Capital in the Twenty-First Century (53 page)

FIGURE 8.10.
   The composition of top incomes in the United States, 2007

Capital income becomes dominant at the level of top 0.1 percent in 2007, as opposed
to the top 1 percent in 1929.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The final and perhaps most important point in need of clarification is that the increase
in very high incomes and very high salaries primarily reflects the advent of “supermanagers,”
that is, top executives of large firms who have managed to obtain extremely high,
historically unprecedented compensation packages for their labor. If we look only
at the five highest paid executives in each company listed on the stock exchange (which
are generally the only compensation packages that must be made public in annual corporate
reports), we come to the paradoxical conclusion that there are not enough top corporate
managers to explain the increase in very high US incomes, and it therefore becomes
difficult to explain the evolutions we observe in incomes stated on federal income
tax returns.
⁴¹
But the fact is that in many large US firms, there are far more than five executives
whose pay places them in the top 1 percent (above
$
352,000 in 2010) or even the top 0.1 percent (above
$
1.5 million).

Recent research, based on matching declared income on tax returns with corporate compensation
records, allows me to state that the vast majority (60 to 70 percent, depending on
what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000–2010
consists of top managers. By comparison, athletes, actors, and artists of all kinds
make up less than 5 percent of this group.
⁴²
In this sense, the new US inequality has much more to do with the advent of “supermanagers”
than with that of “superstars.”
⁴³

It is also interesting to note that the financial professions (including both managers
of banks and other financial institutions and traders operating on the financial markets)
are about twice as common in the very high income groups as in the economy overall
(roughly 20 percent of top 0.1 percent, whereas finance accounts for less than 10
percent of GDP). Nevertheless, 80 percent of the top income groups are not in finance,
and the increase in the proportion of high-earning Americans is explained primarily
by the skyrocketing pay packages of top managers of large firms in the nonfinancial
as well as financial sectors.

Finally, note that in accordance with US tax laws as well as economic logic, I have
included in wages all bonuses and other incentives paid to top managers, as well as
the value of any stock options (a form of remuneration that has played an important
role in the increase of wage inequality depicted in
Figures 8.9
and
8.10
).
⁴⁴
The very high volatility of incentives, bonuses, and option prices explains why top
incomes fluctuated so much in the period 2000–2010.

{NINE}

Inequality of Labor Income

Now that I have introduced the evolution of income and wages in France and the United
States since the beginning of the twentieth century, I will examine the changes I
have observed and consider how representative they are of long-term changes in other
developed and emerging economies.

I will begin by examining in this chapter the dynamics of labor income inequality.
What caused the explosion of wage inequalities and the rise of the supermanager in
the United States after 1980? More generally, what accounts for the diverse historical
evolutions we see in various countries?

In subsequent chapters I will look into the evolution of the capital ownership distribution:
How and why has the concentration of wealth decreased everywhere, but especially in
Europe, since the turn of the twentieth century? The emergence of a “patrimonial middle
class” is a crucial issue for this study, because it largely explains why income inequality
decreased during the first half of the twentieth century and why we in the developed
countries have gone from a society of rentiers to a society of managers (or, in the
less optimistic version, from a society of superrentiers to a somewhat less extreme
form of rentier society).

Why is inequality of income from labor, and especially wage inequality, greater in
some societies and periods than others? The most widely accepted theory is that of
a race between education and technology. To be blunt, this theory does not explain
everything. In particular, it does not offer a satisfactory explanation of the rise
of the supermanager or of wage inequality in the United States after 1980. The theory
does, however, suggest interesting and important clues for explaining certain historical
evolutions. I will therefore begin by discussing it.

The theory rests on two hypotheses. First, a worker’s wage is equal to his marginal
productivity, that is, his individual contribution to the output of the firm or office
for which he works. Second, the worker’s productivity depends above all on his skill
and on supply and demand for that skill in a given society. For example, in a society
in which very few people are qualified engineers (so that the “supply” of engineers
is low) and the prevailing technology requires many engineers (so that “demand” is
high), then it is highly likely that this combination of low supply and high demand
will result in very high pay for engineers (relative to other workers) and therefore
significant wage inequality between highly paid engineers and other workers.

This theory is in some respects limited and naïve. (In practice, a worker’s productivity
is not an immutable, objective quantity inscribed on his forehead, and the relative
power of different social groups often plays a central role in determining what each
worker is paid.) Nevertheless, as simple or even simplistic as the theory may be,
it has the virtue of emphasizing two social and economic forces that do indeed play
a fundamental role in determining wage inequality, even in more sophisticated theories:
the supply and demand of skills. In practice, the supply of skills depends on, among
other things, the state of the educational system: how many people have access to
this or that track, how good is the training, how much classroom teaching is supplemented
by appropriate professional experience, and so on. The demand for skills depends on,
among other things, the state of the technologies available to produce the goods and
services that society consumes. No matter what other forces may be involved, it seems
clear that these two factors—the state of the training system on the one hand, the
state of technology on the other—play a crucial role. At a minimum, they influence
the relative power of different social groups.

