New research finds strong evidence that Thomas Piketty’s theory of why income inequality in the United States has increased in recent decades is wrong

From Cafe Hayek.

"New research by Jae Song, David Price, Fatih Guvenen, and Nicholas Bloom finds strong evidence that Thomas Piketty’s theory of why income inequality in the United States has increased in recent decades is wrong.  (In summary: Piketty argues that the recent increase in income inequality in the U.S. is explained largely by the rise in the pay of corporate executives.  And this rise in pay, according to Piketty, has nothing to do with managers’ productivity and everything to do with the cozy relationship between managers and corporate boards.  Allegedly, managers and board members are clubby friends scratching each other’s well-massaged backs and setting each other’s astronomical salaries.  Content to blame rising executive compensation on American “social norms” that encourage toleration of such payments, Piketty strangely never asks why shareholders continue to invest in corporations that spend their funds so wastefully.  Nor does Piketty even attempt to square his assertion that important managerial decisions are made chiefly for reasons that have nothing to do with productivity with his foundational assertion that the real returns to capital keep rising, and rising fast.  Song, et al., have an answer.)  Here’s the abstract from Song, et al.:

Earnings inequality in the United States has increased rapidly over the last three decades, but little is known about the role of firms in this trend. For example, how much of the rise in earnings inequality can be attributed to rising dispersion between firms in the average wages they pay, and how much is due to rising wage dispersion among workers within firms? Similarly, how did rising inequality affect the wage earnings of different types of workers working for the same employer—men vs. women, young vs. old, new hires vs. senior employees, and so on? To address questions like these, we begin by constructing a matched employer-employee data set for the United States using administrative records. Covering all U.S. firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population."