An Important Point about Labor Income Inequality

The second contentious point relates to the discussion of the sources of American inequality. Over the long run, Mr Piketty says, the supply and demand for skills is critical in determining the distribution of labour income. Over shorter horizons and smaller margins policies like the minimum wage matter. But to explain the extraordinary performance of the incomes of America’s top 1% requires a different story. Recourse to “superstar” explanations gets you only so far, since other similar economies, including Britain, have experienced a rising top income share but nothing remotely as dramatic as that in America. Mr Piketty reckons that one needs to turn to norms at the very top. Productivities are hard to assess among top executives, and salaries are often determined by sympathetic boards or supervisors or peers, who at any rate share similar ideas about what top executives are worth. In America, this peer group votes itself massive raises that would be considered obscene in other advanced economies.

That may not be right. But Mr Piketty notes that if America’s current income gaps reflect actual productivity differences, then the dispersion in productivity at the top and bottom of the spectrum is greater in modern America than in apartheid South Africa. And it is hard to believe that could be the case

Ryan Avent on Picketty


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