Unequal Incomes

A friend of mine is concerned about the existence today of income inequality that is leading to the accumulation of disproportionate wealth and economic and political power into the hands of a few.

No one doubts that individuals try to better their condition. Adam Smith in the Wealth of Nations at page 237 said “But the principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go to the grave”. President Abraham Lincoln said “I hold that while man exists, it is his duty to improve not only his own condition, but to assist in ameliorating mankind”.

Executive compensation varies dramatically between the USA and Japan. In 2012 the annual compensation for the top 10 executives in the USA was over $100 million each (see The Guardian, October 22, 2013). In Japan there exists a culture of much lower pay for executives. For example, the Chairman of Toyota Motors earned $1.5 million in 2009 (see Bloomberg Businessweek, July11, 2010, Compensation in Japan, at page 14).

Government price controls to remedy income inequality are unlikely.

Lawyer incomes can vary widely in North America. Equity partners in the large law firms receive large sums compared to lawyers who are associates in the large firms. See the book The Lawyer Bubble (2013) by Stephen J. Harper which describes how some equity partners maximize their income at the expense of associate lawyers. Harper also describes the management practices that led to the bankruptcy of a surprising number of large firms. For example, the Dewey firm with 1300 lawyers and debt of $245 million was dissolved in 2012. Harper states that in 1986 a law partner’s average income was 11 times that of the average American employee and in 2010 it was 23 times that benchmark (see page 99).

Managing large law firms has proved difficult. A management consultant states that the optimal size of a law firm is about 100 lawyers (see Harper book at page 75).

Harper states that the 250 largest law firms in the U.S. employ 15% of all practising lawyers (see page 67).

Some large law firms require associate lawyers to bill a minimum of 1900 to 2000 hours per year; and clients are billed at $400 plus per hour. When I was practicing law in Fredericton in the 1960s the top hourly rate by senior lawyers was $20 per hour. Also at that time 1500 billable hours per year was a reasonable target for a practicing lawyer.

Today here in Fredericton some lawyers bill at the rate of $500 per hour. A retired university professor told me that he consulted a Fredericton lawyer to revise his will. The lawyer charged the professor $500 per hour and the professor promptly changed lawyers.

Harper in his book suggests that some high incomes are due in part to a concentration on profit to the exclusion of other interests. Harper refers to some firms that provide an alternative model where the firm has no annual minimum billable hour requirement for associates and the ratio of partners to associates is one to one (see page 193).

Some clients are objecting to the existing billing methods of some large law firms. In the Globe and Mail of November 28, 2013, an article states that some large client firms are seeking new billing methods that provide some predictability; that is, more than an hourly rate and an open ended retainer.

The free market system has produced for many nations unprecedented prosperity but not without excesses. Clearly some incomes are excessive.

Historically, unequal incomes and unequal wealth have been a problem in all types of political systems. Hopefully, our politicians will address the current problem.