For three decades, the debate about rising income inequality in the United States has centered on the dispersion of wages and the increased premium for skilled/educated workers, attributed in varying proportions to skillbiased technological change and to globalization (for example, see Katz and Autor 1999 for a survey). In recent years, however, there has been a growing realization that most of the action has been at the very top. This has attracted a great deal of public attention (as witnessed by the number of visits to and press citations of our World Top Incomes Database at http://topincomes.parisschoolofeconomics.eu/) and has represented a challenge to the economics profession. Stories based on the supply and demand for skills are not enough to explain the extreme top tail of the earnings distribution; nor is it enough to look only at earned incomes. Different approaches are necessary to explain what has happened in the United States over the past century and also to explain the differing experience in other high-income countries over recent decades. We begin with the international comparison in the first section and then turn to the causes and implications of the evolution of top income shares. ...
We should start by emphasizing the factual importance of the top 1 percent. It is tempting to dismiss the study of this group as a passing political fad due to the slogans of the Occupy movement or as the academic equivalent of reality TV. But the magnitudes are truly substantial. Based on pre-tax and pre-transfer market income (excluding nontaxable fringe benefits such as health insurance but including realized capital gains) per family reported on tax returns, the share of total annual income received by the top 1 percent has more than doubled from 9 percent in 1976 to 20 percent in 2011 (Piketty and Saez, 2003, and the World Top Incomes Database). There have been rises for other top shares, but these have been much smaller: during the same period, the share of the group from 95th to 99th percentile rose only by 3 percentage points. The rise in the share of the top 1 percent has had a noticeable effect on overall income inequality in the United States (Atkinson, Piketty, and Saez 2011, Section 2.2).The authors conclude -
The rise in top income shares in the United States has been dramatic. In seeking explanations, however, it would be misleading to focus just on the doubling of the share of income going to the top 1 percent of the US distribution over the past 40 years. We also have to account for the fact that a number of high-income countries have seen more modest or little increase in top shares. Hence, the explanation cannot rely solely on forces common to advanced countries, like the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century that characterize the countries discussed here.
In this paper, we have highlighted four main factors that have contributed to the growing income shares at the very top of the income distribution, noting that they may operate to differing extents in the United States and other countries, particularly in continental Europe. The first is tax policy: top tax rates have moved in the opposite direction from top pre-tax income shares. The second factor is a richer view of the labor market, where we have contrasted the standard supply-side model with the alternative possibility that there may have been changes to bargaining power and greater individualization of pay. Tax cuts may have led managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. In Europe—but less so in the United States—private wealth (relative to national income) has followed a spectacular U-shaped path over time, and inherited wealth may be making a return, implying that inheritance and capital income taxation will become again central policy tools for curbing inequality. The final, little-investigated, element is the correlation between earned income and capital income, which have become more closely associated in the United States.