4 Pages Essay: Does Capitalism Promote (Social) Equality?

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I have now precisely defi ned the notions needed for what follows, and I have introduced the orders of magnitude attained in practice by in e qual ity with respect to labor and capital in various societies. Th e time has now come to look at the historical evolution of in e qual ity around the world. How and why has the structure of in e qual ity changed since the nineteenth century? Th e shocks of the period 1914– 1945 played an essential role in the compression of in e qual- ity, and this compression was in no way a harmonious or spontaneous occur- rence. Th e increase in in e qual ity since 1970 has not been the same everywhere, which again suggests that institutional and po liti cal factors played a key role.

A Simple Case: Th e Reduction of In e qual ity in France in the Twentieth Century

I will begin by examining at some length the case of France, which is particu- larly well documented (thanks to a rich lode of readily available historical sources). It is also relatively simple and straightforward (as far as it is possible for a history of in e qual ity to be straightforward) and, above all, broadly repre- sentative of changes observed in several other Eu ro pe an countries. By “Eu ro- pe an” I mean “continental Eu ro pe an,” because in some respects the British case is intermediate between the Eu ro pe an and the US cases. To a large extent the continental Eu ro pe an pattern is also representative of what happened in Japan. Aft er France I will turn to the United States, and fi nally I will extend the analysis to the entire set of developed and emerging economies for which adequate historical data exist.

Figure 8.1 depicts the upper decile’s share of both national income and wages over time. Th ree facts stand out.

First, income in e qual ity has greatly diminished in France since the Belle Époque: the upper decile’s share of national income decreased from 45– 50 percent on the eve of World War I to 30– 35 percent today.

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Th is drop of 15 percentage points of national income is considerable. It represents a decrease of about one- third in the share of each year’s output go- ing to the wealthiest 10 percent of the population and an increase of about a third in the share going to the other 90 percent. Note, too, that this is roughly equivalent to three- quarters of what the bottom half of the population re- ceived in the Belle Époque and more than half of what it receives today.1 Re- call, moreover, that in this part of the book, I am examining in e qual ity of primary incomes (that is, before taxes and transfers). In Part Four, I will show how taxes and transfers reduced in e qual ity even more. To be clear, the fact that in e qual ity decreased does not mean that we are living today in an egali- tarian society. It mainly refl ects the fact that the society of the Belle Époque was extremely inegalitarian— indeed, one of the most inegalitarian societies of all time. Th e form that this in e qual ity took and the way it came about would not, I think, be readily accepted today.

Second, the signifi cant compression of income in e qual ity over the course of the twentieth century was due entirely to diminished top incomes from capital. If we ignore income from capital and concentrate on wage in e qual ity,

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Figure 8.1. Income in e qual ity in France, 1910– 2010 In e qual ity of total income (labor and capital) has dropped in France during the twen- tieth century, while wage in e qual ity has remained the same. Sources and series: see piketty.pse.ens.fr/capital21c.

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we fi nd that the distribution remained quite stable over the long run. In the fi rst de cade of the twentieth century as in the second de cade of the twenty- fi rst, the upper decile of the wage hierarchy received about 25 percent of total wages. Th e sources also indicate long- term stability of wage in e qual ity at the bottom end of the distribution. For example, the least well paid 50 percent always received 25– 30 percent of total wages (so that the average pay of a mem- ber of this group was 50– 60 percent of the average wage overall), with no clear long- term trend.2 Th e wage level has obviously changed a great deal over the past century, and the composition and skills of the workforce have been to- tally transformed, but the wage hierarchy has remained more or less the same. If top incomes from capital had not decreased, income in e qual ity would not have diminished in the twentieth century.

Th is fact stands out even more boldly when we climb the rungs of the social ladder. Look, in par tic u lar, at the evolution of the top centile (Figure 8.2).3 Compared with the peak in e qual ity of the Belle Époque, the top centile’s share of income literally collapsed in France over the course of the twentieth century, dropping from more than 20 percent of national income in 1900– 1910

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Figure 8.2. Th e fall of rentiers in France, 1910– 2010 Th e fall in the top percentile share (the top 1 percent highest incomes) in France between 1914 and 1945 is due to the fall of top capital incomes. Sources and series: see piketty.pse.ens.fr/capital21c.

