Rise in US and UK inequality principally due to financialisation and executive pay


In 1920, the 1 per cent — the top percentile of the income distribution — accounted for 15-20 per cent of total gross income in developed countries. Germany was strikingly unequal, while the most egalitarian societies were countries such as Australia, Canada and the US, made up largely of immigrants.

In the 50 years that followed, the share of the 1 per cent fell almost everywhere by about half, to 7-10 per cent of total income. The relative decline in the standing of the top 0.1 per cent was even more dramatic.

I will focus on the experience of the 1 per cent in Britain, France, Germany and the US, drawing on Atkinson and Morelli’s Chartbook of Economic Inequality, a comprehensive analysis of gross income — but other economically advanced countries (Australia, Canada, Netherlands, Sweden) tell much the same story.

During that half century, public spending on health, education and especially social benefits increased; taxation became more burdensome and more progressive. The forces of equalisation were powerful indeed.

By 1970, West Germany was still a conspicuously unequal outlier, with the top 0.1 per cent receiving more than twice the share of the equivalent group in Britain, France or the US. The German Mittelstand, the medium-sized family-controlled enterprises that drive export success, had created a cadre of very well remunerated business owners, and continues to do so.

From 1970, the egalitarian trend came to an end everywhere. But experiences diverged. In France and Germany the share of the top 1 per cent and 0.1 per cent has remained flat. In the US it has soared: the top 1 per cent now earn relatively more than they did in 1920. Britain has also experienced a sharp rise in the share of top incomes, although this reversal is not as dramatic as in the US, and the UK figures are still well below those of 1920. What has happened in other states seems to reflect cultural origins: Canada and Australia look rather like the UK, and the Netherlands rather like Germany.

To understand the trends, and their implications, we need more data on who the top 1 per cent are — and tax authorities are coy about telling us. A survey in the US shows that about one-third of the top 1 per cent, and more of the top 0.1 per cent, are corporate executives.

Almost a quarter of the 1 per cent are doctors or lawyers, although there are fewer among the very highest paid. The phalanx of affluent medics and attorneys is probably a distinctively US phenomenon: in other countries, public health systems and more limited roles for litigation keep these incomes under more control.

But the big change since the 1970s has, of course, been in the representation of finance professionals: their share in the top 1 per cent of incomes has risen from 8 per cent to 14 per cent; and, among the top 0.1 per cent, from 11 per cent to 18 per cent. Since the income level needed to put you in the 1 per cent has increased dramatically, this understates how much the growth of finance has contributed to inequality in income distribution.

The rise in inequality in some western countries is principally the result of two interrelated causes: the growth of the finance sector; and the explosion of the remuneration of senior executives. The people who ran big companies were always relatively well paid, but the meaning of “relatively well paid” is now altogether different. Finance employs more people, recruits more able people and pays them a lot more.

These effects have not been seen in countries, such as France and Germany, that have proved more resistant to financialisation. It is in Britain and the US, which have experienced the most extensive growth in the sector, where they have made their greatest impact.

This article was first published in the Financial Times on January 6th, 2015.

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