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Were Top Corporate Executives Really Hogging Workers’ Wages?

Posted on Sep 18, 2014

Photo by jbelluch (CC BY-ND 2.0)

By Andrew Kliman

Thomas Piketty attributes rising inequality in the U.S. primarily to huge increases in the salaries of CEOs and other top executives, but he misinterprets the evidence. Rising salaries of top executives actually explain very little of the rise in inequality, and they depressed other employees’ pay by only a negligible amount.

In his best-selling book “Capital in the Twenty-First Century,” French economist Thomas Piketty identifies “the rise of the supermanager”—that is, “top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor”—as “the primary reason for increased income inequality in recent decades.” [1]

Leading economists and economics writers have been quick to endorse this view. In The New York Times, columnist Paul Krugman contended that “soaring inequality has to date … largely been driven by labor income—by ‘supermanagers.’ ” Staff writer John Cassidy of The New Yorker agreed that “  ‘supermanagers’… account for up to seventy per cent of the top 0.1 per cent of the income distribution.” And Nobel laureate Robert M. Solow, professor emeritus of economics at MIT, claimed that “much of the increased income (and wealth) inequality in the United States is driven by the rise of … supermanagers,” that is, “top executives of large corporations, with very rich compensation packages.”

Piketty bases his “supermanager” explanation of rising inequality on a recent study of the occupations of people in the top 0.1 percent and top 1 percent income groups, but that study actually indicates that rising salaries of top executives have been only a minor cause of growing income inequality in the U.S. It also suggests that the degree to which increases in the salaries of top executives depressed other employees’ compensation is just as minor. [2]

Although Piketty does not deal directly with the latter issue, if the huge rise in supermanagers’ salaries were the chief cause of rising inequality, it would also be the chief cause of the relatively slow increase in the pay of the typical worker over the past few decades. Top executives would have captured a much larger share of the total amount of money paid out in compensation, leaving other employees in the dust. This, in effect, is what critics of an April article of mine in Truthdig contend.


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In that article I showed that official U.S. government statistics for the 1970–2007 period indicate that, as shares of the Net Domestic Product (value produced by the nation’s industries, after depreciation) of the corporate sector and the wider business sector, compensation paid to employees did not trend downward, and businesses’ profits did not trend upward. Thus, the average worker’s hourly compensation fully kept pace with his or her productivity, and the claim of a productivity/compensation gap is misleading. (It results, as I showed, from inconsistent inflation-adjustment.)

Yet as critics of the article note correctly, the official employee-compensation numbers themselves might be misleading. Those numbers include “compensation” received by top salaried executives, most of which is arguably a share of the profits of the corporations that employ them, rather than payment for the labor services they provide. If Piketty’s supermanagers were hogging bigger and bigger chunks of total employee compensation, one could argue that the demonstrated failure of “profits” to rise at the expense of “compensation” is a statistical mirage since, if we reclassified the lavish salaries paid to supermanagers as profit rather than employee compensation, we would find that the corporate profit share of Net Domestic Product rose substantially, at the expense of the “real” workers’ share.

The critics’ line of reasoning depends crucially on the assertion that supermanagers were hogging substantially larger and larger shares of employee compensation. Despite what Piketty writes, this assertion turns out to be unfounded.

How Many of the Super-Rich Are Supermanagers?

Compensation of top salaried executives has indeed increased rapidly. This increase has had little effect on inequality and on other employees’ pay, however, because there were too few supermanagers for their rising salaries to have made a significant difference. This seems to be the key fact that Piketty gets wrong.

In a crucial statement, Piketty writes: “Recent research … allows me to state that the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000-2010 consists of top managers.” [3] He bases his claim on a recent study by Jon Bakija, Adam Cole and Bradley Heim (BC&H). This study, the first comprehensive examination of the occupations of “the 1%,” is extraordinarily important, but Piketty has seriously misinterpreted it.

Contrary to what he says, BC&H found that between 2001 and 2005 (the final year they studied), only 21 percent of those in the top 0.1 percent of tax filers were “salaried nonfinancial managers” (“executives,” “managers” and “supervisors”). (These managers were also just 21 percent of “the 1%.” [4]) This is a far cry from “the vast majority.”

How then does Piketty come up with his 60 percent figure? Although the figure appears in BC&H’s study, it does not refer to salaried managers alone. It bundles together three distinct occupational groups: (1) salaried managers, (2) owner-managers of closely held noncorporate businesses and (3) “financial professionals.” The owner-managers and the large majority of financial professionals are not supermanagers in Piketty’s sense. Together, however, they comprise nearly two-thirds of his “vast majority.” [5]

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