LECTURE 12: THE 1 PERCENT IN EUROPE AND THE USA

Transcription

1 LECTURE 12: THE 1 PERCENT IN EUROPE AND THE USA Dr. Aidan Regan aidan.regan@ucd.ie Teaching blog: #CapitalUCD

2 Introduction The increase in inequality since 1970 has not been the same everywhere. This suggests that political & institutional factors play a key role in shaping differences between countries. Comparative political economy To illustrate this we will start by examining the evolution of top incomes (decile/centile) in France and the USA.

3 Top decile 50% Figure 8.1. Income inequality in France, top decile in total (incomes or wages) Share of t 45% 40% 35% 30% 25% Share of top income decile in total income Share of top wage decile in total wage bill 20% Inequality of total income (labor and capital) has dropped in France during the 20th century, while wage inequality has remained the same. Sources and series: see piketty.pse.ens.fr/capital21c.

4 Top centile 24% Figure 8.2. The fall of rentiers in France, % Share of top percentile in total (incomes or wages) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% Share of top income percentile in total income Share of top wage percentile in total wage bill 0% The fall in the top percentile share (the top 1% highest incomes) in France between 1914 and 1945 is due to the fall of top capital incomes. Sources and series: see piketty.pse.ens.fr/capital21c.

5 A fall in inequality 1. Income inequality has greatly diminished in France since the Belle Époque. The share of the top decile in national income declined from 45-50% on the eve of WW1 to 30-35% today. 2. The compression of income inequality was entirely due to diminished top incomes from capital. If we only look at wage inequality we'll see that this has remained stable over time. The least well paid have always received around percent of total wages. This has not changed that much over time. 3. If top incomes from capital (the 19th century rentier class) had not diminished, income inequality would not have declined the 20th century. Hence, falling income inequality = fall in capital income. 4. There is no natural equilibrium in the shape of the income distribution. It is shaped by politics and institutions.

6 Two worlds at the top 100% Figure 8.3. The composition of top incomes in France in 1932 Share in total income of various fractiles 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Labor income Capital income Mixed income P90-95 P95-99 P P P P Labor income becomes less and less important as one goes up within the top decile of total income. Notes: (i) "P90-95" includes individuals between percentiles 90 to 95, "P95-99" includes the next 4%, "P " the next 0.5%, etc. (ii) Labor income: wages, bonuses, pensions. Capital income: dividends, interest, rent. Mixed income: self-employment income. Sources and series: see piketty.pse.ens.fr/capital21c.

7 Top decile % Figure 8.4. The composition of top incomes in France in 2005 Share in total income of various fractiles 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Labor income Capital income Mixed income P90-95 P95-99 P P P P Capital income becomes dominant at the level of the top 0.1% in France in 2005, as opposed to the top 0.5% in Sources and series: see piketty.pse.ens.fr/capital21c.

8 Two worlds Today, one has to climb much higher up the social hierarchy before before income from capital outweighs income from labour. Income from capital only assumes decisive importance in the top 0.1%. In the top 9 percent in France you will mainly find individuals who earn 2-3 times the average monthly wage ($2,000). To make it into the top half of the 9% requires an income 4-5 times the average monthly wage ($8-10,000). To make it into the top 1 percent it is necessary to earn an income that is 7-10 the average monthly wage ($15-20,000). Only those who substantial amounts of financial capital assets are only like to reach this level of income.

9 The 1 Percent The top decile always composes two different worlds: the 9% in which income from labour dominates and the 1% in which income from capital becomes progressively more important. This is not to say that someone in the 9% earns nothing from capital. A manager on an income of $4,000 per month might rent out an apartment at $1,000 per month. This is a monthly income of $5,000. This is equal to 80% labour income and 20% from capital income. In the top 1% it is primarily business and financial assets that dominate: dividends and interest from mobile capital. Note: large fortunes primarily consist of financial assets not housing (stocks and shares in partnerships).

10 Tax evasion It is important to note that figures 8.3 and 8.4 are pre-tax returns and therefore the estimates are based solely on income from capital that is reported in national tax returns accounts. Actual capital income is, therefore, completed under-estimated, owing to large scale tax evasion (it is much easier to hide investment income than it is is to hide wage income). This can be achieved by using foreign bank accounts in countries that do not cooperate with the country in which the taxpayer resides and using quasi-legal tax-exemption strategies on whole categories of capital income. It is extremely difficult to measure capital income. Very large capital income fortunes are almost always inherited.

11 France since 1980 The long-term stability in wage inequality should not mask short-term fluctuations. After May 68' Charles De Gaulle's government increased the minimum wage by 20%. It was then indexed to the average wage such that the purchasing power of the low paid increased by more than 130% between 68' and 83'. Figure 9.1 shows the evolution of the minimum wage in France and the USA. This led to a significant compression of wage inequalities. The turn toward fiscal austerity and wage competitiveness from the 1980 s meant that this compression was reversed. Wages were frozen and profits increased. From the late 1990's when the purchasing power of the bottom 50 percent stagnated it increased for the top decile, primarily because of a new phenomena - super salaries at the very top (where purchasing power increased by 50 percent).

