The New Economy a driver in rising income inequality

When pundits and presidential candidates talk about inequality and the tiny sliver of the population whose fortunes have soared, they often drop names like Warren Buffett, Bill Gates, Sheldon Adelson and Mark Zuckerberg.

But those are just the most visible members of a larger but less talked-about cadre of the big winners in today's economy. This group consists of roughly 250,000 Americans who mainly populate the executive offices and managerial suites of major companies and financial institutions, along with a smattering of top law firms, hedge funds and other elite aeries.

The consumer price index rose just 1 per cent from the same period a year earlier.
The consumer price index rose just 1 per cent from the same period a year earlier.  Photo: Erin Jonasson

These people - the top one-quarter of one per cent of America's employed population - have enjoyed explosive gains in income and wealth in recent decades, even as salaries and wages stagnated for the typical US worker.

"You hear about CEOs, entertainers, athletes and hedge funders, but that's the tip of the iceberg," said Nicholas A. Bloom, a professor of economics at Stanford University. "It's a much, much bigger group and they are outpacing everyone else."

The new $500,000 lifetime cap on concessional contributions will curtail the abiity of Australians to inject windfall ...
The new $500,000 lifetime cap on concessional contributions will curtail the abiity of Australians to inject windfall payments, such as from the sale of a house, into their super accounts.  Photo: Tanya Lake

Bloom's findings are bringing to light fresh perspectives on why income inequality is growing and how it is reshaping the national and global economy.

While the much-talked-about one per cent is doing just fine, the supersize gains are taking place even further up the income ladder, according to what Bloom and four colleagues found by examining 35 years of data from the Social Security Administration.

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The phenomenon is not limited to Wall Street or the big banks - manufacturers rewarded their top executives every bit as generously as did firms in the finance, insurance and real estate sectors. And this pattern is being repeated in countries where the political landscape is quite different from that in the US, like Sweden, Germany and the UK.

"This is a truly global phenomenon and I don't know any serious economist who would deny inequality has gone up," said Bloom. "The debate is over the magnitude, not the direction."

There's a growing consensus among economists that inequality is growing.
There's a growing consensus among economists that inequality is growing. 

At the same time, there's a growing consensus among economists of all ideological stripes that inequality is growing - in the US and abroad - even if the usual political fault lines appear when the discussion turns to the consequences of the trend and whether new public policies are needed to address it.

"It's pretty much indisputable that the percentage of income being earned by the top one per cent, or the top quarter of one per cent, is going up," said Richard H. Thaler.

Some households are starting to look beyond the turbulence in financial markets.
Some households are starting to look beyond the turbulence in financial markets. 

"It was true five years ago, but it was not as widely recognised," said Thaler, a behavioral economist who teaches at the University of Chicago. "As with climate change, scientific consensus takes a while to build."

For all the focus on the roots and extent of income inequality, most academics are leery of any easy solution. At the same time, they acknowledge that their traditional tools are inadequate for the task.

"There's no reason the free market will solve this," Bloom said.

He believes inequality is being magnified by technological change and what's known as skills bias, where workers with a particular expertise reap the biggest reward. Neither is amenable to quick fixes.

In Bloom's new paper, which he co-wrote with David J. Price, a Stanford graduate student, and three other economists - Jae Song, Fatih Guvenen and Till von Wachter - the top quarter of one per cent of Americans appear to be pulling away from the rest.

For workers at this threshold, who earn at least $US640,000 annually, their salaries rose 96 per cent from 1981 to 2013, after taking account of inflation. Among the top one per cent, which includes people earning more than $US320,000, salaries rose 71 per cent. Pay for the typical US worker rose by 13 per cent over the same period, according to Social Security Administration data.

The trend was especially pronounced among the most successful enterprises, creating a divergence between the highest paid people at companies that employ more than 10,000 people and the rest of the workforce. In this rarefied circle, overall pay jumped 140 per cent versus a five per cent drop for the typical employee at these corporate behemoths.

The split in compensation between executives and everyone else was much less pronounced at smaller companies, according to the research by Bloom and his colleagues. At these firms, between 1981 and 2013, top salaries rose 49 per cent, while median pay rose 30 per cent.

Bloom traces the outsize gains to large grants of stock and options to top workers at big companies, with their fortunes rising in line with the performance of the stock market.

"There used to be a premium for working at a big company, even in a lower level job," he said. "That's not true anymore. The people who have really suffered are lower-level employees at big companies."

The New York Times