The US has less income inequality today than in 2000

By James Pethokoukis of AEI.

"I gave a brief talk earlier today about income inequality to the National Academy of Social Insurance. (My co-speaker was my frequent CNBC debate partner Jared Bernstein.) And I think the talk was well-received. In it, I made a point to highlight two data points or data sets that often get ignored.



First, high-end income inequality has risen a lot in recent decades. According to the World Wealth and Income Database — a resource assembled by a number of inequality researchers including French economist and best-selling author Thomas Piketty — the top 1% income share since 1979 has surged to 21.24% from 9.96%, the top 0.1% to 10.26% from 3.44%, and the top 0.01% has more 4.89% to 1.37%.

Less frequently noted is that inequality today is actually lower than it was in 2000 (although the peak was in the 2005-2007 period). Overall it’s been up and down this century, but lower now than 15 years ago — as the above shows (using WWID data). I might also point out that the big rise in inequality during the 1990s was matched by fast rising incomes, showing you can have both. Real incomes grew by a cumulative 32% from 1993-2000.

Second, another common inequality ratio is the comparison of big company CEO pay to that of the average worker. It was 373 last year, according to the AFL-CIO. Now as my AEI colleague Mark Perry points out, you really shouldn’t compare the wages of the average worker to the compensation of CEOs at a few hundred, large companies. In 2014, the BLS reported that the average pay for America’s 250,000 chief executives was only $181,000. So the CEO-to-worker pay ratio for the average CEO compared to the average worker is only about 4, not 373.

But let’s take that 373 number. The pay ratio was actually higher in 2000 at 383, slipping to 351 in 2007, then to 193 in a recessionary 2009. Here is economist Steven Kaplan from a recent podcast chat with me:

Pethokoukis: Every year one of the unions trots out the stats saying the average CEO makes, whatever, 400 times the average worker…. [and] CEOs seem to make a lot more versus the workers in this country, than some other advanced economies, like Japan. So why do American executives seem to make so much more than in some other very wealthy advanced countries?

Kaplan: I would say that, number one, Japan is perhaps not the country you want to emulate over the last 20 years.  I think if you were to look at the United Kingdom, you would see trends very similar to our own. I think if you were look at Western Europe, you know, there’d be more variation, but you’d see at a number of the larger multinational companies where the executives are mobile, the pay has gone up. And it may not be at US numbers, but it’s getting closer there.

So I think around the world, you’ve seen CEO pay go up and is – may not be, again, equal to the US, but it’s certainly going up because of these same forces [of technology and globalization]. And you also see, particularly in Western Europe you see a lot of the top executives going to work for private equity funded firms, where they are paid more like US executives. And because, again – and that’s actually a very useful example for the private equity firms because the private equity investors are not people who are – tend to overpay people. And the incentives they give to their CEOs, whether they’re in the US or Europe, are pretty much the same.

The point here is that two common inequality metrics show less inequality today than when the decade started. Now maybe those numbers will climb ever higher in the years to come, as we move further beyond the Great Recession. But what isn’t speculative is that the economy remains stuck in 2% mode. (And maybe not growing at all in the last quarter of 2015.) It would be great if we had more prosperity to share, wouldn’t it?"