Capital in the Twenty-First Century (50 page)

By contrast, the differences observed during this period are at first sight more surprising:
Why did the share of the upper decile rise sharply after the crash of 1929 and continue
at least until 1935, while the share of the top centile fell, especially between 1929
and 1932?

In fact, when we look at the data more closely, year by year, each of these variations
has a perfectly good explanation. It is enlightening to revisit the chaotic interwar
period, when social tensions ran very high. To understand what happened, we must recognize
that “the 9 percent” and “the 1 percent” lived on very different income streams. Most
of the income of “the 1 percent” came in the form of income from capital, especially
interest and dividends paid by the firms whose stocks and bonds made up the assets
of this group. That is why the top centile’s share plummeted during the Depression,
as the economy collapsed, profits fell, and firm after firm went bankrupt.

By contrast, “the 9 percent” included many managers, who were the great beneficiaries
of the Depression, at least when compared with other social groups. They suffered
much less from unemployment than the employees who worked under them. In particular,
they never experienced the extremely high rates of partial or total unemployment endured
by industrial workers. They were also much less affected by the decline in company
profits than those who stood above them in the income hierarchy. Within “the 9 percent,”
midlevel civil servants and teachers fared particularly well. They had only recently
been the beneficiaries of civil service raises granted in the period 1927–1931. (Recall
that government workers, particularly those at the top of the pay scale, had suffered
greatly during World War I and had been hit hard by the inflation of the early 1920s.)
These midlevel employees were immune, too, from the risk of unemployment, so that
the public sector’s wage bill remained constant in nominal terms until 1933 (and decreased
only slightly in 1934–1935, when Prime Minister Pierre Laval sought to cut civil service
pay). Meanwhile, private sector wages decreased by more than 50 percent between 1929
and 1935. The severe deflation France suffered in this period (prices fell by 25 percent
between 1929 and 1935, as both trade and production collapsed) played a key role in
the process: individuals lucky enough to hold on to their jobs and their nominal compensation—typically
civil servants—enjoyed increased purchasing power in the midst of the Depression as
falling prices raised their real wages. Furthermore, such capital income as “the 9
percent” enjoyed—typically in the form of rents, which were extremely rigid in nominal
terms—also increased on account of the deflation, so that the real value of this income
stream rose significantly, while the dividends paid to “the 1 percent” evaporated.

For all these reasons, the share of national income going to “the 9 percent” increased
quite significantly in France between 1929 and 1935, much more than the share of “the
1 percent” decreased, so that the share of the upper decile as a whole increased by
more than 5 percent of national income (see
Figures 8.1
and
8.2
). The process was completely turned around, however, when the Popular Front came
to power: workers’ wages increased sharply as a result of the Matignon Accords, and
the franc was devalued in September 1936, resulting in inflation and a decrease of
the shares of both “the 9 percent” and the top decile in 1936–1938.
¹⁸

The foregoing discussion demonstrates the usefulness of breaking income down by centiles
and income source. If we had tried to analyze the interwar dynamic by using a synthetic
index such as the Gini coefficient, it would have been impossible to understand what
was going on. We would not have been able to distinguish between income from labor
and income from capital or between short-term and long-term changes. In the French
case, what makes the period 1914–1945 so complex is the fact that although the general
trend is fairly clear (a sharp drop in the share of national income going to the top
decile, induced by a collapse of the top centile’s share), many smaller counter-movements
were superimposed on this overall pattern in the 1920s and 1930s. We find similar
complexity in other countries in the interwar period, with characteristic features
associated with the history of each particular country. For example, deflation ended
in the United States in 1933, when President Roosevelt came to power, so that the
reversal that occurred in France in 1936 came earlier in America, in 1933. In every
country the history of inequality is political—and chaotic.

