The End of the Supermanager?

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.

Average income of top 0.01% of US households, from World Top Incomes Database. 3-year moving averages.

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.


8 thoughts on “The End of the Supermanager?”

  1. That’s bizarre. If the “other income” isn’t capital gains and isn’t labor-related, what is it? Bond interest, under today’s interest rates? That seems implausible. Dividends? Yes, there are some companies paying larger dividends today, but are there enough to account for this difference? Royalties? Lawsuit proceeds?

    I suspect there is some sort of income reclassification going on in the statistics, rather than a wholesale replacement of the people in the top 1%, but I don’t really know. It seems like something that should be investigated more carefully, though.

    1. The biggest part, 40% of the total, is proprietor’s income — S corporations, partnerships, etc. Dividends are 15%, interest 8%, and rents and royalties 4%. I’m sure there is some reclassification going on, but I don’t think that’s the story here. Keep in mind, we are talking about the change since 2000. And keep in mind, this is all income that is being declared and paid tax on.

      It’s also important to be clear about what we are talking about here. We are talking about the share of income of people in the top one percent of one percent of the income distribution. For the dividend share of income for this fractile to increase, there is no need for corporations to pay higher dividends. It’s sufficient that dividend income become more concentrated at the top. But, we are not just talking about a decline in the wage share at the top, we are talking about a (large) absolute decline in wage income at the top. Since we don’t think there has been any decline in the number of people receiving very high wages, it follows that a smaller proportion of very-high-wage-earners are in the top 0.01%.

      1. Think of all the hedge fund and private equity shops that are set up as LLCs or partnerships. Looking at the world of finance since 2008 there has been a movement of highly paid positions out of the big investment banks and into these types of firms. I don’t doubt that the median income at these firms is much higher than the national average.

        1. It’s certainly possible that this accounts for a big part of the shift. My first thought is that it’s not likely this could be the whole story, or even most of it. But in the absence of more data first thoughts aren’t worth much.

          The SSA dataset would be amazing for answering questions like this. Hopefully the Bloom paper is just the beginning.

  2. “The fact that the whole increase is accounted for by the between-firm component, yet none by the between-industry component, is very puzzling.”

    This is very weird since profit expansion has been mainly in the tech and finance sectors. See the blog post below.

    Also, why be reluctant to include capital gains as income? They must be included to get the real income picture.

    Assuming capital gains affect savings/consumption behavior the same as other income, they will have the same effect. It’s like buyback-dividend equivalence. A dividend will be reinvested at the savings rate, and capital gains will be realized at the consumption rate.

    1. This is very weird

      Yes, it is. One of the things that makes me skeptical of the paper.

      Also, why be reluctant to include capital gains as income? They must be included to get the real income picture.

      Sorry, I think I wasn’t clear. We are talking about two datasets here. The Bloom paper, which is based on SSA data, and the Top incomes database, which is based on tax returns. The Bloom paper doesn’t talk about capital gains for the simple reason that the Social Security system never sees them. It’s strictly about labor income. Piketty and his Top Incomes collaborators, on the toehr hand, do make a conscious choice not to include capital gains in their headline numbers, and not to use them in the classification of households even when they do include them. I think this is a mistake; I think it overstates the importance of labor income relative to capital income at the top; I also think that share buybacks conceptually are equivalent to dividends; I think I’ve written about this before. But at least arguably this bias toward overstating the labor share in the Top Incomes database makes the reported decline in the labor share even more dramatic.

    1. That’s a nice graph. Maybe I’ll make similar ones for the top 0.1 and 0.01 percents, if he hasn’t.

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