Everyone is talking about this new paper, Firming Up Inequality. It uses individual-level data from the Social Security Administration, matched to employers by Employer Identification Number (EIN), to decompose changes in earnings inequality into a within-firm and a between-firm component. It’s a great exercise — marred only modestly by the fact that the proprietary data means that no one can replicate it — exactly the sort of careful descriptive work I wish more economists would do.
The big finding from the paper is that all the rise in earnings inequality between 1982 and 2012 is captured by the between-firm component. There is no increase in the earnings of a person in the top 1% of the earnings distribution within a given business, and the earnings of someone at the median for that same business. The whole increase in earnings inequality over this period consists of a widening gap between the firms that pay more across the board, and the firms that pay less.
I’m not sure we want to take the results of this study at face value. Yes, we should be especially interested in empirical work that challenges our prior beliefs, but at the same time, it’s hard to square the claims here with all the other evidence of a disproportionate increase in the top pay within a given firm. Lawrence Mishel gives some good reasons for skepticism here. The fact that the whole increase is accounted for by the between-firm component, yet none by the between-industry component, is very puzzling. More generally, I wonder how reliable is the assumption that there is a one to one match between EINs and what we normally think of as employers.
That said, these findings may be pointing to something important. As a check on the plausibility of the numbers in the paper, I took a look at labor income of the top 1 percent and 0.01 percent of US households, as reported in the World Top Incomes Database. And I found something I didn’t expect: Since 2000, there’s been a sharp fall in the share of top incomes that come from wages and salaries. In 2000, according to the tax data used by Piketty and his collaborators, households in the top 0.01 percent got 61 percent of their income from wages, salaries and pensions. By 2013, that had fallen to just 33 percent. (That’s excluding capital gains; including them, the labor share of top incomes fell from 31 percent to 21 percent.) For the top 1 percent, the labor share falls from 63 percent to 56 percent, the lowest it’s been since the 1970s.
Here is the average income of the top 0.01 percent over the past 40 years in inflation-adjusted dollars, broken into three components: labor income, all other non-capital gains income, and capital gains.
As you can see, the 1990s look very different from today. Between 1991 and 2000, the average labor income of a top 0.01% household rose from $2.25 million to $10 million; this was about 90 percent of the total income increase for these households. During the 1990s, rising incomes at the top really were about highly paid superstars. Since 2000, though, while average incomes of the top 0.01% have increased another 20 percent, labor income for these households has fallen by almost half, down to $5.5 million. (Labor income has also fallen for the top 1 percent, though less dramatically.) So the “Firming” results, while very interesting, are perhaps less important for the larger story of income distribution than both the authors and critics assume. The rise in income inequality since 2000 is not about earnings; the top of the distribution is no longer the working rich. I don’t think that debates about inequality have caught up with this fact.
Fifteen years ago, the representative rich person in the US was plausibly a CEO, or even an elite professional. Today, they mostly just own stuff.