Economists have figured out who’s really to blame for exploding income inequality [View all]

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Economists have figured out who’s really to blame for exploding income inequality

By Matt O'Brien at the Washington Post

http://www.washingtonpost.com/blogs/wonkblog/wp/2015/05/29/economists-have-figured-out-whos-really-to-blame-for-inequality/

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The easiest way to think about this is to think about the different types of inequality. There isn't just inequality between everyone, but also between everyone at a single company. Why does this matter? Well, if CEOs really are gobbling up a bigger and bigger slice of the profit pie, then inequality within society at large should have increased because inequality within companies increased. But that's not what happened. The research team of Jae Song of the Social Security Administration, Fatih Guvenen of the University of Minnesota, and David Price and Nicholas Bloom of Stanford were able to look at what had previously between private earnings data for every company between 1978 and 2012—the best data we have so far—and found that the pay gap between executives and their own workers had barely changed during this time. What had changed, though, was the pay gap between every worker at the highest-paid firms and everyone else. In other words, inequality exploded because the top 1 percent of companies were making more and paying all their employees more. This was true across the country and across industries.

Why would this be? Well, it's not clear, but we can make a couple of guesses based on what we know about inequality both within and between industries. Think about it like this. The fact that the top 1 percent of every kind of company seem to have pulled away from their peers tells us that some big-picture thing about the economy must have changed. The researchers hypothesize it might be that the best firms are getting better at picking out the best workers, who, in turn, are getting more picky about going to the best, and most remunerative, firms. Maybe, but there's a simpler explanation. Maybe it's that technology has made every market into a winner-take-all one, or close enough to it, so that the top companies can make more money than they used to even if nothing else has changed.

But one thing that has changed is the center of gravity in the economy. Workers have traded in their blue collars for white ones, and the top 1 percent overall have become much more finance-focused. Indeed, according to one estimate, Wall Street and corporate executives explain as much as 60 percent of the increasing share of income going to the top 1 percent the past 30 years. Why? It's probably that deregulation has freed the banks to not only get into new businesses, but also take bigger risks, which has supercharged their bottom lines and bonuses (but made them blow up when those bets have gone bad). So inequality between industries—or at least between finance and everything else—has all but certainly increased. That's why, even though Wall Street firms still share the spoils just as much as they ever did come bonus time, it's not misguided to pay particular attention to them when we talk about the pay gap.

Gordon Gekko, in other words, isn't the only one to blame for inequality. His traders are too.





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