Evolution of Top Incomes

During the post-1970 period, one observes a

major divergence between rich countries. While

top income shares have remained fairly stable in

continental European countries or Japan over

the past three decades, they have increased

enormously in the United States and other

English-speaking countries. This rise of top income

shares is due not to the revival of top

capital incomes, but rather to the very large

increases in top wages (especially top executive

compensation). As a consequence, top executives

(the “working rich”) replaced top capital

owners (the “rentiers”) at the top of the income

hierarchy during the twentieth century. Understanding

why top wages have surged in English speaking

countries in recent decades, but not in

continental Europe or Japan, remains a controversial

question, with three broad views. First,

the free market view claims that technological

progress has made managerial skills more general

and less firm-specific, increasing competition

for the best executives from segregated

within-firm markets to a single economy wide

market. While this view can account for U.S.

trends, it cannot explain why executive pay has

not changed in other countries such as Japan

and France, which have gone through similar

technological changes. A second view claims

impediments to free markets due to labor market

regulations, unions, or social norms regarding

pay inequality can keep executive pay

below market. Such impediments have been

largely removed in the United States, but still

exist in Europe and Japan. Under this view, the

surge in executive compensation actually represents

valuable efficiency gains. Finally, a third

view claims the surge in top compensation in

the United States is due to the increased ability

of executives to set their own pay and extract

rents at the expense of shareholders, perhaps for

the same reasons as under the second view. In

this case, however, there might not be any associated

efficiency gains.

The relationship one might want to test, ultimately

using our database, is the impact of

inequality on growth. Casual examination of the

series constructed suggests income concentration

and growth are not systematically related.

Many countries (such as France, the United

States, and Japan) grew fastest in the postwar

decades when income concentration was at its

lowest. Thus, one can safely conclude that the

enormous decline in wealth concentration that

took place between 1914 and 1945 did not prevent

high growth from occurring. It seems that

in recent decades, however, growth and increases

in inequality have been positively correlated:

the United States and the United

Kingdom have grown faster than continental

Europe and Japan. Although cross-country analysis

will always suffer from severe identification

problems, our hope is that the database will

renew the analysis of the interplay between

inequality and growth.