Data sliced sufficiently finely begin once again to tell stories. The top 1 percent of the income distribution—representing household incomes in excess of roughly $475,000—comprises only about 1.5 million households. If one adds up the numbers of vice presidents or above at S&P 1500 companies (perhaps 250,000), professionals in the finance sector, including in hedge funds, venture capital, private equity, investment banking, and mutual funds (perhaps 250,000), professionals working at the top five management consultancies (roughly 60,000), partners at law firms whose profits per partner exceed $400,000 (roughly 25,000), and specialist doctors (roughly 500,000), this yields perhaps 1 million people.
These are surely not all one-percenters, but they are all plausibly parts of the top 1 percent, and this group might comprise half—a sizable share—of 1 percent households overall. At the very least, the people in these known and named jobs constitute a material, rather than just marginal or eccentric, part of the top 1 percent of the income distribution. They are also, of course, the people depicted in journalistic accounts of extreme jobs—the people who regularly cancel vacation plans, spend most of their time on the road, live in unfurnished luxury apartments, and generally subsume themselves in work, encountering their personal lives only occasionally, and as strangers.
BEYOND CAPITAL VERSUS LABOR
At least since Marx developed his theory of exploitation, critics of economic inequality have cast the rich as rentiers. On this view, idle elites enjoy the excessive returns that they receive by mixing their unearned capital with other people’s exploited labor. Inequality’s modern critics no doubt employ a less systematic method and strike a more moderate tone, but the conventional wisdom to this day pursues a similar style of argument, a variation on Marx’s rentier theme.
Critics still commonly connect economic inequality to the familiar political and economic battle between capital and labor, associating the rich with capital and inequality’s increase with capital’s renewed dominance. Thomas Piketty’s formidable book Capital in the Twenty-First Century gives this view its now-canonical statement. Familiar laments about the decline of labor unions, rising market power among large employers, and outsourcing and globalization also share this general attitude.
These complaints capture something real. Unions have been systematically dismantled in recent decades. Labor’s share of national income has fallen—modestly, but appreciably—since the middle of the last century. And stock prices—which roughly capture income to capital—have indeed far outstripped the wages of ordinary workers. But these and other similar effects are, it will become clear, much too small to explain the enormous increase in top incomes and top income shares. Moreover, a close examination of elite incomes, informed by an account of the distinction between labor and capital that accurately reflects meritocratic ideas of entitlement and desert, reveals that the rich increasingly, and now overwhelmingly, owe their massive incomes to selling their own labor—to long, intensive, and exceptionally remunerative work.
No one need weep for the wealthy. But ignoring how oppressively the rich now work is equally misleading. The intensity of elite labor structures both the lived experience and the social meaning of top incomes today. The rich now dominate the rest not idly but effortfully, by exploiting their own enormous skill and industry. Meritocratic inequality principally arises not from the familiar conflict between capital and labor but from a new conflict—within labor—between superordinate and middle-class workers. The politics of economic inequality inevitably reflect this complex of great wealth burdened by great effort, and the conventional wisdom, which disregards economic inequality’s meritocratic roots, disguises as much as it reveals.
Labor income now figures prominently even at the very sharpest peak of the distribution. Eight of the ten richest Americans today owe their wealth not to inheritance or to returns on inherited capital but rather to compensation earned through entrepreneurial or managerial labor, paid in the form of founder’s stock or partnership shares. A slightly broader view reveals that the Forbes list of the four hundred richest Americans has also seen its center of gravity shift away from people who owe their wealth to inherited capital and toward those whose wealth stems (originally) from their own labor. Whereas in the early 1980s, only four in ten of the Forbes 400 were predominantly “self-made,” today nearly seven in ten are. And whereas in 1984, purely inherited fortunes outnumbered purely self-made ones in the list by a factor of ten to one, by 2014, purely self-made fortunes had come to outnumber purely inherited ones. Indeed, the share of the four hundred top incomes attributable specifically to salaries grew by half between 1961 and 2007, and the share going to people with no college education fell by over two-thirds between 1982 and 2011. The shift toward labor income at the very top has been sufficiently pronounced to change the balance of industries in which the super-rich acquire their fortunes. In the inaugural 1982 version of the Forbes list, 15.5 percent of the people on the list owed their wealth to capital-intensive manufacturing, and only 9 percent came from labor-intensive finance. By 2012, only 3.8 percent of the list came from manufacturing and a full 24 percent from finance.
Labor also dominates stories of elite income at the next rung down. Although only three hedge fund managers took home over $1 billion in 2017, more than twenty-five took home $100 million or more, and $10 million incomes are so common that they do not make the papers. Even only modestly elite finance workers now receive huge paydays. According to one survey, a portfolio manager at a midsized hedge fund makes on average $2.4 million, and average Wall Street bonuses exploded from roughly $14,000 in 1985 to more than $180,000 in 2017, a year in which the average total salary for New York City’s 175,000 securities industry workers reached over $420,000.
