It is interesting to note that the capital-labor split tends to move in the same direction as inequality in income from labor, so that the two reinforce each other in the short to medium term but not necessarily in the long run. For example, each of the two world wars saw a decrease in capital’s share of national income (and of the capital/income ratio) as well as a compression of wage inequality. Generally speaking, inequality tends to evolve “procyclically” (that is, it moves in the same direction as the economic cycle, in contrast to “countercyclical” changes). In economic booms, the share of profits in national income tends to increase, and pay at the top end of the scale (including incentives and bonuses) often increases more than wages toward the bottom and middle. Conversely, during economic slowdowns or recessions (of which war can be seen as an extreme form), various noneconomic factors, especially political ones, ensure that these movements do not depend solely on the economic cycle.
The substantial increase in French inequality between 1945 and 1967 was the result of sharp increases in both capital’s share of national income and wage inequality in a context of rapid economic growth. The political climate undoubtedly played a role: the country was entirely focused on reconstruction, and decreasing inequality was not a priority, especially since it was common knowledge that inequality had decreased enormously during the war. In the 1950s and 1960s, managers, engineers, and other skilled personnel saw their pay increase more rapidly than the pay of workers at the bottom and middle of the wage hierarchy, and at first no one seemed to care. A national minimum wage was created in 1950 but was seldom increased thereafter and fell farther and farther behind the average wage.
Things changed suddenly in 1968. The events of May 1968 had roots in student grievances and cultural and social issues that had little to do with the question of wages (although many people had tired of the inegalitarian productivist growth model of the 1950s and 1960s, and this no doubt played a role in the crisis). But the most immediate political result of the movement was its effect on wages: to end the crisis, Charles de Gaulle’s government signed the Grenelle Accords, which provided, among other things, for a 20 percent increase in the minimum wage. In 1970, the minimum wage was officially (if partially) indexed to the mean wage, and governments from 1968 to 1983 felt obliged to “boost” the minimum significantly almost every year in a seething social and political climate. The purchasing power of the minimum wage accordingly increased by more than 130 percent between 1968 and 1983, while the mean wage increased by only about 50 percent, resulting in a very significant compression of wage inequalities. The break with the previous period was sharp and substantial: the purchasing power of the minimum wage had increased barely 25 percent between 1950 and 1968, while the average wage had more than doubled.20 Driven by the sharp rise of low wages, the total wage bill rose markedly more rapidly than output between 1968 and 1983, and this explains the sharp decrease in capital’s share of national income that I pointed out in Part Two, as well as the very substantial compression of income inequality.
These movements reversed in 1982–1983. The new Socialist government elected in May 1981 surely would have preferred to continue the earlier trend, but it was not a simple matter to arrange for the minimum wage to increase twice as fast as the average wage (especially when the average wage itself was increasing faster than output). In 1982–1983, therefore, the government decided to “turn toward austerity”: wages were frozen, and the policy of annual boosts to the minimum wage was definitively abandoned. The results were soon apparent: the share of profits in national income skyrocketed during the remainder of the 1980s, while wage inequalities once again increased, and income inequalities even more so (see Figures 8.1 and 8.2). The break was as sharp as that of 1968, but in the other direction.
The Increase of Inequality in France since the 1980s
How should we characterize the phase of increasing inequality that began in France in 1982–1983? It is tempting to see it in a long-run perspective as a microphenomenon, a simple reversal of the previous trend, especially since by 1990 or so the share of profits in national income had returned to the level achieved on the eve of May 1968.21 This would be a mistake, however, for several reasons. First, as I showed in Part Two, the profit share in 1966–1967 was historically high, a consequence of the restoration of capital’s share that began at the end of World War II. If we include, as we should, rent as well as profit in income from capital, we find that capital’s share of national income actually continued to grow in the 1990s and 2000s. A correct understanding of this long-run phenomenon requires that it be placed in the context of the long-term evolution of the capital/income ratio, which by 2010 had returned to virtually the same level it had achieved in France on the eve of World War I. It is impossible to fully appreciate the implications of this restoration of the prosperity of capital simply by looking at the evolution of the upper decile’s share of income, in part because income from capital is understated, so that we tend to slightly underestimate the increase in top incomes, and in part because the real issue is the renewed importance of inherited wealth, a long-term process that has only begun to reveal its true effects and can be correctly analyzed only by directly studying the changing role and importance of inherited wealth as such.
