Income Inequality Boom: Where It Came From & Why Business Should Care
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Presentation for the Boston College Center for Corporate Citizenship Executive Forum meeting Fall 2015 by Timothy Noah, labor policy editor for Politico. For more information on the Boston College Center for Corporate Citizenship visit http://ccc.bc.edu
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Income Inequality Boom: Where It Came From & Why Business Should Care
- 1. “The Income Inequality Boom: Where It Came From & Why Business Should Care” A Reporter Reviews the Evidence Presentation by Timothy Noah October 29, 2015 Executive Forum, Center for Corporate Citizenship Boston College
- 2. Once upon a time… From 1934 to 1979 incomes grew more equal or the income distribution remained stable. “The Great Compression”: Income grew more equal 1934-1952. Income distribution remained stable 1952- 1979.
- 3. That ended in 1979. (As a general rule of thumb, everything bad comes from the 1970s.)
- 4. Goodbye, Great Compression. Hello, Great Divergence. From 1979 to the present, incomes have grown steadily more unequal.
- 5. Great Divergence is not one trend, but two. TREND ONE: The top 1 percent (with family income currently exceeding $423,090) doubled its share of the nation’s income from 10 percent to 21 percent. TREND TWO: People who lacked college or graduate degrees saw incomes increase much more slowly than people who had college or graduate degrees, and often not at all.
- 6. Story One: 1 percent inequality (This story is fairly simple.)
- 7. Top one percent doubled its income share between 1979 and 2008.
- 9. The 1 percent and the Great Recession (2007-2009) Top 1 percent absorbed 49 percent of income losses, 2007-2009.Their incomes fell 36 percent. (Recessions are bad for rich people!) But top 1 percent subsequently received 58 percent of income gains during the recovery (2009-2014). Income gain for 1 percent: 27 percent. Income gain for 99 percent: 4 percent.
- 10. Impact of taxes and transfers
- 11. What’s driving this? Out-of-control pay increases for top executives in nonfinancial corporations (driven since the early 1990s by stock option awards). Out-of-control growth in the finance industry (driven by Wall Street deregulation and investment banks’ shift from partnerships to publicly-owned corporations).
- 12. Growth in CEO/worker compensation ratio, 1965-2010 (source: the Atlantic)
- 13. Increase in compensation for the 0.1 percent, 1979-2005 (source: Jon Bakija, Adam Cole, and Bradley Heim, “Jobs and Income Growth of Top Earners,” 2010).
- 14. Story Two: Skill-based inequality (This story is complicated.)
- 15. Stagnation at the middle. Great Compression: From 1950 to 1970 median household income grew by 63 percent. Great Divergence: From 1979 to 2013 median household income (currently $56,279) increased a mere 6 percent. Median income as of Sept. 2015 was 1.3 percent higher than at recession’s end, 0.5 percent lower than at the recession’s start, and 1.7 percent lower than in Jan. 2000.
- 16. Why? Usual suspects are innocent: • Race and gender. Inapplicable because black- white pay gap is virtually same as in 1979, while the male-female pay gap is narrower. • Immigration. Largely inapplicable because the only native-born group whose pay is driven down by immigrants is high school dropouts. • Trade. Inapplicable until 21st century, with rise of imports from China and Mexico.
- 17. What’s driving this? Mainly Decline of labor unions and government retreat from pro-labor policies Rise in demand for highly skilled workers …but for last 15-20 years, mostly the first.
- 18. Decline of labor • Union density peaked in 1954 at about 40% of private-sector workforce. • Today union density is about 7% of private- sector workforce—same level as in 1933. • Main governmental source of decline: 1947’s Taft-Hartley law. • Ronald Reagan’s politicization of the National Labor Relations Board also had an effect.
- 19. Income share for top 10 percent inverse to union membership (source: Economic Policy Institute).
- 20. Wages are a declining share of total income (Jacobson and Occhino, 2012)
- 21. Shortage of high school grads starting in the 1970s had large effect.
- 23. Cross-national differences in wage returns to skills, 2011–2013 (Autor, 2014) Reproduced with permission from Hanushek et al. [(15), table 2]. D H Autor Science 2014;344:843-851 Published by AAAS
- 24. College/high school median annual earnings gap, 1979–2012 (Autor, 2014) D H Autor Science 2014;344:843-851 Published by AAAS
- 25. “Strengthening education … will raise productivity and raise overall incomes in our society” but it’s “not likely, in my view, that any feasible program of improving education will have a large impact on inequality in any relevant horizon.” --Larry Summers, quoted in the Washington Post March 3, 2015
- 26. “But inequality isn’t what matters. Opportunity is what matters.”
- 27. Does U.S. income mobility compensate for U.S. income inequality? No.
- 28. From Economic Report to the President, Feb. 2012: Growing income inequality shrinks income mobility.
- 29. From Harvard-Berkeley “Equality of Opportunity” project, Jan. 2014: Growing income inequality doesn’t shrink income mobility.
- 30. What we know • The one percent versus the 99 percent has nothing to do with education but something to do with labor’s decline. • Skill-based inequality is caused by a shortage of skilled workers relative to demand and by labor’s decline. It hasn’t grown in 21st century. • Income inequality may be reducing economic opportunity, but that can’t yet be proven.
