The evolution of top incomes

November 1, 2006

Free Market Foundation

Among economists, there has been general dissatisfaction with existing international data on income inequality. In “The Evolution of Top Incomes: A Historical and International Perspective,” authors Thomas Piketty and Emmanuel Saez construct a high quality, long-run, international database on income and wealth concentration using historical tax statistics. The resulting database includes annual series covering most of the twentieth century for a number of (mostly Western) countries.

They find:

Most countries experienced a dramatic drop in top income shares in the first part of the century because large wealth holdings dropped precipitously during the wars and the Depression.

Top income shares did not recover in the immediate post-war decades.

However, over the last thirty years, top income shares have increased substantially in English speaking countries, while not at all in the continental European countries or Japan.

This increase is attributable to an unprecedented surge in top wage incomes that began in the 1970s and accelerated in the 1990s.

As a result, top wage earners have replaced capital income earners at the top of the income distribution in English speaking countries.

Understanding why top wages have surged in English speaking countries in recent decades, but not in continental Europe or Japan, remains controversial, say the authors:

The free-market view claims that technological progress has made managerial skills more general and less firm-specific, hence increasing competition for the best executives from segregated, within-firm markets to a single economy-wide market.

While this view can possibly account for U.S. trends, it cannot explain why executive pay has not changed in other countries, such as Japan or France, which have gone through similar technological changes.

Source: Les Picker, The Evolution of Top Incomes, NBER Digest, October 2006; based upon: Thomas Piketty and Emmanuel Saez, The Evolution of Top Incomes,

National Bureau of Economic Research, Working Paper No. 11955, January 2006.

For text: http://nber.com/digest/oct06/w11955.html

For study text: http://papers.nber.org/papers/w11955

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 24 October 2006