These two factors themselves depend on many other forces. The educational system is
shaped by public policy, criteria of selection for different tracks, the way it is
financed, the cost of study for students and their families, and the availability
of continuing education. Technological progress depends on the pace of innovation
and the rapidity of implementation. It generally increases the demand for new skills
and creates new occupations. This leads to the idea of a race between education and
technology: if the supply of skills does not increase at the same pace as the needs
of technology, then groups whose training is not sufficiently advanced will earn less
and be relegated to devalued lines of work, and inequality with respect to labor will
increase. In order to avoid this, the educational system must increase its supply
of new types of training and its output of new skills at a sufficiently rapid pace.
If equality is to decrease, moreover, the supply of new skills must increase even
more rapidly, especially for the least well educated.

Consider, for example, wage inequalities in France. As I have shown, the wage hierarchy
was fairly stable over a long period of time. The average wage increased enormously
over the course of the twentieth century, but the gap between the best and worst paid
deciles remained the same. Why was this the case, despite the massive democratization
of the educational system during the same period? The most natural explanation is
that all skill levels progressed at roughly the same pace, so that the inequalities
in the wage scale were simply translated upward. The bottom group, which had once
only finished grade school, moved up a notch on the educational ladder, first completing
junior high school, then going on to a high school diploma. But the group that had
previously made do with a high school diploma now went on to college or even graduate
school. In other words, the democratization of the educational system did not eliminate
educational inequality and therefore did not reduce wage inequality. If educational
democratization had not taken place, however, and if the children of those who had
only finished grade school a century ago (three-quarters of each generation at that
time) had remained at that level, inequalities with respect to labor, and especially
wage inequalities, would surely have increased substantially.

Now consider the US case. Two economists, Claudia Goldin and Lawrence Katz, systematically
compared the following two evolutions in the period 1890–2005: on the one hand the
wage gap between workers who graduated from college and those who had only a high
school diploma, and on the other the rate of growth of the number of college degrees.
For Goldin and Katz, the conclusion is stark: the two curves move in opposite directions.
In particular, the wage gap, which decreased fairly regularly until the 1970s, suddenly
begins to widen in the 1980s, at precisely the moment when for the first time the
number of college graduates stops growing, or at any rate grows much more slowly than
before.
¹
Goldin and Katz have no doubt that increased wage inequality in the United States
is due to a failure to invest sufficiently in higher education. More precisely, too
many people failed to receive the necessary training, in part because families could
not afford the high cost of tuition. In order to reverse this trend, they conclude,
the United States should invest heavily in education so that as many people as possible
can attend college.

The lessons of French and US experience thus point in the same direction. In the long
run, the best way to reduce inequalities with respect to labor as well as to increase
the average productivity of the labor force and the overall growth of the economy
is surely to invest in education. If the purchasing power of wages increased fivefold
in a century, it was because the improved skills of the workforce, coupled with technological
progress, increased output per head fivefold. Over the long run, education and technology
are the decisive determinants of wage levels.

By the same token, if the United States (or France) invested more heavily in high-quality
professional training and advanced educational opportunities and allowed broader segments
of the population to have access to them, this would surely be the most effective
way of increasing wages at the low to medium end of the scale and decreasing the upper
decile’s share of both wages and total income. All signs are that the Scandinavian
countries, where wage inequality is more moderate than elsewhere, owe this result
in large part to the fact that their educational system is relatively egalitarian
and inclusive.
²
The question of how to pay for education, and in particular how to pay for higher
education, is everywhere one of the key issues of the twenty-first century. Unfortunately,
the data available for addressing issues of educational cost and access in the United
States and France are extremely limited. Both countries attach a great deal of importance
to the central role of schools and vocational training in fostering social mobility,
yet theoretical discussion of educational issues and of meritocracy is often out of
touch with reality, and in particular with the fact that the most prestigious schools
tend to favor students from privileged social backgrounds. I will come back to this
point in
Chapter 13
.

Education and technology definitely play a crucial role in the long run. This theoretical
model, based on the idea that a worker’s wage is always perfectly determined by her
marginal productivity and thus primarily by skill, is nevertheless limited in a number
of ways. Leave aside the fact that it is not always enough to invest in training:
existing technology is sometimes unable to make use of the available supply of skills.
Leave aside, too, the fact that this theoretical model, at least in its most simplistic
form, embodies a far too instrumental and utilitarian view of training. The main purpose
of the health sector is not to provide other sectors with workers in good health.
By the same token, the main purpose of the educational sector is not to prepare students
to take up an occupation in some other sector of the economy. In all human societies,
health and education have an intrinsic value: the ability to enjoy years of good health,
like the ability to acquire knowledge and culture, is one of the fundamental purposes
of civilization.
³
We are free to imagine an ideal society in which all other tasks are almost totally
automated and each individual has as much freedom as possible to pursue the goods
of education, culture, and health for the benefit of herself and others. Everyone
would be by turns teacher or student, writer or reader, actor or spectator, doctor
or patient. As noted in
Chapter 2
, we are to some extent already on this path: a characteristic feature of modern growth
is the considerable share of both output and employment devoted to education, culture,
and medicine.