- 31. What business can do End CEO pay madness. (Promote from within?) Welcome unions as partners. (Truman-era Chamber of Commerce President Eric Johnson: “Labor unions are woven into our economic pattern of American life, and collective bargaining is part of the democratic process. I say recognize this fact not only with our lips but with our hearts.” Limit subcontracting and franchising & don’t misclassify workers (it’s illegal!). Don’t abuse guest-worker programs (even though that’s legal).
Editor's Notes
- “The Great Compression” was coined by economic historians Claudia Goldin of Harvard and Robert Margo, then of Vanderbilt, now of Boston U. Libertarian writer Brink Lindsey: "Republicans want to go home to the United States of the 1950s, while Democrats want to work there.” Simon Kuznets “Kuznets Curve”: Incomes grow more unequal with industrialization, then more equal as industrial democracies mature.
- The postwar economic boom ended in 1973 with the Arab Oil embargo, inflation, and the energy crisis. Household median income stopped growing, even though there were more two-income households. Except during the tech boom of the late 1990s, pre-tax median income growth has been meager or nonexistent ever since.
- Starting in 1979 and especially after the two recessions of the early 1980s income inequality started to rise.
- Let’s start by establishing that the Great Divergence, the growth in income inequality since 1979, isn’t one trend but two. PLEASE NOTE: This is not intrinsic to capitalism. U.S. was a capitalist country from 1934 to 1979. Trend two is the trend the business class wants to discuss, when it wants to discuss income inequality at all. But you need to consider both.
- That green patch at the top shows income share for the top 1 percent. It thins after 1940 and stabilizes in 1973, when the top 1 percent consumed 8 percent of the nation’s income. Then, starting in 1979, the green patch starts to thicken, and by 2008 the top 1 percent is consuming 18 percent of the nation’s income. Since then (i.e. as of 2014) it’s grown to 21 percent.
- Here you see it broken down into two periods, the Great Compression and the Great Divergence.
- How did the one percent do during the recession and after? (Top marginal income-tax rate rose in 2013 from 35 to 39.6 percent)
- Taxes and transfers change distribution only somewhat—1 percent goes from 19 percent (this was a couple years ago) to 15 percent.
- Cause here isn’t Bertie Wooster-like coupon clippers who inherit wealth. It’s meritocratic winners who accumulate wealth.
- The SEC has a new rule requiring companies to report this information. Note that the increase begins in the late 1970s.
- About 60 percent of the 0.1 percent are top executives and financial professionals. The proportions have shifted somewhat since 1979: finance professionals in the top 0.1 percent nearly doubled. Nonfinancial executives remained a bigger share but declined slightly. Celebrity artists and sports figures increased presence but still don’t exceed 3 percent.
- I’ll try to keep this as simple as I can.
- These are all pre-tax figures, which means they don’t include the effects of taxes and transfer payments. When you include those, you see a steady but still quite modest increase in the median since 2000. The Sept. 2015 data and the estimate of median income at $56,279, also as of Sept. 2015, come from Sentier Research, a private firm.
- When I talk about government here I mean Republican presidents, Congress, and Democratic- as well as Republican-appointed Fed chairmen.
- Taft-Hartley passed in 1947. Congressional support for labor weakened in late 1970s and Reagan administration was openly hostile to labor. PATCO strike, Richard Freeman: If sole cause were global trends average earnings for US industrial workers in 2005 would have been $25 per hour rather than $16 per hour. Estimates of the effects of labor’s decline on inequality growth range from one-third to one-half.
- This is pretty straightforward.
- Here we see that the share of the nation’s total income going to wages has been declining since either the early 70s or the early 80s.
- The high school graduation rate stopped growing in the 1970s for the first time in a century, as demand for skilled labor continued to increase.
- Here you see that the supply of college-educated workers met or exceeded demand from 1940 to 1980. Starting in 1980, supply fell behind demand.
- This slide is from a paper by MIT economist David Autor in Science this past May. Here we see that the wage return on skills is higher in the U.S. than it is in most comparable nations.
- But a college degree may no longer be enough. Note that the lines flatten around 2000. The college premium stopped growing then. Others say it stopped in 1995. With a college degree you do better than someone with a high school degree, but that doesn’t mean you do well.
- This quote is food for thought for two reasons. One is that Summers is a centrist economist who’ll likely play some role in any Hillary Clinton campaign for president. Hillary Clinton’s husband placed great emphasis on education as the solution to income inequality back in the 1990s. The second reason is that Summers teaches at, and used to be president of Harvard, the most famous college in America. So when he says college is overrated, that’s pretty interesting.
- US income mobility declined between the turn of the century and the 1950s. Since then it’s leveled off. Now the U.S. lags most other comparable nations in income mobility—a dramatic change from the early 20th century.
- What effect does growing income inequality have on upward mobility? Evidence thus far is mixed. Countries with greater income inequality tend to have less income mobility. “Harder to climb the ladder when the rungs are further apart.”
- In effect, researchers have found a geographic link between growing income inequality and reduced economic mobility. But they have not found a temporal link, i.e., since the 1970s economic mobility has not declined nationwide even though income inequality has been increasing. So the president, for instance, has stopped suggesting too explicitly that inequality and mobility are linked. Most accurate to say that the linkage is murky.
- Final thoughts.
- David Weil, who now runs the Labor Department’s Wage and Hour division, wrote a book called “The Fissured Workplace” documenting a cultural shift in the U.S. economy. Companies have offloaded less-skilled workers onto subcontractors or declared them independent contractors so they don’t have to pay benefits or worry about obeying wage/hour laws. Or they’ve moved to a franchise model that makes less-skilled workers the franchisee’s problem.