Explaining the Rise in Top Incomes

Since the 1970s, the concentration of income at the top has grown in most advanced capitalist nations.  The standard economic explanation is that the development of information technology has increased the productivity of managers and professionals and reduced the demand for blue-collar and white-collar workers.   However, the extent of growth in top incomes varies widely among countries, suggesting that it is necessary to go beyond the common technological factor.  This paper suggests three factors that seem to have the potential to explain the national differences.  The first is changes in the power of labor and capital.  A decline in the strength of labor may have led to a decline in the wages of ordinary workers and an increase in profits and the wages of top management.   The second is a combination of deregulation, especially in financial markets, and the degree to which the political system facilitates “rent-seeking.”   Where the “rent-seeking” is possible, financiers and top managers may have been able to shape the regulations in ways that worked to their advantage.  The third is changes in social norms.  There has been a good deal of discussion of the influence of social norms on pay, but most of it has focused on lower-level workers.  However, it seems possible that the same factors also influence top earnings.  On the one hand, a concern for reputation might put some restraint on top earnings.  On the other hand, social comparison might lead to a “race” for relative position among top earners.  It is possible that the increase in top earnings reflects the degree to which the forces that produced stability were weakened or disrupted.

The paper will discuss the implications of these three hypotheses and offer a preliminary test using data for OECD nations.