Skewness in Earnings
By Arnold Kling
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?
He cites this paper by Thomas Piketty and Emmanuel Saez.
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.