Rents, Rents, Everywhere Rents!

April 17th, 2014 at 2:25 pm

Once you start seeing rents at the high end of the US compensation scale, it’s hard to stop (“rents” in this context means being paid well above your actual contribution to your firm’s value-added).

There’s all the “front-running” stuff by high-frequency traders that’s finally getting a lot of press, which is a close cousin of the early-info traders I’ve written about a few times.  Then there’s the collusion among Silicon Valley CEOs to suppress competitive wage bargaining in the labor market (h/t: KA).

And then there’s the extreme cyclicality of top-tier wage trends.

Start with EPIs revealing wage series, developed from Social Security administrative wage data, a highly reliable source.  The figure below, from their State of Working America, shows the extremes of growing earnings inequality since the late 1970s.  It plots real earnings by income group, indexed to 1979, to enable comparison of very different scales—by 2012, the average annual earnings of the top 1% was about $650,000, while that of the bottom 90% was $32,000 (and that of the top 0.1%, not shown, was $2.5 million).


Now, OTEers know I’m always going on about tight labor markets and wage trends, but the point I’ve stressed is that full employment boosts the pay of low-wage workers the most, middle-wage a good bit, and not at all at the top of the scale (see, for example, figure 5 here).

One can see the full employment impact of the latter 1990s in the figure’s bottom line for the 0-90%, as those are about the only years in the series where the bottom 90% gets a clear boost.  But look at those very large cyclical bips and bops amidst the top 1%–and they’re even more pronounced for the top 0.1%.  What the heck’s up with that?

Did our supermanagers, as Thomas Piketty calls them, suddenly all become super-responsive to the business cycle?  Did they all bang their heads at the same time and suddenly become terribly unproductive, only to recover from their amnesia shortly thereafter?  Under what version of marginal product does this pattern prevail?  In fact, that pattern looks a lot like the movements in the stock market!  J’accuse!

The Real Earnings of the Top 0.1% (left axis) and the Dow Jones Index (right axis)



Now, as EPI’s Larry Mishel points out—and this post comes out of discussions with Larry about these data—the salary of these top earners is increasingly a function of stock options (though the truly “skilled” ones know how to time, if not backdate, the options to avoid such capital losses).  So the pattern in the above figure isn’t so surprising.  But unless you want to bend yourself into a pretzel to do so, explaining why a bubble-induced implosion in equity values should sharply and temporarily reduce to the marginal product of a narrow group of execs seems like a fool’s errand.

A slightly more formal analysis reinforces the point about whose pay is more sensitive to tautness and slack in the job market–and whose isn’t.  The table below shows a simple Phillip’s wage curve regression of the traditional format (see data note if interested).  An extra percentage point of unemployment (technically, an added point to the unemployment gap) lowers the average wage growth of the bottom 90% of workers by a highly significant one percent and that simple model explains almost a third of the variance in this series.  For the top 0.1%, however, the coefficient is insignificant and the model explains nothing.


It’s neither a coincidence nor a surprise that the earnings of these tippy-top earners moves with the market these days.  But it sure makes it hard to tell a story that doesn’t involve a hefty dose of rent seeking—and not just seeking, but finding!


Data note: The dependent variable in the regression is the log change in nominal salary minus the rate of inflation lagged one year (using the CPI-RS inflation index).  The sole independent variable is actual unemployment rate minus the CBO’s NAIRU, or their unemployment rate associated with full employment.


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5 comments in reply to "Rents, Rents, Everywhere Rents!"

  1. Tom in MN says:

    And if all your wealth is in your house, you are still down from before the recession, while those with lots of stock wealth are back in the black. Not to mention that when average folks panicked and sold on the way down someone else (who likely did not have to worry about putting food on the table) was buying.

  2. wkj says:

    Are you familiar with “The Road to Recovery” by Andrew Smithers?
    Smithers argues (with a lot of data) that the linkage of executive and director compensation to the stock market strongly biases corporate management toward maximizing short term profits and against taking risk and making long-term investments. He further argues that these biases are a major cause of the massive accumulations of cash by public corporations and the sluggishness of the recovery.

  3. Larry Signor says:

    The amazing part of the story is that the financial industry increased credit by many magnitudes while wage growth for the %90 was essentially flat. Why hand a person an anchor who already has concrete blocks strapped to their feet? Um, future rent extraction?

  4. Perplexed says:

    Great post on the foundation of sand that is “marginal products” theology Jared! Like most magic tricks, the key is in creating an illusion that distracts the observer from what is really happening – the real “slight of hand.” It would be great to have some measure of the total rents hidden behind the economic magicians’ illusions of “marginal products” and “labor markets.” It would be truly interesting to see what the public reaction might be when they saw the real story of rents that are ultimately taxes hidden in the prices they pay that generate no public benefits, but are instead just government sanctioned transfers to private interests. The correlation with stock prices is quite revealing (although not unexpected), but it would even be more interesting to see the correlation between returns to patent holders and other monopoly protections and barriers and these “supermanager” salaries. Such a comparison might reveal that our “supermanagers” are more like the blackjack dealers at the tables where the players beat the house and tip the dealer proportionately. If you’re a card counter and can tip the odds in your favor, why would you not tip the dealer that doesn’t give you away and reshuffles the deck only when he’s forced to? What economic “rules” govern the “divvying up” of monopoly profits?

    With so much of the economy operating outside of the “marginal products” and “labor markets” illusions, it rather amazing we don’t have the same kind of measurements and statistics tracking monopoly profits and other rents that we do tracking every minute detail of wage distributions to the “working classes.” It kind of makes one wonder who designed that tracking system doesn’t it?