Capital in the Twenty-First Century
Page 37
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 Rise of the Supermanager: An Anglo-Saxon Phenomenon
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 st
upendous 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
The share of the top 0.1 percent highest incomes in total income rose sharply since the 1970s in all Anglo-Saxon countries, but with varying magnitudes.
Sources and series: see piketty.pse.ens.fr/capital21c.
Furthermore, the higher one climbs in the income hierarchy, the more spectacular the raises. Even if the number of individuals benefiting from such salary increases is fairly limited, they are nevertheless quite visible, and this visibility naturally raises the question of what justifies such high levels of compensation. Consider the share of the top thousandth—the best remunerated 0.1 percent—in the national income of the English-speaking countries on the one hand (Figure 9.5) and continental Europe and Japan on the other (Figure 9.6). The differences are obvious: the top thousandth in the United States increased their share from 2 to nearly 10 percent over the past several decades—an unprecedented rise.17 But there has been a remarkable increase of top incomes everywhere. In France and Japan, the top thousandth’s share rose from barely 1.5 percent of national income in the early 1980s to nearly 2.5 percent in the early 2010s—close to double. In Sweden, the same share rose from less than 1 percent to more than 2 percent in the same period.
To make clear what this represents in concrete terms, remember that a 2 percent share of national income for 0.1 percent of the population means that the average individual in this group enjoys an income 20 times higher than the national average (or 600,000 euros a year if the average income is 30,000 per adult). A share of 10 percent means that each individual enjoys an income 100 times the national average (or 3 million euros a year if the average is 30,000).18 Recall, too, that the top 0.1 percent is by definition a group of 50,000 people in a country with a population of 50 million adults (like France in the early 2010s). This is a very small minority (“the 1 percent” is of course 10 times larger), yet it occupies a significant place in the social and political landscape.19 The central fact is that in all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990–2010, while the average person’s purchasing power stagnated.
FIGURE 9.6. The top decile income share in Continental Europe and Japan, 1910–2010
As compared to Anglo-Saxon countries, the top 0.1 percent income share barely increased in Continental Europe and Japan.
Sources and series: see piketty.pse.ens.fr/capital21c.
From a macroeconomic point of view, however, the explosion of very high incomes has thus far been of limited importance in continental Europe and Japan: the rise has been impressive, to be sure, but too few people have been affected to have had an impact as powerful as in the United States. The transfer of income to “the 1 percent” involves only two to three points of national income in continental Europe and Japan compared with 10 to 15 points in the United States—5 to 7 times greater.20
The simplest way to express these regional differences is no doubt the following: in the United States, income inequality in 2000–2010 regained the record levels observed in 1910–1920 (although the composition of income was now different, with a larger role played by high incomes from labor and a smaller role by high incomes from capital). In Britain and Canada, things moved in the same direction. In continental Europe and Japan, income inequality today remains far lower than it was at the beginning of the twentieth century and in fact has not changed much since 1945, if we take a long-run view. The comparison of Figures 9.2 and 9.3 is particularly clear on this point.
Obviously, this does not mean that the European and Japanese evolutions of the past few decades should be neglected. On the contrary: their trajectory resembles that of the United States in some respects, with a delay of one or two decades, and one need not wait until the phenomenon assumes the macroeconomic significance observed in the United States to worry about it.
Nevertheless, the fact remains that the evolution in continental Europe and Japan is thus far much less serious than in the United States (and, to a lesser extent, in the other Anglo-Saxon countries). This may tell us something about the forces at work. The divergence between the various regions of the wealthy world is all the more striking because technological change has been the same more or less everywhere: in particular, the revolution in information technology has affected Japan, Germany, France, Sweden, and Denmark as much as the United States, Britain, and Canada. Similarly, economic growth—or, more precisely, growth in output per capita, which is to say, productivity growth—has been quite similar throughout the wealthy countries, with differences of a few tenths of a percentage point.21 In view of these facts, this quite large divergence in the way the income distribution has evolved in the various wealthy countries demands an explanation, which the theory of marginal productivity and of the race between technology and education does not seem capable of providing.
Europe: More Inegalitarian Than the New World in 1900–1910
Note, moreover, that the United States, contrary to what many people think today, was not always more inegalitarian than Europe—far from it. Income inequality was actually quite high in Europe at the beginning of the twentieth century. This is confirmed by all the indices and historical sources. In particular, the top centile’s share of national income exceeded 20 percent in all the countries of Europe in 1900–1910 (see Figures 9.2–4). This was true not only of Britain, France, and Germany but also of Sweden and Denmark (proof that the Nordic countries have not always been models of equality—far from it), and more generally of all European countries for which we have estimates from this period.22
The similar levels of income concentration in all European countries during the Belle Époque obviously demand an explanation. Since top incomes in this period consisted almost entirely of income from capital,23 the explanation must be sought primarily in the realm of concentration of capital. Why was capital so concentrated in Europe in the period 1900–1910?
It is interesting to note that, compared with Europe, inequality was lower not only in the United States and Canada (where the top centile’s share of national income was roughly 16–18 percent at the beginning of the twentieth century) but especially in Australia and New Zealand (11–12 percent). Thus it was the New World, and especially the newest and most recently settled parts of the New World, that appear to have been less inegalitarian than Old Europe in the Belle Époque.
It is also interesting to note that Japan, despite its social and cultural differences from Europe, seems to have had the same high level of inequality at the beginning of the twentieth century, without about 20 percent of national income going to the top centile. The available data do not allow me to make all the comparisons I would like to make, but all signs are that in terms of both income structure and income inequality, Japan was indeed part of the same “old world” as Europe. It is also striking to note the similar evolution of Japan and Europe over the course of the twentieth century (Figure 9.3).
I will return later to the reasons for the very high concentration of capital in the Belle Époque and to the transformations that took place in various countries over the course of the twentieth century (namely, a reduction of concentration). I will show in particular that the greater inequality of wealth that we see in Europe and Japan is fairly naturally explained by the low demographic growth rate we find in the Old World, which resulted almost automatically in a greater accumulation and concentration of capital.
At this stage, I want simply to stress the magnitude of the changes that have altered the relative standing of countries and continents. The clearest way to make this point is probably to look at the evolution of the top decile’s share of national income. Figure 9.7 shows this for the United States and four European countries (Britain, France, Germany, and Sweden) since the turn of the twentieth
century. I have indicated decennial averages in order to focus attention on long-term trends.24
FIGURE 9.7. The top decile income share in Europe and the United States, 1900–2010
In the 1950s–1970s, the top decile income share was about 30–35 percent of total income in Europe as in the United States.
Sources and series: see piketty.pse.ens.fr/capital21c.
What we find is that on the eve of World War I, the top decile’s share was 45–50 percent of national income in all the European countries, compared with a little more than 40 percent in the United States. By the end of World War II, the United States had become slightly more inegalitarian than Europe: the top decile’s share decreased on both continents owing to the shocks of 1914–1945, but the fall was more precipitous in Europe (and Japan). The explanation for this is that the shocks to capital were much larger. Between 1950 and 1970, the upper decile’s share was fairly stable and fairly similar in the United States and Europe, around 30–35 percent of national income. The strong divergence that began in 1970–1980 led to the following situation in 2000–2010: the top decile’s share of US national income reached 45–50 percent, or roughly the same level as Europe in 1900–1910. In Europe, we see wide variation, from the most inegalitarian case (Britain, with a top decile share of 40 percent) to the most egalitarian (Sweden, less than 30 percent), with France and Germany in between (around 35 percent).