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to 8 or 9 percent in 2000– 2010. Th is represents a decrease of more than half in one century, indeed nearly two- thirds if we look at the bottom of the curve in the early 1980s, when the top centile’s share of national income was barely 7 percent.

Again, this collapse was due solely to the decrease of very high incomes from capital (or, crudely put, the fall of the rentier). If we look only at wages, we fi nd that the upper centile’s share remains almost totally stable over the long run at around 6 or 7 percent of total wages. On the eve of World War I, income in e qual ity (as mea sured by the share of the upper centile) was nearly three times greater than wage in e qual ity. Today it is a nearly a third higher and largely identical with wage in e qual ity, to the point where one might imagine— incorrectly—that top incomes from capital have virtually disappeared (see Figure 8.2).

To sum up: the reduction of in e qual ity in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized structural pro cess of in e qual ity compression (and particularly wage in e qual ity compression) seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

Herein lies a fundamental lesson about the historical dynamics of the distribution of wealth, no doubt the most important lesson the twentieth century has to teach. Th is is all the more true when we recognize that the factual picture is more or less the same in all developed countries, with minor variations.

Th e History of In e qual ity: A Chaotic Po liti cal History Th e third important fact to emerge from Figures 8.1 and 8.2 is that the history of in e qual ity has not been a long, tranquil river. Th ere have been many twists and turns and certainly no irrepressible, regular tendency toward a “natural” equilibrium. In France and elsewhere, the history of in e qual ity has always been chaotic and po liti cal, infl uenced by convulsive social changes and driven not only by economic factors but by countless social, po liti cal, military, and cultural phenomena as well. Socioeconomic inequalities— disparities of in- come and wealth between social groups— are always both causes and eff ects of other developments in other spheres. All these dimensions of analysis are

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inextricably intertwined. Hence the history of the distribution of wealth is one way of interpreting a country’s history more generally.

In the case of France, it is striking to see the extent to which the compres- sion of income in e qual ity is concentrated in one highly distinctive period: 1914– 1945. Th e shares of both the upper decile and upper centile in total in- come reached their nadir in the aft ermath of World War II and seem never to have recovered from the extremely violent shocks of the war years (see Figures 8.1 and 8.2). To a large extent, it was the chaos of war, with its attendant eco- nomic and po liti cal shocks, that reduced in e qual ity in the twentieth century. Th ere was no gradual, consensual, confl ict- free evolution toward greater equal- ity. In the twentieth century it was war, and not harmonious demo cratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.

What were these shocks? I discussed them in Part Two: destruction caused by two world wars, bankruptcies caused by the Great Depression, and above all new public policies enacted in this period (from rent control to national- izations and the infl ation- induced euthanasia of the rentier class that lived on government debt). All of these things led to a sharp drop in the capital/income ratio between 1914 and 1945 and a signifi cant decrease in the share of income from capital in national income. But capital is far more concentrated than labor, so income from capital is substantially overrepresented in the upper decile of the income hierarchy (even more so in the upper centile). Hence there is nothing surprising about the fact that the shocks endured by capital, especially private capital, in the period 1914– 1945 diminished the share of the upper decile (and upper centile), ultimately leading to a signifi cant compres- sion of income in e qual ity.

