to sue their employers for a variety of things -- often things that the employer has absolutely no control over.  (For example, offsite incidents between employees, unrelated to work).

If an employee has a new, Congressionally-granted, right to sue the employer, it should be completely clear that such a right imposes a cost upon the employer.  The employer recognizes that litigation rights make that employee more expensive.  It might not involve cash this very minute, but there is an immediate expectation that the employee is now more costly to the employer.  Shouldn't this cost be included as part of the employee's income?

If your answer is no, then that suggests that the right to sue is of no benefit to the employee.  If the right to sue is of no benefit, then why have it?  Since, clearly the right to sue by an employee implies a cost to the employer.

If litigation rights have value to employees, then estimates of worker income should include the costs of these litigation rights.  It would be easy to enough to come up with such a calculation based upon the known costs of such litigation.  Adding in these costs will increase worker income growth over the past two decades and reduce the inequality calculations, since litigation rights for wealthy people are rarely used in the same context as employee litigation rights.

Litigation rights are not the only source of worker income.  What about mandated days off, sick leave rights, occupation and safety rules, employer social security contributions, etc.  All of these items have been subject to ever increasing government mandates.  If they are of value to employees, then they should be included in worker income.  This should prompt a fresh look at the inequality debate as well as a revision in the incorrect view that worker real income has declined over the past few decades.

What has declined is "real" money income.  No question.  And, if more and more mandates are loaded upon employers who have the temerity to hire anyone, then real money income can be reduced even further.  Employers don't care about money income, they care about the total cost to them of employing someone.  Mandates raise that cost and, by simple arithmetic, lower worker income.  It's that simple.

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