Mad Skillz

Over at the American Enterprise Institute, James Pethokoukis has an excellent write-up on a new study by Steven Kaplan (University of Chicago Booth School of Business) and Joshua Rauh (Stanford Graduate School of Business) on income inequality and the “1% vs. 99%” war cry. The findings:

  • The increase in pay at the highest income levels has been broad-based, ranging from public and private company executives to pro athletes.1
  • Instead of drastically rising, the afer-tax, after-transfer income share of the top 1% is about the same as it was in 1987-1988, 1996, and 2001 (most inequality alarmists cite pre-tax, pre-transfer income).
  • Top earners come less from inherited wealth (which dropped from 60 to 32% between 1982 and 2011) and more from modest households, access to education (the share of those with no college dropped from 17 to 5 percent, with college grads rising from 77 to 87% between ’82 and ’11), and placing their efforts in tech-based industries.

“We believe,” write Kaplan and Rauh,

that the US evidence on income and wealth shares for the top 1 percent is most consistent with a “superstar”-style explanation rooted in the importance of scale and skill-biased technological change. In particular, we interpret the fact that the top 1 percent is spread broadly across a variety of occupations as most consistent with an important role for skill-biased technological change and increased scale. These facts are less consistent with an argument that the gains to the top 1 percent are rooted in greater managerial power or changes in social norms about what managers should earn.2

Though globalization “may have contributed to greater scale,” it “cannot drive the increase in inequality at the top levels given the breadth of the phenomenon across the occupations we study.”3 Funny enough, increasing globalization has actually decreased global inequality over the last few decades.4

Xavier Sala-i-Martin, Maxim Pinkovskiy, 2010

So, maybe the superrich aren’t all Gordon Gekkos. Maybe they’ve just got mad skillz in the globalized economy.