France fi rst imposed a tax on income in 1914 (the Senate had blocked this reform since the 1890s, and it was not fi nally adopted until July 15, 1914, a few weeks before war was declared, in an extremely tense climate). For that rea- son, we unfortunately have no detailed annual data on the structure of in- come before that date. In the fi rst de cade of the twentieth century, numerous estimates were made of the distribution of income in anticipation of the im- position of a general income tax, in order to predict how much revenue such a tax might bring in. We therefore have a rough idea of how concentrated in- come was in the Belle Époque. But these estimates are not suffi cient to give us historical perspective on the shock of World War I (for that, the income tax

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would have to have been adopted several de cades earlier).4 Fortunately, data on estate taxes, which have been levied since 1791, allow us to study the evolu- tion of the wealth distribution throughout the nineteenth and twentieth centuries, and we are therefore able to confi rm the central role played by the shocks of 1914– 1945. For these data indicate that on the eve of World War I, nothing presaged a spontaneous reduction of the concentration of capital ownership— on the contrary. From the same source we also know that in- come from capital accounted for the lion’s share of the upper centile’s income in the period 1900– 1910.

From a “Society of Rentiers” to a “Society of Managers” In 1932, despite the economic crisis, income from capital still represented the main source of income for the top 0.5 percent of the distribution (see Figure 8.3).5 But when we look at the composition of the top income group

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Figure 8.3. Th e composition of top incomes in France in 1932 Labor income becomes less and less important as one goes up within the top decile of total income. Notes: (i) “P90– 95” includes individuals between percentiles 90 to 95, “P95– 99” includes the next 4 percent, “P99– 99.5” the next 0.5 percent, etc.; (ii) Labor income: wages, bonuses, pensions. Capital income: dividends, interest, rent. Mixed income: self- employment income. Sources and series: see piketty.pse.ens.fr/capital21c.

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today, we fi nd that a profound change has occurred. To be sure, today as in the past, income from labor gradually disappears as one moves higher in the income hierarchy, and income from capital becomes more and more predomi- nant in the top centiles and thousandths of the distribution: this structural feature has not changed. Th ere is one crucial diff erence, however: today one has to climb much higher in the social hierarchy before income from capital outweighs income from labor. Currently, income from capital exceeds income from labor only in the top 0.1 percent of the income distribution (see Figure 8.4). In 1932, this social group was 5 times larger; in the Belle Époque it was 10 times larger.

Make no mistake: this is a signifi cant change. Th e top centile occupies a very prominent place in any society. It structures the economic and po liti cal landscape. Th is is much less true of the top thousandth.6 Although this is a matter of degree, it is nevertheless important: there are moments when the quantitative becomes qualitative. Th is change also explains why the share of income going to the upper centile today is barely higher than the upper centile’s

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Figure 8.4. Th e composition of top incomes in France in 2005 Capital income becomes dominant at the level of the top 0.1 percent in France in 2005, as opposed to the top 0.5 percent in 1932. Sources and series: see piketty.pse.ens.fr/capital21c.

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share of total wages: income from capital assumes decisive importance only in the top thousandth or top ten- thousandth. Its infl uence in the top centile as a whole is relatively insignifi cant.

To a large extent, we have gone from a society of rentiers to a society of managers, that is, from a society in which the top centile is dominated by rentiers (people who own enough capital to live on the annual income from their wealth) to a society in which the top of the income hierarchy, including to upper centile, consists mainly of highly paid individuals who live on income from labor. One might also say, more correctly (if less positively), that we have gone from a society of superrentiers to a less extreme form of rentier society, with a better balance between success through work and success through capital. It is important, however, to be clear that this major upheaval came about, in France at any rate, without any expansion of the wage hierarchy (which has been globally stable for a long time: the universe of individuals who are paid for their labor has never been as homogeneous as many people think); it was due entirely to the decrease in high incomes from capital.

To sum up: what happened in France is that rentiers (or at any rate nine- tenths of them) fell behind managers; managers did not race ahead of rentiers. We need to understand the reasons for this long- term change, which are not obvious at fi rst glance, since I showed in Part Two that the capital/income ratio has lately returned to Belle Époque levels. Th e collapse of the rentier be- tween 1914 and 1945 is the obvious part of the story. Exactly why rentiers have not come back is the more complex and in some ways more important and interesting part. Among the structural factors that may have limited the con- centration of wealth since World War II and to this day have helped prevent the resurrection of a society of rentiers as extreme as that which existed on the eve of World War I, we can obviously cite the creation of highly progressive taxes on income and inheritances (which for the most part did not exist prior to 1920). But other factors may also have played a signifi cant and potentially equally important role.