These sums reflect the fact that a typical investment bank disburses roughly half of its revenues after interest paid to its professional workers (making it a better three decades to be an elite banker than to be an owner of bank stocks). Elite managers in the real economy also do well. CEO incomes—the wages paid to top managerial labor—regularly reach seven figures; indeed, the average 2017 income of the CEO of an S&P 500 company was nearly $14 million. In a typical recent year the total compensation paid to the five highest-paid employees of each S&P 1500 firm (7,500 workers overall) might amount to 10 percent of S&P 1500 firms’ collective profits. These workers do not own the assets—the portfolios or the companies—that they manage. Their incomes constitute wages paid for managerial labor rather than a return on invested capital. The enormous paydays reflect what prominent business analysts recently called a war between talent and capital—a war that talent is winning.
Labor’s dominance applies more broadly still among the million jobs listed by name in the earlier discussion of elite hours—finance-sector professionals, vice presidents at S&P 1500 firms, elite management consultants, partners at highly profitable law firms, and specialist medical doctors. These specifically identified workers collectively constitute a substantial share—fully half—of the 1 percent. The terms of trade under which they work—the economic arrangements that underwrite their incomes—are well known. All these workers contribute effectively no capital to their businesses and therefore again owe their income ultimately to their own industrious work, which is to say to labor.
Comprehensive data based on tax returns corroborate that the new economic elite owes its income predominantly not to capital but rather, at root, to selling its own labor. The data themselves can be technical and even abstruse, but a clear message emerges from them nevertheless. The data confirm that the meritocratic rich (unlike their aristocratic predecessors) get their money by working.
Even guarded estimates, which defer to tax categories that treat some labor income as capital gains, show a stark increase in the labor component of top incomes. According to this method of calculating, the richest 1 percent received as much as three-quarters of their income from capital at midcentury, and the richest 0.1 percent rec
eived up to nine-tenths of their income from capital. These shares then declined steadily over four decades beginning in the early 1960s, reaching bottom in 2000. In that year, both the top 1 percent and the top 0.1 percent received only about half of their incomes from capital (roughly 49 percent and 53 percent, respectively). The capital shares of top incomes then rose again, by about 10 percent, over the first decade of the new millennium, before beginning to fall again at the start of the second decade (when the data series runs out).
A complete meritocratic accounting of earned advantage is more expansive than this and traces income through its shallow sources back to its deep roots—to reveal that some income nominally attributed to capital in fact originates in labor and therefore should be counted as earned through effort, skill, and industry. An entrepreneur who sells founder’s shares in her firm, an executive who realizes appreciation after being paid in stock, and a hedge fund manager who gets paid a “carried interest” share of profits on funds she invests (but does not own) all report capital gains income on their tax returns. But all these types of income ultimately reflect returns to the founder’s, the executive’s, or the manager’s labor and, the meritocrat insists, are on this account earned. A similar analysis applies to pensions and owner-occupied housing. All this income is earned in a way that distinguishes it from the true capital income of the hereditary rentier who lives, at leisure, from returns on an inherited patrimony. Regardless of what the tax accounts say, therefore, accurate meritocratic accounting attributes all these types of income not to capital but to labor.
These are not marginal or idiosyncratic categories of income (although the need to translate from tax categories to moral ones inevitably introduces judgment and imprecision into any accounting). Founder’s shares, carried interest, and executive stock compensation give nominally capital gains a substantial component of labor income, especially among the very rich. To begin with, roughly half of the twenty-five largest American fortunes, according to Forbes, arise from founder’s stock still held by the founders who built the firms. Moreover, the share of total capital gains income reported to the Treasury that is attributable to carried interest alone—to the labor of hedge fund managers—has grown by a factor of perhaps ten in the past two decades and now comprises a material share of all the capital gains reported by one-percenters. And over the past twenty years, roughly half of all CEO compensation across the S&P 1500 has taken the form of stock or stock options. Pensions and housing also contribute substantially to top incomes today, roughly doubling the shares that they contributed in the 1960s. Once again, the data cannot sustain precise measurements, but these forms of labor income, taken together, plausibly comprise roughly another third of top incomes, sitting atop the roughly half of top incomes attributable to labor on even the most conservative accounting.
The data therefore confirm—top-down—the narrative of labor income that bubbles up from a survey of elite jobs. Both the top 1 percent and even the top 0.1 percent today receive between two-thirds and three-quarters of their income in exchange not for land, machines, or financing but rather for deploying their own effort and skill. The richest person out of every hundred in the United States today, and indeed the richest person out of every thousand, now literally works for a living.
This explosion of elite labor income has transformed not only the internal accounts of rich households but also the balance sheet of the economy writ large. Along the way, it has reframed the balance of economic advantage between the rich and the rest.