Broadly speaking, it is important when studying the dynamics of the income and wealth
distributions to distinguish among several different time scales. In this book I am
primarily interested in long-term evolutions, fundamental trends that in many cases
cannot be appreciated on time scales of less than thirty to forty years or even longer,
as shown, for example, by the structural increase in the capital/income ratio in Europe
since World War II, a process that has been going on for nearly seventy years now
yet would have been difficult to detect just ten or twenty years ago owing to the
superimposition of various other developments (as well as the absence of usable data).
But this focus on the long period must not be allowed to obscure the fact that shorter-term
trends also exist. To be sure, these are often counterbalanced in the end, but for
the people who live through them they often appear, quite legitimately, to be the
most significant realities of the age. Indeed, how could it be otherwise, when these
“short-term” movements can continue for ten to fifteen years or even longer, which
is quite long when measured on the scale of a human lifetime.

The history of inequality in France and elsewhere is replete with these short- and
medium-term movements—and not just in the particularly chaotic interwar years. Let
me briefly recount the major episodes in the case of France. During both world wars,
the wage hierarchy was compressed, but in the aftermath of each war, wage inequalities
reasserted themselves (in the 1920s and then again in the late 1940s and on into the
1950s and 1960s). These were movements of considerable magnitude: the share of total
wages going to the top 10 percent decreased by about 5 points during each conflict
but recovered afterward by the same amount (see
Figure 8.1
).
¹⁹
Wage spreads were reduced in the public as well as the private sector. In each war
the scenario was the same: in wartime, economic activity decreases, inflation increases,
and real wages and purchasing power begin to fall. Wages at the bottom of the wage
scale generally rise, however, and are somewhat more generously protected from inflation
than those at the top. This can induce significant changes in the wage distribution
if inflation is high. Why are low and medium wages better indexed to inflation than
higher wages? Because workers share certain perceptions of social justice and norms
of fairness, an effort is made to prevent the purchasing power of the least well-off
from dropping too sharply, while their better-off comrades are asked to postpone their
demands until the war is over. This phenomenon clearly played a role in setting wage
scales in the public sector, and it was probably the same, at least to a certain extent,
in the private sector. The fact that large numbers of young and relatively unskilled
workers were mobilized for service (or held in prisoner-of-war camps) may also have
improved the relative position of low- and medium-wage workers on the labor market.

In any case, the compression of wage inequality was reversed in both postwar periods,
and it is therefore tempting to forget that it ever occurred. Nevertheless, for workers
who lived through these periods, the changes in the wage distribution made a deep
impression. In particular, the issue of restoring the wage hierarchy in both the public
and private sectors was one of the most important political, social, and economic
issues of the postwar years.

Turning now to the history of inequality in France between 1945 and 2010, we find
three distinct phases: income inequality rose sharply between 1945 and 1967 (with
the share going to the top decile increasing from less than 30 to 36 or 37 percent).
It then decreased considerably between 1968 and 1983 (with the share of the top decile
dropping back to 30 percent). Finally, inequality increased steadily after 1983, so
that the top decile’s share climbed to about 33 percent in the period 2000–2010 (see
Figure 8.1
). We find roughly similar changes of wage inequality at the level of the top centile
(see
Figures 8.3
and
8.3
). Once again, these various increases and decreases more or less balance out, so
it is tempting to ignore them and concentrate on the relative stability over the long
run, 1945–2010. Indeed, if one were interested solely in very long-term evolutions,
the outstanding change in France during the twentieth century would be the significant
compression of wage inequality between 1914 and 1945, followed by relative stability
afterward. Each way of looking at the matter is legitimate and important in its own
right, and to my mind it is essential to keep all of these different time scales in
mind: the long term is important, but so are the short and the medium term. I touched
on this point previously in my examination of the evolution of the capital/income
ratio and the capital-labor split in
Part Two
(see in particular
Chapter 6
).

It is interesting to note that the capital-labor split tends to move in the same direction
as inequality in income from labor, so that the two reinforce each other in the short
to medium term but not necessarily in the long run. For example, each of the two world
wars saw a decrease in capital’s share of national income (and of the capital/income
ratio) as well as a compression of wage inequality. Generally speaking, inequality
tends to evolve “procyclically” (that is, it moves in the same direction as the economic
cycle, in contrast to “countercyclical” changes). In economic booms, the share of
profits in national income tends to increase, and pay at the top end of the scale
(including incentives and bonuses) often increases more than wages toward the bottom
and middle. Conversely, during economic slowdowns or recessions (of which war can
be seen as an extreme form), various noneconomic factors, especially political ones,
ensure that these movements do not depend solely on the economic cycle.