But that is not all. A stunning new phenomenon emerged in France in the 1990s: the very top salaries, and especially the pay packages awarded to the top executives of the largest companies and financial firms, reached astonishing heights—somewhat less astonishing in France, for the time being, than in the United States, but still, it would be wrong to neglect this new development. The share of wages going to the top centile, which was less than 6 percent in the 1980s and 1990s, began to increase in the late 1990s and reached 7.5–8 percent of the total by the early 2010s. Thus there was an increase of nearly 30 percent in a little over a decade, which is far from negligible. If we move even higher up the salary and bonus scale to look at the top 0.1 or 0.01 percent, we find even greater increases, with hikes in purchasing power greater than 50 percent in ten years.22 In a context of very low growth and virtual stagnation of purchasing power for the vast majority of workers, raises of this magnitude for top earners have not failed to attract attention. Furthermore, the phenomenon was radically new, and in order to interpret it correctly, we must view it in international perspective.
FIGURE 8.5. Income inequality in the United States, 1910–2010
The top decile income share rose from less than 35 percent of total income in the 1970s to almost 50 percent in the 2000s–2010s.
Sources and series: see piketty.pse.ens.fr/capital21c.
A More Complex Case: The Transformation of Inequality in the United States
Indeed, let me turn now to the US case, which stands out precisely because it was there that a subclass of “supermanagers” first emerged over the past several decades. I have done everything possible to ensure that the data series for the United States are as comparable as possible with the French series. In particular, Figures 8.5 and 8.6 represent the same data for the United States as Figures 8.1 and 8.2 for France: the goal is to compare, in the first figure of each pair, the evolution of the shares of income going to the top decile and top centile of the wage hierarchy and to compare, in the second figure, the wage hierarchies themselves. I should add that the United States first instituted a federal income tax in 1913, concluding a long battle with the Supreme Court.23 The data derived from US income tax returns are on the whole quite comparable to the French data, though somewhat less detailed. In particular, total income can be gleaned from US statements from 1913 on, but we do not have separate information on income from labor until 1927, so the series dealing with the wage distribution in the United States before 1927 are somewhat less reliable.24
FIGURE 8.6. Decomposition of the top decile, United States, 1910–2010
The rise of the top decile income share since the 1970s is mostly due to the top percentile.
Sources and series: see piketty.pse.en
s.fr/capital21c.
When we compare the French and US trajectories, a number of similarities stand out, but so do certain important differences. I shall begin by examining the overall evolution of the share of income going to the top decile (Figure 8.6). The most striking fact is that the United States has become noticeably more inegalitarian than France (and Europe as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period. What makes the US case complex is that the end of the process did not simply mark a return to the situation that had existed at the beginning: US inequality in 2010 is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different.
I will proceed systematically. First, European income inequality was significantly greater than US income inequality at the turn of the twentieth century. In 1900–1910, according to the data at our disposal, the top decile of the income hierarchy received a little more than 40 percent of total national income in the United States, compared with 45–50 percent in France (and very likely somewhat more in Britain). This reflects two differences. First, the capital/income ratio was higher in Europe, and so was capital’s share of national income. Second, inequality of ownership of capital was somewhat less extreme in the New World. Clearly, this does not mean that American society in 1900–1910 embodied the mythical ideal of an egalitarian society of pioneers. In fact, American society was already highly inegalitarian, much more than Europe today, for example. One has only to reread Henry James or note that the dreadful Hockney who sailed in luxury on Titanic in 1912 existed in real life and not just in the imagination of James Cameron to convince oneself that a society of rentiers existed not only in Paris and London but also in turn-of-the-century Boston, New York, and Philadelphia. Nevertheless, capital (and therefore the income derived from it) was distributed somewhat less unequally in the United States than in France or Britain. Concretely, US rentiers were fewer in number and not as rich (compared to the average US standard of living) as their European counterparts. I will need to explain why this was so.
Income inequality increased quite sharply in the United States during the 1920s, however, peaking on the eve of the 1929 crash with more than 50 percent of national income going to the top decile—a level slightly higher than in Europe at the same time, as a result of the substantial shocks to which European capital had already been subjected since 1914. Nevertheless, US inequality was not the same as European inequality: note the already crucial importance of capital gains in top US incomes during the heady stock market ascent of the 1920s (see Figure 8.5).
During the Great Depression, which hit the United States particularly hard, and again during World War II, when the nation was fully mobilized behind the war effort (and the effort to end the economic crisis), income inequality was substantially compressed, a compression comparable in some respects to what we observe in Europe in the same period. Indeed, as we saw in Part Two, the shocks to US capital were far from negligible: although there was no physical destruction due to war, the Great Depression was a major shock and was followed by substantial tax shocks imposed by the federal government in the 1930s and 1940s. If we look at the period 1910–1950 as a whole, however, we find that the compression of inequality was noticeably smaller in the United States than in France (and, more generally, Europe). To sum up: inequality in the United States started from a lower peak on the eve of World War I but at its low point after World War II stood above inequality in Europe. Europe in 1914–1945 witnessed the suicide of rentier society, but nothing of the sort occurred in the United States.
