What’s Driving the Growth of US Inequality: Labor or Capital Income?

April 13th, 2014 at 12:29 pm

As noted yesterday, I’m working on a longer piece about sky-high salaries—merit vs. “rents”—so I was interested to see this piece (“Invasion of the Supersalaries”—nice!) in the NYT this AM.  That piece reports that “the median compensation of a chief executive in 2013 was $13.9 million, up 9 percent from 2012…”  I’m assuming that 9% is nominal (not inflation adjusted) but according to the BLS, nominal median weekly earnings for regular old full-time workers not from the exec suites went up about 1% last year, which was actually a bit behind inflation (1.5%; see table 7; we’re talking about $40,000/year).

So, the bakers are once again getting smaller slices of the pie.

A related observation came to mind today as I working through Thomas Piketty’s incredible new book on inequality (the fact that it’s already a best seller gives me more hope for the future of this critical debate than almost anything else I can think of in recent years).

What with the rise and fall and inexorable rise again of financial markets in recent decades, many people who think about this believe that it is the rise of capital incomes, like capital gains, that’s the primary factor driving US inequality upwards.

Not so (though with an asterisk).  The figure below from Piketty’s book shows the increase in the share of US income going to the top 10%, i.e., the top decile.  The increase in the wage share since 1970 is about 10 percentage points, or about two-thirds of the increase.  The increase in capital income explains the other third, which ain’t nuttin,’ but the wage story told in the NYT piece and the figure below is still the main driver.

Piketty also shows how the rise in supersalaries has changed the composition of income at the very top.  Back in 1929 (the last time inequality was at today’s levels), income from capital comprised the main source of income for the top 1%; today, you’d have to go all the way up to the top 0.1% before capital overtook earnings as the main source of income.

Re that asterisk, labor economist Larry Mishel correctly stresses that stock options are typically counted as part of compensation in this research (which seems right to me) and they’re a growing source of CEOs pay packets.  Is that labor income or capital income?  Somewhere in between, I’d say, but certainly connected to work.


Source: Piketty (2014, Fig 8.7)

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10 comments in reply to "What’s Driving the Growth of US Inequality: Labor or Capital Income?"

  1. Perplexed says:

    -“Is that labor income or capital income? Somewhere in between, I’d say, but certainly connected to work.”

    But what is the “market value” of that “work”? What’s the bid/ask on managing the optimization of monopoly profits? Once we get past the myth of “labor markets” we’ve only really scratched the surface of how these cartels operate. What is it about economic “science” that allows such myths to perpetuate unchallenged for so long? Why spend so much time and effort modeling something that doesn’t exist in the real world? Is it laziness? Is it that the “marginal products” assumption just avoids so much of the work of discovering and explaining what’s really going on that its a convenient way to avoid that work (and the opposition to it) or is it something even more nefarious than that? Why is work like Pickety & Zucman’s such a rare occurrence? The “arbitrary and inequitable distribution of wealth and income” has been part of this “system” for quite some time now. Real “sciences” work to explain such anomalies, not avoid them in favor of simplifications that tell them what they (and those in power and advantaged by such a system) wish to believe.

    So what’s the rents/GDP ratio again? Oh, yeah, economists have decided for “We The People” that its not important enough to measure haven’t they.

  2. Sandwichman says:

    “…but certainly connected to work.”

    Connected to a position. Not the same as “work.”

  3. Robert Buttons says:

    As long as the govt (actually the quasi- govt federal reserve, but the effect is the same) keeps usurping the market by price fixing of interest rates below their natural level, we will see more money to be made by financialization and relatively less by workers actually making something, viz. real production.

  4. doverby says:

    Wow, it looks like I had this completely backwards. I always thought taxing capital gains the same way we tax income could have a significant effect, but it looks like that may not be the case. I don’t know if I agree that stock options are a type of labor income, though. I would love to see what kind of effect it would have on these findings if stock options were considered a type of capital income.

  5. Seattle Alex says:

    Loving his book so far. I’m curious about the generation following all of these execs with their super-salaries as PK alluded to in his book review. It seems capital is making a comeback and that the offshore stashing really isn’t as trivial as some make it seem.

    • Perplexed says:

      -“A Marxist review of Piketty’s book is at…”

      Yes, and if you click on “next” at the bottom of the page it takes you to the “Testimony of Pete Seeger before the House Un-American Activities Committee, August 18, 1955” for a pretty stark reminder of how “fear mongering” about the “threat of communism” by those in power overcame Constitutional Rights to free speech and victimized many American citizens in the process. Great reminder of how fragile these “Constitutional Rights” can be in the face of relentless attacks by those in power. Good thing we learned that lesson and refused to even consider falling prey to those kind of arguments.

  6. spencer says:

    I have long thought that
    BLS did NOT include stock
    options in the compensation data.

    I”m sure it was the BLS that told me this.

    • Jared Bernstein says:

      Tax data–W2’s–include realized stock options, and that’s what’s being used here.

  7. Patrick Trombly says:

    Supersalary is a myth. Hedge fund managers pay themselves a bigger draw because the fund did better. CEO options are comp – the corporations started paying in options and restricted stock in 1994 when cash comp deduction was capped at 1 million. The issue isn’t whether it’s salary or capital but why that part of the comp increased. It’s because the discount rate was suppressed. It’s not tax rates – average holding periods have declined. Most capital gains now are short term. The effective tax rate on capital gains has been higher since 1985 than before.