Th e Diff erent Worlds of the Top Decile But fi rst, let me dwell a moment on the very diverse social groups that make up the top decile of the income hierarchy. Th e boundaries between the vari- ous subgroups have changed over time: income from capital used to predomi-

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nate in the top centile but today predominates only in the top thousandth. More than that, the coexistence of several worlds within the top decile can help us to understand the oft en chaotic short- and medium- term evolutions we see in the data. Income statements required by the new tax laws have proved to be a rich historical source, despite their many imperfections. With their help, it is possible to precisely describe and analyze the diversity at the top of the in- come distribution and its evolution over time. It is particularly striking to note that in all the countries for which we have this type of data, in all peri- ods, the composition of the top income group can be characterized by inter- secting curves like those shown in Figures 8.3 and 8.4 for France in 1932 and 2005, respectively: the share of income from labor always decreases rapidly as one moves progressively higher in the top decile, and the share of income from capital always rises sharply.

In the poorer half of the top decile, we are truly in the world of managers: 80– 90 percent of income comes from compensation for labor.7 Moving up to the next 4 percent, the share of income from labor decreases slightly but re- mains clearly dominant at 70– 80 percent of total income in the interwar pe- riod as well as today (see Figures 8.3 and 8.4). In this large “9 percent” group (that is, the upper decile exclusive of the top centile), we fi nd mainly individuals living primarily on income from labor, including both private sector manag- ers and engineers and se nior offi cials and teachers from the public sector. Here, pay is usually 2 to 3 times the average wage for society as a whole: if average wages are 2,000 euros a month, in other words, this group earns 4,000– 6,000 a month.

Obviously, the types of jobs and levels of skill required at this level have changed considerably over time: in the interwar years, high school teachers and even late- career grade school teachers belonged to “the 9 percent,” whereas today one has to be a college professor or researcher or, better yet, a se nior government offi cial to make the grade.8 In the past, a foreman or skilled tech- nician came close to making it into this group. Today one has to be at least a middle manager and increasingly a top manager with a degree from a pres- tigious university or business school. Th e same is true lower down the pay scale: once upon a time, the least well paid workers (typically paid about half the average wage, or 1,000 euros a month if the average is 2,000) were farm laborers and domestic servants. At a later point, these were replaced by less skilled industrial workers, many of whom were women in the textile and food

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pro cessing industries. Th is group still exists today, but the lowest paid work- ers are now in the ser vice sector, employed as waiters and waitresses in restau- rants or as shop clerks (again, many of these are women). Th us the labor mar- ket was totally transformed over the past century, but the structure of wage in e qual ity across the market barely changed over the long run, with “the 9 percent” just below the top and the 50 percent at the bottom still drawing about the same shares of income from labor over a very considerable period of time.

Within “the 9 percent” we also fi nd doctors, lawyers, merchants, restaura- teurs, and other self- employed entrepreneurs. Th eir number grows as we move closer to “the 1 percent,” as is shown by the curve indicating the share of “mixed incomes” (that is, incomes of nonwage workers, which includes both compen- sation for labor and income from business capital, which I have shown sepa- rately in Figures 8.3 and 8.4). Mixed incomes account for 20– 30 percent of total income in the neighborhood of the top centile threshold, but this per- centage decreases as we move higher into the top centile, where pure capital income (rent, interest, and dividends) clearly predominates. To make it into “the 9 percent” or even rise into the lower strata of “the 1 percent,” which means attaining an income 4– 5 times higher than the average (that is, 8,000– 10,000 euros a month in a society where the average income is 2,000), choosing to become a doctor, lawyer, or successful restaurateur may therefore be a good strategy, and it is almost as common (actually about half as common) as the choice to become a top manager in a large fi rm.9 But to reach the stratosphere of “the 1 percent” and enjoy an income several tens of times greater than aver- age (hundreds of thousands if not millions of euros per year), such a strategy is unlikely to be enough. A person who owns substantial amounts of assets is more likely to reach the top of the income hierarchy.10