The transformation is unexpected and as a result often overlooked. Aristocratic inequality framed economic justice in terms of the conflict between capital and labor—between those who own things and those who work—and associated capital income with inequality and labor income with equality. This framing makes it awkward, both morally and intellectually, to locate the roots of rising economic inequality in labor. It is more natural, especially for progressives, to explain rising inequality in terms of labor’s (especially organized labor’s) demise and capital’s resurgence.
This view remains seductive, but it is rejected by the data. Although national income has shifted against labor and in favor of capital over the past half century, this shift is simply too small—much too small—to account for rising top income shares. The labor-to-capital shift has increased the top 1 percent’s income share by at most 2.5 percent of total national income. But the 1 percent’s actual income has grown by about 10 percent of national income, from a midcentury low of roughly 10 percent to roughly 20 percent today. Accordingly, only about a quarter of the increase can be attributed to rich households’ participation, as capitalists, in the overall shift in income from labor to capital. The remainder of the increase in the 1 percent’s total income share—fully three-quarters—must come from within the distribution of labor income.
These calculations take a rough—even a blunderbuss—approach to intricate data; they are designed to identify dominant aggregate effects in an intuitive way rather than to quantify exact income shares. More fine-grained but also less comprehensive methods reinforce the lesson that elite labor income constitutes the dominant cause of rising top income shares. For example, between 1960 and 2000, about nine-tenths of the increase in the top decile’s overall income share, about four-fifths of the increase in the top 1 percent’s income share, and about two-thirds of the increase in the top .01 percent’s income share came specifically from elite wages—the enormous salaries paid to top lawyers, bankers, managers, and so on. Of course, labor income, particularly for narrower elites, includes much more than just wages—law firm partners receive shares of firm profits, hedge fund managers get carried interest, CEOs get stock options, and so on. These numbers therefore achieve their clarity at the cost of being incomplete and conservative. A more complete (but commensurately more controversial) accounting that builds labor income out of wages plus a share of business income and capital gains attributes over three-quarters of the increase in the top .01 percent’s income share to elite labor income.
All these complexities point to the same, simple conclusion. The traditional way of thinking about the conflict between the rich and the rest—as a battle between capital and labor—no longer captures what is really going on. Instead, the dominant sources of individual top incomes lie in superordinate labor. The overwhelmingly greater part of the recent increase in the top 1 percent’s aggregate income share is attributable not to a shift of overall income away from labor and in favor of capital, but rather to a shift within labor income, away from the middle class and in favor of elite workers.
The working rich have risen by fundamentally transforming class conflict and then winning the new battle between elite and middle-class labor. The claim that meritocratic inequality reflects earned advantage may ultimately be a moral error. But it rests on economic facts.
A CULTURE OF INDUSTRY
Shortly after his first child was born, Mark Zuckerberg—whose labor income from creating Facebook (paid to him in founder’s shares) has created the fifth-largest fortune in the world—wrote his new daughter an open letter. The letter, expounding on the hopes of the meritocratic elite, admired human creativity and innovation, lamented inequality, and pledged to donate 99 percent of Zuckerberg’s Facebook fortune to “advance human potential and promote equality for all children in the next generation.” Zuckerberg’s donation immediately placed him in the top rank of American philanthropists. But the most remarkable thing about his act is not its scale, but its setting and its motives. Zuckerberg’s letter drew a direct connection between the Facebook Foundation’s social mission to support education, innovation, and equality of opportunity and Zuckerberg’s own devotion to the newborn daughter in whose name he dedicated the enterprise and the gift.
This connection would have been literally unimaginable to an earlier elite, for whom inherited wealth and the leisure that it allowed constituted social status. The old aristocracy joined land and titles into a
single social unity, establishing elaborate express formulas to govern dynastic succession. Under aristocracy, when leisure was mandatory for the elite, disinheritance ostracized the heir. If the Duke of Marlborough had divested his only daughter of Blenheim Palace (and of the inheritance required to support a rentier’s leisure) this would have been intended and understood as a profound rejection—of the daughter or perhaps of the entire aristocratic order. This relegated disinheritance to an imaginative fiction, a device used to swell the progress of a plot or to symbolize an ideal. It would have been eccentric, disruptive, and even bizarre for an actual person to disinherit his child.
Meritocratic inequality gives Zuckerberg’s choice an entirely different frame. He has, of course, deprived his daughter of virtually all of a massive patrimony, including the immense capital income that would otherwise have attended her inheritance. But his remaining wealth and social position more than suffice for him to give her the education and training she needs to join the ranks of her generation’s elite workers. Moreover, the economics of elite labor will enable her to deploy her training to command a high income of her own, and the social economy of esteem will enable her to convert her training, work, and labor income into her own independent social status.
The Meritocracy Trap Page 13
