Capital in the Twenty-First Century (55 page)

The most striking failure of the theory of marginal productivity and the race between
education and technology is no doubt its inability to adequately explain the explosion
of very high incomes from labor observed in the United States since 1980. According
to this theory, one should be able to explain this change as the result of skill-biased
technological change. Some US economists buy this argument, which holds that top labor
incomes have risen much more rapidly than average wages simply because unique skills
and new technology have made these workers much more productive than the average.
There is a certain tautological quality to this explanation (after all, one can “explain”
any distortion of the wage hierarchy as the result of some supposed technological
change). It also has other major weaknesses, which to my mind make it a rather unconvincing
argument.

First, as shown in the previous chapter, the increase in wage inequality in the United
States is due mainly to increased pay at the very top end of the distribution: the
top 1 percent and even more the top 0.1 percent. If we look at the entire top decile,
we find that “the 9 percent” have progressed more rapidly than the average worker
but not nearly at the same rate as “the 1 percent.” Concretely, those making between
$
100,000 and
$
200,000 a year have seen their pay increase only slightly more rapidly than the average,
whereas those making more than
$
500,000 a year have seen their remuneration literally explode (and those above
$
1 million a year have risen even more rapidly).
¹¹
This very sharp discontinuity at the top income levels is a problem for the theory
of marginal productivity: when we look at the changes in the skill levels of different
groups in the income distribution, it is hard to see any discontinuity between “the
9 percent” and “the 1 percent,” regardless of what criteria we use: years of education,
selectivity of educational institution, or professional experience. One would expect
a theory based on “objective” measures of skill and productivity to show relatively
uniform pay increases within the top decile, or at any rate increases within different
subgroups much closer to one another than the widely divergent increases we observe
in practice.

Make no mistake: I am not denying the decisive importance of the investments in higher
education and training that Katz and Goldin have identified. Policies to encourage
broader access to universities are indispensable and crucial in the long run, in the
United States and elsewhere. As desirable as such policies are, however, they seem
to have had limited impact on the explosion of the topmost incomes observed in the
United States since 1980.

In short, two distinct phenomena have been at work in recent decades. First, the wage
gap between college graduates and those who go no further than high school has increased,
as Goldin and Katz showed. In addition, the top 1 percent (and even more the top 0.1
percent) have seen their remuneration take off. This is a very specific phenomenon,
which occurs within the group of college graduates and in many cases separates individuals
who have pursued their studies at elite universities for many years. Quantitatively,
the second phenomenon is more important than the first. In particular, as shown in
the previous chapter, the overperformance of the top centile explains most (nearly
three-quarters) of the increase in the top decile’s share of US national income since
1970.
¹²
It is therefore important to find an adequate explanation of this phenomenon, and
at first sight the educational factor does not seem to be the right one to focus on.

The second difficulty—and no doubt the major problem confronting the marginal productivity
theory—is that the explosion of very high salaries occurred in some developed countries
but not others. This suggests that institutional differences between countries rather
than general and a priori universal causes such as technological change played a central
role.

I begin with the English-speaking countries. Broadly speaking, the rise of the supermanager
is largely an Anglo-Saxon phenomenon. Since 1980 the share of the upper centile in
national income has risen significantly in the United States, Great Britain, Canada,
and Australia (see
Figure 9.2
). Unfortunately, we do not have separate series for wage inequality and total income
inequality for all countries as we do for France and the United States. But in most
cases we do have data concerning the composition of income in relation to total income,
from which we can infer that in all of these countries the explosion of top incomes
explains most (generally at least two-thirds) of the increase in the top centile’s
share of national income; the rest is explained by robust income from capital. In
all the English-speaking countries, the primary reason for increased income inequality
in recent decades is the rise of the supermanager in both the financial and nonfinancial
sectors.

FIGURE 9.2.
   Income inequality in Anglo-Saxon countries, 1910–2010

The share of top percentile in total income rose since the 1970s in all Anglo-Saxon
countries, but with different magnitudes.

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

This family resemblance should not be allowed to obscure the fact that the magnitude
of the phenomenon varies widely from country to country, however.
Figure 9.2
is quite clear on this point. In the 1970s, the upper centile’s share of national
income was quite similar across countries. It ranged from 6 to 8 percent in the four
English-speaking countries considered, and the United States did not stand out as
exceptional: indeed, Canada was slightly higher, at 9 percent, whereas Australia came
in last, with just 5 percent of national income going to the top centile in the late
1970s and early 1980s. Thirty years later, in the early 2010s, the situation is totally
different. The upper centile’s share is nearly 20 percent in the United States, compared
with 14–15 percent in Britain and Canada and barely 9–10 percent in Australia (see
Figure 9.2
).
¹³
To a first approximation, we can say that the upper centile’s share in the United
States increased roughly twice as much as in Britain and Canada and about three times
as much as in Australia and New Zealand.
¹⁴
If the rise of the supermanager were a purely technological phenomenon, it would
be difficult to understand why such large differences exist between otherwise quite
similar countries.

FIGURE 9.3.
   Income inequality in Continental Europe and Japan, 1910–2010

As compared to Anglo-Saxon countries, the share of top percentile barely increased
since the 1970s in Continental Europe and Japan.

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

Let me turn now to the rest of the wealthy world, namely, continental Europe and Japan.
The key fact is that the upper centile’s share of national income in these countries
has increased much less than in the English-speaking countries since 1980. The comparison
between
Figures 9.2
and
9.3
is particularly striking. To be sure, the upper centile’s share increased significantly
everywhere. In Japan the evolution was virtually the same as in France: the top centile’s
share of national income was barely 7 percent in the 1980s but is 9 percent or perhaps
even slightly higher today. In Sweden, the top centile’s share was a little more than
4 percent in the early 1980s (the lowest level recorded in the World Top Incomes Database
for any country in any period) but reached 7 percent in the early 2010s.
¹⁵
In Germany, the top centile’s share rose from about 9 percent to nearly 11 percent
of national income between the early 1980s and the early 2010s (see
Figure 9.3
).

If we look at other European countries, we observe similar evolutions, with the top
centile’s share increasing by two or three points of national income over the past
thirty years in both northern and southern Europe. In Denmark and other Nordic countries,
top incomes claim a smaller share of the total, but the increase is similar: the top
centile received a little more than 5 percent of Danish national income in the 1980s
but got close to 7 percent in 2000–2010. In Italy and Spain, the orders of magnitude
are very close to those observed in France, with the top centile’s share rising from
7 to 9 percent of national income in the same period, again an increase of two points
of national income (see
Figure 9.4
). In this respect, continental Europe is indeed an almost perfect “union.” Britain,
of course, stands apart, being much closer to the pattern of the United States than
that of Europe.
¹⁶

FIGURE 9.4.
   Income inequality in Northern and Southern Europe, 1910–2010

As compared to Anglo-Saxon countries, the top percentile income share barely increased
in Northern and Southern Europe since the 1970s.

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

Make no mistake: these increases on the order of two to three points of national income
in Japan and the countries of continental Europe mean that income inequality rose
quite significantly. The top 1 percent of earners saw pay increases noticeably more
rapid than the average: the upper centile’s share increased by about 30 percent, and
even more in countries where it started out lower. This was quite striking to contemporary
observers, who read in the daily paper or heard on the radio about stupendous raises
for “supermanagers.” It was particularly striking in the period 1990–2010, when average
income stagnated, or at least rose much more slowly than in the past.

FIGURE 9.5.
   The top decile income share in Anglo-Saxon countries, 1910–2010