Inequality and Occupy Wall Street 2: the facts are fertile soil

The Occupiers have their facts right.

There has been an unprecedented increase in earnings inequality in the United States, with significant shares of total earnings increasingly going to the very top.

Let’s be clear on this: we are not talking about inherited wealth, but rather “earnings”, the stuff we get from being an “employee”.

The only group to see their average earnings rise over the course of the last three decades or so are highly educated, older, men. And this is driven by the select few. It is not an exaggeration to say that it is the top 1%.

These changes have been documented in a series of research papers published by a loosely coordinated network of labour economists over the course of the last decade or so. If you want all the details take a look at the book edited by Atkinson and Piketty called Top Incomes over the Twentieth Century. But since you need a top income to afford it, visit the associated web site that holds the data or go to  Emmanuel Saez’s website .

Saez wrote some of the path breaking articles using income tax data to document how the distribution of earnings have become increasingly concentrated among the top 1% in the United States. But he also co-authored an article with Mike Veall of the Department of Economics at McMaster University to document the extent to which this was going on in Canada.

The Saez-Veall article called “The Evolution of High Incomes in North America: Lessons from Canadian Evidence” is published in the June 2005 issue of the American Economic Review, and shows that since 1980 the share of total earnings going to the top 5% has increased from about 23% to 30%, but also that all of this has been driven by the top 1% who have seen their share rise from about 7.5% to about 13%. And half of this increase is driven by the top one-tenth of one percent.

We know why this is happening in Canada. It is because top earners here have the option of moving to the US, and Canadian employers have to offer competitive compensation to keep them. Saez and Veall show that the changes in Quebec, where the top earners are presumably less mobile than in English-speaking parts of Canada, were not as significant. Competitive North American labour markets are the driving force.

But the matter of why it happened in the US is left open. If the top 1% merit this increasing share, the implications are one thing. But if they don’t, being due to just luck and privilege, they are another.

Couple the later scenario, or at least the belief in the latter scenario, with the fact that the typical individual has not seen any gains in earnings for more than 30 years; throw in the implication that young people are facing an increasingly polarized labour market that does not promise the same earnings as it did for their parents when they were getting started; ah … now you have fertile soil for an Occupy Movement.

The surprising thing is that there weren’t protests long ago. The timing has to do with the bursting of the financial bubble. It is now much more credible to start believing that luck and privilege (or maybe even greed and criminality), not skills and determination, are what was behind the success of the top 1%.

The Occupiers may have their facts correct, but the underlying reasons are worth a second thought … something I’ll address in a series of posts over the coming days.