It is interesting that it was only in the immediate postwar years (1919– 1920 in France and then again 1945– 1946) that this hierarchy was reversed: mixed incomes very briefl y surpassed income from capital in the upper levels of the top centile. Th is apparently refl ects rapid accumulation of new fortunes in connection with postwar reconstruction.11

To sum up: the top decile always encompasses two very diff erent worlds: “the 9 percent,” in which income from labor clearly predominates, and “the 1 percent,” in which income from capital becomes progressively more impor- tant (more or less rapidly and massively, depending on the period). Th e transi-

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tion between the two groups is always gradual, and the frontiers are of course porous, but the diff erences are nevertheless clear and systematic.

For example, while income from capital is obviously not altogether absent from the income of “the 9 percent,” it is usually not the main source of income but simply a supplement. A manager earning 4,000 euros a month may also own an apartment that she rents for 1,000 euros a month (or lives in, thus avoiding paying a rent of 1,000 euros a month, which comes to the same thing fi nancially). Her total income is then 5,000 euros a month, 80 percent of which is income from labor and 20 percent from capital. Indeed, an 80– 20 split be- tween labor and capital is reasonably representative of the structure of income among “the 9 percent”; this was true between the two world wars and remains true today. A part of this group’s income from capital may also come from sav- ings accounts, life insurance contracts, and fi nancial investments, but real es- tate generally predominates.12

Conversely, within “the 1 percent,” it is labor income that gradually be- comes supplementary, while capital increasingly becomes the main source of income. Another interesting pattern is the following: if we break income from capital down into rent on land and structures on the one hand and dividends and interest from mobile capital on the other, we fi nd that the very large share of income from capital in the upper decile is due largely to the latter (espe- cially dividends). For example, in France, the share of income from capital in 1932 as well as 2005 is 20 percent at the level of “the 9 percent” but increases to 60 percent in the top 0.01 percent. In both cases, this sharp increase is ex- plained entirely by income from fi nancial assets (almost all of it in the form of dividends). Th e share of rent stagnates at around 10 percent of total income and even tends to diminish in the top centile. Th is pattern refl ects the fact that large fortunes consist primarily of fi nancial assets (mainly stocks and shares in partnerships).

Th e Limits of Income Tax Returns Despite all these interesting patterns, I must stress the limits of the fi scal sources used in this chapter. Figures 8.3 and 8.4 are based solely on income from capital reported in tax returns. Actual capital income is therefore under- estimated, owing both to tax evasion (it is easier to hide investment income than wages, for example, by using foreign bank accounts in countries that do

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not cooperate with the country in which the taxpayer resides) and to the exis- tence of various tax exemptions that allow whole categories of capital income to legally avoid the income tax (which in France and elsewhere was originally intended to include all types of income). Since income from capital is over- represented in the top decile, this underdeclaration of capital income also implies that the shares of the upper decile and centile indicated on Figures 8.1 and 8.2, which are based solely on income tax returns, are underestimated (for France and other countries). Th ese shares are in any case approximate. Th ey are interesting (like all economic and social statistics) mainly as indicators of orders of magnitude and should be taken as low estimates of the actual level of in e qual ity.