The substantial increase in French inequality between 1945 and 1967 was the result
of sharp increases in both capital’s share of national income and wage inequality
in a context of rapid economic growth. The political climate undoubtedly played a
role: the country was entirely focused on reconstruction, and decreasing inequality
was not a priority, especially since it was common knowledge that inequality had decreased
enormously during the war. In the 1950s and 1960s, managers, engineers, and other
skilled personnel saw their pay increase more rapidly than the pay of workers at the
bottom and middle of the wage hierarchy, and at first no one seemed to care. A national
minimum wage was created in 1950 but was seldom increased thereafter and fell farther
and farther behind the average wage.

Things changed suddenly in 1968. The events of May 1968 had roots in student grievances
and cultural and social issues that had little to do with the question of wages (although
many people had tired of the inegalitarian productivist growth model of the 1950s
and 1960s, and this no doubt played a role in the crisis). But the most immediate
political result of the movement was its effect on wages: to end the crisis, Charles
de Gaulle’s government signed the Grenelle Accords, which provided, among other things,
for a 20 percent increase in the minimum wage. In 1970, the minimum wage was officially
(if partially) indexed to the mean wage, and governments from 1968 to 1983 felt obliged
to “boost” the minimum significantly almost every year in a seething social and political
climate. The purchasing power of the minimum wage accordingly increased by more than
130 percent between 1968 and 1983, while the mean wage increased by only about 50
percent, resulting in a very significant compression of wage inequalities. The break
with the previous period was sharp and substantial: the purchasing power of the minimum
wage had increased barely 25 percent between 1950 and 1968, while the average wage
had more than doubled.
²⁰
Driven by the sharp rise of low wages, the total wage bill rose markedly more rapidly
than output between 1968 and 1983, and this explains the sharp decrease in capital’s
share of national income that I pointed out in
Part Two
, as well as the very substantial compression of income inequality.

These movements reversed in 1982–1983. The new Socialist government elected in May
1981 surely would have preferred to continue the earlier trend, but it was not a simple
matter to arrange for the minimum wage to increase twice as fast as the average wage
(especially when the average wage itself was increasing faster than output). In 1982–1983,
therefore, the government decided to “turn toward austerity”: wages were frozen, and
the policy of annual boosts to the minimum wage was definitively abandoned. The results
were soon apparent: the share of profits in national income skyrocketed during the
remainder of the 1980s, while wage inequalities once again increased, and income inequalities
even more so (see
Figures 8.1
and
8.2
). The break was as sharp as that of 1968, but in the other direction.

How should we characterize the phase of increasing inequality that began in France
in 1982–1983? It is tempting to see it in a long-run perspective as a microphenomenon,
a simple reversal of the previous trend, especially since by 1990 or so the share
of profits in national income had returned to the level achieved on the eve of May
1968.
²¹
This would be a mistake, however, for several reasons. First, as I showed in
Part Two
, the profit share in 1966–1967 was historically high, a consequence of the restoration
of capital’s share that began at the end of World War II. If we include, as we should,
rent as well as profit in income from capital, we find that capital’s share of national
income actually continued to grow in the 1990s and 2000s. A correct understanding
of this long-run phenomenon requires that it be placed in the context of the long-term
evolution of the capital/income ratio, which by 2010 had returned to virtually the
same level it had achieved in France on the eve of World War I. It is impossible to
fully appreciate the implications of this restoration of the prosperity of capital
simply by looking at the evolution of the upper decile’s share of income, in part
because income from capital is understated, so that we tend to slightly underestimate
the increase in top incomes, and in part because the real issue is the renewed importance
of inherited wealth, a long-term process that has only begun to reveal its true effects
and can be correctly analyzed only by directly studying the changing role and importance
of inherited wealth as such.