Income Inequality

In a previous post I pointed out that the largest source of inequality in wages was the higher earnings by managers.  The latest interview on EconTalk deals with the subject of inequality.  Steve Kaplan, the interviewee expresses the opinion that the increase in inequality is due to scale factors in the economy.  The best workers in each area are able to reach or serve a larger number of people due to improvements in technology and globalization.  He compares the increases in salaries for CEO's and top managers and finds that it is comparable to the increases in salaries for people in the top 1% who have other jobs.

On the other hand Bruce Bueno de Mesquita and Alastair Smith pointed out that the governance at most publicly traded firms is akin to rigged election autocracy.  They go into more detail on this in their new book, The Dictator's Handbook.  To be sure Steve Kaplan found that privately owned firms were indeed more profitably managed.

I suspect that both ideas have merit.  It is possible that the top management of publicly traded firms is ripping off the shareholders and hurting the economy, but that this is not responsible for the rise in inequality.  What would cause an increase in inequality would be if corporate governance was deteriorating and the problem was getting worse.  If corporate governance was just as bad in the past as it is today it would cause just as much inequality in the past as it does today, so this wouldn't result in increasing inequality.  It would only cause inequality to be consistently higher than it otherwise would be.

Steve Kaplan points out that CEO's and other managers don't make up the majority of the richest 1%, so it would be unlikely that they would account for a large part of the increase in inequality.  However, I have found that the higher salaries of managers is the largest source of inequality in wages, second only to the lower wages of food preparation and service workers (note that this link is to the same post that I linked to in the first paragraph).  There is a great deal of inequality in the bottom 99%, particularly when it comes to wages and salaries, which are much more evenly distributed than other forms of income.

On this last point, I should note that much of the inequality of capital gains income is caused by the fact that people earn this at the time of sale, which isn't a serious problem.  The top 1% of capital gains income will accrue to those who happened to sell a lot of assets in a given year.  Much of the income was earned over a longer period in which the assets were owned.  In addition to this there are short term capital gains on assets with volatile prices.  The prices can go up or down quite rapidly, so that some people will happen to make really large returns.  The fact that the most successful investor, Warren Buffet, took a more long term strategy gives us very strong evidence that this type of strategy is unlikely to produce consistently good results.  Such an investor will have good years and bad years.  It is only during the good years that they are part of the top 1% of capital gains earners.  Hence inequality in wages is probably a much larger part of the problem than the statistics indicate.

As I indicated in a previous post, information about the number of managers and average salaries over, say, the last thirty years for purposes of comparison is hard to find.  I have found that firm size is increasing, and it would seem that we would need more and more highly paid managers to run larger firms, but I have been unable to verify this.  Perhaps reading Steve Kaplan's paper will help.