Brad Delong, professor of economics at UC Berkeley asked, “What skills and assets do the top 1% of America’s pretax income distribution have today that lead the market to grant them 14% of total income, when their counterparts back in 1980 were granted only 8% of total income?”
Arnold Kling, Phd in economics from MIT responds with:
I suspect that two things are going on.
One is that we have added a lot more low-income households, because of immigration and family break-ups. This pushes some high-income households into the top of the income distribution who previously were closer to the middle. The second development is increased entrepreneurship, which takes some people out of the middle of the income distribution and moves them either toward the bottom or the top.
For example, suppose that we have one hundred families, and the top family gets $1.8 million, the next family gets $1.7 million, the next family gets $1.6 million, and so on, until the tenth family gets $0.9 million. Families 11 through 100 each earn $50,000. [typo in earlier version had this at $40,000] Total income is $18 million, and the share of income earned by the top one percent (the top earner) is 10.0 percent.
Next, add 100 new families, consisting of immigrants, single-parent households, and so on, earning $30,000 per year. The total income in the economy is now $12 million, so the share of the top earner has declined a bit. However, with 200 families in the population, the top one percent now includes the top two earners, whose combined income of $3.5 million is now 16.67 percent of the total.
The other factor is entrepreneurship. For me, becoming an entrepreneur meant that for several years, my income went down. It increased when the business became successful, and it spiked when the business was sold. Since then, it has been below what I would have earned as a salary, but the one-time spike makes up for that.
As Paul Graham put it,
Economically, you can think of a startup as a way to compress your whole working life into a few years.
The rise of the personal computer has increased the potential for entrepreneurship. More entrepreneurship means that more people are compressing their working lives and generally increasing the variation in incomes.
The full article along with some very interesting comments can be found here. Arnold Kling has more here.
DOes the tax policy favoring investment income over earned income have a factor?
Nope, not according to this guy.
thanks for the pho, lets eat mexican next time.
My first problem with Arnold Kling’s logic is that immigrants don’t enter the country instantaneosly, allowing time for social mobility. Infact it has taken about 60 years for the entire population to double, not entirely atributable to immigrants. I have more problems with Kling but dinner beckons
How ’bout we just eat a mexican next time?
LOL. No way, I’ve eaten way too much Mexican food (and Mexicans ;-)) all my life, Pho is definitely my choice.
OH yeah, and next time, I won’t forget to be armed with these statistics.
Not to worry, I’ll bring the weighty evidence against your “henry ford created the 40 hour work week” bullshit.
What’s up with the blogads? You hurtin’ on cash? You know daddy’ll help you out if you’re short this month.
LOL. No, I was invited on it by an online buddy of mine, just trying it out for a few weeks.
Oh yeah, and about Henry Ford, if you don’t trust me check out Wiki here.