12 Minimum wage 10 Figure 9.1. Minimum wage in France and the U.S., $ $ $9.6 7 $8.4 Hourly minimum wage 6 5 4, $7.2 $6.0 $4.8 3 France (2013 euros, left hand scale) $ United States (2013 dollars, right hand scale) $2.4 $ Expressed in 2013 purchasing power, the hourly minimum wage rose from $3.8 to $7.3 between 1950 and 2013 in the U.S., and from 2.1 to 9.4 in France. Sources and series: see piketty.pse.ens.fr/capital21c. $0.0

13 USA top decile Share of top decile in national income 50% 45% 40% 35% 30% Figure 8.5. Income inequality in the United States, Share of top decile in total income (incl. capital gains) Excl. capital gains 25% The top decile income share rose from less than 35% of total income in the 1970s to almost 50% in the 2000s-2010s. Sources and series: see piketty.pse.ens.fr/capital21c.

14 USA top centile 25% Figure 8.6. Decomposition of the top decile, U.S Share of the different groups in total income 20% 15% 10% 5% Top 1% (annual incomes above $ in 2010) Top 5%-1% (annual incomes between $ and $ in 2010) Top 10%-5% (annual incomes between $ and $ in 2010) 0% The rise of the top decile income share since the 1970s is mostly due to the top percentile. Sources and series: see piketty.pse.ens.fr/capital21c.

15 Inequality in the USA Figures 8.5 and 8.6 represent the share of the top decile (and centile) in national income in the USA. The most striking fact is that the USA has become much more unequal than France (and Europe). It is quantitatively as extreme as Old Europe in the first decade of the 20th century. Inequality was at it's lowest from when the top decile took 30-35% of national income (the same as most of Europe today). This is what Paul Krugman describes as "the America we love" - the period of the TV series Mad Men.

16 The explosion since 1980 Since 1980 income inequality has exploded. The shape of the curve is impressively steep (from 35 percent to 52 percent today). If it continues it will go beyond 60 percent in Remember, this most likely under-estimates the returns to capital income because of tax evasion strategies. The financial crisis did not impact on the increase in inequality at all. Figure 8.6 shows that the bulk of the increase in inequality came from the 1% whose share in national income rose from 9 percent in the 1970's to a staggering 20 percent today. The top 0.1 percent earn $1.5 million a year. The top 1 percent include those making $352,00 a year. The 4 percent earn between $ k, and the 5 percent between $ k.

17 Cause of the financial crisis? Given that income inequality peaked at extremely high levels in 1929 & 2007 it seems reasonable to ask whether it was a causal factor behind the financial crisis of 2008? Discuss. Why might some suggest this? The top 1% absorbed a staggering 60 percent of the total increase of US national income during

18 Europe & USA 50% Figure 9.8. Income inequality: Europe vs. the United States, % U.S. Share of top decile in total income 40% 35% 30% Europe 25% The top decile income share was higher in Europe than in the U.S. in ; it is a lot higher in the U.S. in Sources and series: see piketty.pse.ens.fr/capital21c.

19 Top centile % Figure 8.9. The composition of top incomes in the U.S. in 1929 Share in total incomes of various fractiles 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Labor income Capital income Mixed income P90-95 P95-99 P99-99,5 P99,5-99,9 P99,9-99,99 P99, Labor income becomes less and less important as one moves up within the top income decile. Sources and series: see piketty.pse.ens.fr/capital21c

20 Top centile % Figure The composition of top incomes in the U.S., 2007 Share in total income of various fractiles 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Labor income Capital income Mixed income P90-95 P95-99 P99-99,5 P99,5-99,9 P99,9-99,99 P99, Capital income becomes dominant at the level of top 0.1% in 2007, as opposed to the top 1% in Sources(and(series:(see(pike0y.pse.ens.fr/capital21c.((

21 The super manager In 1929 income from capital was the primary source of income for the top 1%. In 2007 one had to climb into the top 0.1% for this to be true. Qualitatively - who are all these people? 60 to 70 percent of the top 0.1 percent ($1.5m per annum) consisted of top managers. Athletes, actors, and celebrities make up less than 5 percent. It is more about super managers than it is about super stars. Who are these top managers in the 0.1 percent? 20 percent work for banks and financial institutions whilst approximately 80 percent work in the non-financial sector.

22 Conclusion The debate that tends to dominate from a macroeconomic point of view (regardless of whether you think this increase at the top is justified or not) is the stagnation of wages for the majority, rather than the steep increase at the top. Why? Market economies require mass consumption. There are only two ways this can happen: wage growth or private debt (credit cards). Next week we will examine the role of politics and institutions in explaining the cross-national variation in different worlds of welfare capitalism in Europe and the USA.