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News : US Economy Last Updated: May 28, 2015 - 8:02 AM


Income gap highest in 30 years; No inequality rise in best-paying US firms
By Michael Hennigan, Finfacts founder and editor
May 27, 2015 - 8:12 AM

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The income earnings gap between the world's rich and poor is at its highest level in 30 years in some countries, according to a 330-page report by the Organisation for Economic Co-operation and Development (OECD). Meanwhile a paper published this week in the United States shows that inequality has not increased in America's best paying firms in a 34-year period.

"The gap between rich and poor keeps widening. Since [the recession], disparities widened and in many OECD countries inequality is today at its highest since data collection started," the report said. "This long-run increase in income inequality does not only raise social and political but also economic concerns."

The richest 10% of the population in the 34 member country OECD that includes all the advanced countries, now earn 9.6 times the income of the poorest 10 per cent, up from 7:1 in the 1980s and 9:1 in the 2000s.

In It Together: Why Less Inequality Benefits All also shows that wealth is even more concentrated at the top than income, exacerbating the overall disadvantage of low-income households. In 2012, the bottom 40% owned only 3% of total household wealth in the 18 OECD countries with comparable data. By contrast, the top 10% controlled half of all total household wealth and the wealthiest 1% owned 18%.

The report stresses that growing inequality and weak opportunities in the labour market are harmful for long-term economic growth. The rise in inequality between 1985 and 2005 in 19 OECD countries analysed is estimated to have knocked 4.7 percentage points off cumulative growth between 1990 and 2010. "In fact, it is inequality affecting the bottom 40% which mainly brings down overall growth. As inequality rises, families with lower socio-economic background experience significant falls in educational attainment and skills, implying large amounts of wasted potential and lower social mobility."

Inequality is highest among OECD countries in Chile, Mexico, Turkey, the United States and Israel and lowest in Denmark, Slovenia, Slovak Republic and Norway. Inequality is even higher in major emerging economies although it has fallen in many including Brazil.

US firms

The Financial Times reported last month: "The average US chief executive earned 295.9 times as much as a typical American worker in 2013, compared with 20 times as much in 1965. The AFL-CIO, the US trade union federation, says that while the chief executive-to-worker average pay ratio is higher in the US than anywhere else in the developed world, countries such as Canada, Germany, France and Sweden have even bigger gaps than the UK."

However in a paper published this week researchers, led by Jae Song of the Social Security Administration, using Social Security confidential earnings data, including companies' tax identification numbers, write:

Covering all US firms between 1978 to 2012, we show that virtually all of the rise in earnings dispersion between workers is accounted for by increasing dispersion in average wages paid by the employers of these individuals. In contrast, pay differences within employers have remained virtually unchanged, a finding that is robust across industries, geographical regions, and firm size groups. Furthermore, the wage gap between the most highly paid employees within these firms (CEOs and high level executives) and the average employee has increased only by a small amount, refuting oft-made claims that such widening gaps account for a large fraction of rising inequality in the population."

The authors say that instead of top incomes rising within firms, top paying firms are now paying even higher wages. "This may tend to make inequality more invisible, as individuals do not see rising inequality among their peers. More research needs to be done to understand why inequality between firms has increased so much more than inequality within them."

The Economist wrote this month "in America, for instance, the best-paid 1% of workers earned 191% more in real (i.e., inflation-adjusted) terms in 2011 than they did in 1980, whereas the wages of the middle fifth fell by 5%."

It cites a paper, which "shows that the benefits of scale are not shared equally among all workers. Using data on wages at British firms, they divide workers into nine groups according to how skilled they are. Over time, they find that the proportional difference in wages between the groups grows as firms get bigger. This trend is driven entirely by a rising gap between wages at the top compared with the middle and bottom of the distribution. As the authors note, this is very similar to the trend in income inequality in America and Britain as a whole since the 1990s, when pay for low and median earners began to stagnate."

Top 30 paying firms in the US

Apple is not included in the list of 30 and in 2012 The New York Times reported that retail staff accounted for about 30,000 of the then US payroll of 43,000 — average pay in Apple's stores was $25,000.

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