The Explosion of US Inequality after 1980
Inequality reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income, or roughly the same level as in France today. This is what Paul Krugman nostalgically refers to as “the America we love”—the America of his childhood.25 In the 1960s, the period of the TV series Mad Men and General de Gaulle, the United States was in fact a more egalitarian society than France (where the upper decile’s share had increased dramatically to well above 35 percent), at least for those US citizens whose skin was white.
Since 1980, however, income inequality has exploded in the United States. The upper decile’s share increased from 30–35 percent of national income in the 1970s to 45–50 percent in the 2000s—an increase of 15 points of national income (see Figure 8.5). The shape of the curve is rather impressively steep, and it is natural to wonder how long such a rapid increase can continue: if change continues at the same pace, for example, the upper decile will be raking in 60 percent of national income by 2030.
It is worth taking a moment to clarify several points about this evolution. First, recall that the series represented in Figure 8.5, like all the series in the WTID, take account only of income declared in tax returns and in particular do not correct for any possible understatement of capital income for legal or extralegal reasons. Given the widening gap between the total capital income (especially dividends and interest) included in US national accounts and the amount declared in income tax returns, and given, too, the rapid development of tax havens (flows to which are, in all likelihood, mostly not even included in national accounts), it is likely that Figure 8.5 underestimates the amount by which the upper decile’s share actually increased. By comparing various available sources, it is possible to estimate that the upper decile’s share slightly exceeded 50 percent of US national income on the eve of the financial crisis of 2008 and then again in the early 2010s.26
Note, moreover, that stock market euphoria and capital gains can account for only part of the structural increase in the top decile’s share over the past thirty or forty years. To be sure, capital gains in the United States reached unprecedented heights during the Internet bubble in 2000 and again in 2007: in both cases, capital gains alone accounted for about five additional points of national income for the upper decile, which is an enormous amount. The previous record, set in 1928 on the eve of the 1929 stock market crash, was roughly 3 points of national income. But such levels cannot be sustained for very long, as the large annual variations evident in Figure 8.5 show. The incessant short-term fluctuations of the stock market add considerable volatility to the evolution of the upper decile’s share (and certainly contribute to the volatility of the US economy as a whole) but do not contribute much to the structural increase of inequality. If we simply ignore capital gains (which is not a satisfactory method either, given the importance of this type of remuneration in the United States), we still find almost as great an increase in the top decile’s share, which rose from around 32 percent in the 1970s to more than 46 percent in 2010, or fourteen points of national income (see Figure 8.5). Capital gains oscillated around one or two points of additional national income for the top decile in the 1970s and around two to three points between 2000 and 2010 (excluding exceptionally good and bad years). The structural increase is therefore on the order of one point: this is not nothing, but then again it is not much compared with the fourteen-point increase of the top decile’s share exclusive of capital gains.27
Looking at evolutions without capital gains also allows us to identify the structural character of the increase of inequality in the United States more clearly. In fact, from the late 1970s to 2010, the increase in the upper decile’s share (exclusive of capital gains) appears to have been relatively steady and constant: it passed 35 percent in the 1980s, then 40 percent in the 1990s, and finally 45 percent in the 2000s (see Figure 8.5).28 Much more striking is the fact that the level attained in 2010 (with more than 46 percent of national income, exclusive of capital gains, going to the top decile) is already significantly higher than the level attained in 2007, on the eve of the financial crisis. Early data for 2011–2012 suggest that the increase is still continuing.
This is a crucial point: the facts show quite clearly that the financia
l crisis as such cannot be counted on to put an end to the structural increase of inequality in the United States. To be sure, in the immediate aftermath of a stock market crash, inequality always grows more slowly, just as it always grows more rapidly in a boom. The years 2008–2009, following the collapse of Lehman Brothers, like the years 2001–2002, after the bursting of the first Internet bubble, were not great times for taking profits on the stock market. Indeed, capital gains plummeted in those years. But these short-term movements did not alter the long-run trend, which is governed by other forces whose logic I must now try to clarify.
To proceed further, it will be useful to break the top decile of the income hierarchy down into three groups: the richest 1 percent, the next 4 percent, and the bottom 5 percent (see Figure 8.6). The bulk of the growth of inequality came from “the 1 percent,” whose share of national income rose from 9 percent in the 1970s to about 20 percent in 2000–2010 (with substantial year-to-year variation due to capital gains)—an increase of 11 points. To be sure, “the 5 percent” (whose annual income ranged from $108,000 to $150,000 per household in 2010) as well as “the 4 percent” (whose income ranged from $150,000 to $352,000) also experienced substantial increases: the share of the former in US national income rose from 11 to 12 percent (or one point), and that of the latter rose from 13 to 16 percent (three points).29 By definition, that means that since 1980, these social groups have experienced income growth substantially higher than the average growth of the US economy, which is not negligible.
Capital in the Twenty-First Century Page 34