In the French case, we can compare self- declared income on tax returns with other sources (such as national accounts and sources that give a more di- rect mea sure of the distribution of wealth) to estimate how much we need to adjust our results to compensate for the underdeclaration of capital income. It turns out that we need to add several percentage points to capital income’s share of national income (perhaps as many as 5 percentage points if we choose a high estimate of tax evasion, but more realistically 2 to 3 percentage points). Th is is not a negligible amount. Put diff erently, the share of the top decile in national income, which according to Figure 8.1 fell from 45– 50 percent in 1900– 1910 to 30– 35 percent in 2000– 2010, was no doubt closer to 50 percent (or even slightly higher) in the Belle Époque and is currently slightly more than 35 percent.13 Nevertheless, this correction does not signifi cantly aff ect the overall evolution of income in e qual ity. Even if opportunities for legal tax avoidance and illegal tax evasion have increased in recent years (thanks in par- tic u lar to the emergence of tax havens about which I will say more later on), we must remember that income from mobile capital was already signifi cantly underreported in the early twentieth century and during the interwar years. All signs are that the copies of dividend and interest coupons requested by the governments of that time were no more eff ective than today’s bilateral agree- ments as a means of ensuring compliance with applicable tax laws.

To a fi rst approximation, therefore, we may assume that accounting for tax avoidance and evasion would increase the levels of in e qual ity derived from tax returns by similar proportions in diff erent periods and would therefore not substantially modify the time trends and evolutions I have identifi ed.

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Note, however, that we have not yet attempted to apply such corrections in a systematic and consistent way in diff erent countries. Th is is an important limitation of the World Top Incomes Database. One consequence is that our series underestimate— probably slightly— the increase of in e qual ity that can be observed in most countries aft er 1970, and in par tic u lar the role of income from capital. In fact, income tax returns are becoming increasingly less accu- rate sources for studying capital income, and it is indispensable to make use of other, complementary sources as well. Th ese may be either macroeconomic sources (of the kind used in Part Two to study the dynamics of the capital/ income ratio and capital- labor split) or microeconomic sources (with which it is possible to study the distribution of wealth directly, and of which I will make use in subsequent chapters).

Furthermore, diff erent capital taxation laws may bias international com- parisons. Broadly speaking, rents, interest, and dividends are treated fairly similarly in diff erent countries.14 By contrast, there are signifi cant variations in the treatment of capital gains. For instance, capital gains are not fully or consistently reported in French tax data (and I have simply excluded them al- together), while they have always been fairly well accounted for in US tax data. Th is can make a major diff erence, because capital gains, especially those realized from the sale of stocks, constitute a form of capital income that is highly concentrated in the very top income groups (in some cases even more than dividends). For example, if Figures 8.3 and 8.4 included capital gains, the share of income from capital in the top ten- thousandth would not be 60 per- cent but something closer to 70 or 80 percent (depending on the year).15 So as not to bias comparisons, I will present the results for the United States both with and without capital gains.

Th e other important limitation of income tax returns is that they contain no information about the origin of the capital whose income is being re- ported. We can see the income produced by capital owned by the taxpayer at a par tic u lar moment in time, but we have no idea whether that capital was inherited or accumulated by the taxpayer during his or her lifetime with in- come derived from labor (or from other capital). In other words, an identical level of in e qual ity with respect to income from capital can in fact refl ect very diff erent situations, and we would never learn anything about these diff er- ences if we restricted ourselves to tax return data. Generally speaking, very

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high incomes from capital usually correspond to fortunes so large that it is hard to imagine that they could have been amassed with savings from labor income alone (even in the case of a very high- level manager or executive). Th ere is every reason to believe that inheritance plays a major role. As we will see in later chapters, however, the relative importance of inheritance and saving has evolved considerably over time, and this is a subject that deserves further study. Once again, I will need to make use of sources bearing directly on the question of inheritance.

Th e Chaos of the Interwar Years Consider the evolution of income in e qual ity in France over the last century. Between 1914 and 1945, the share of the top centile of the income hierarchy fell almost constantly, dropping gradually from 20 percent in 1914 to just 7 percent in 1945 (Figure 8.2). Th is steady decline refl ects the long and virtually uninterrupted series of shocks sustained by capital (and income from capital) during this time. By contrast, the share of the top decile of the income hierar- chy decreased much less steadily. It apparently fell during World War I, but this was followed by an unsteady recovery in the 1920s and then a very sharp, and at fi rst sight surprising, rise between 1929 and 1935, followed by a steep decline in 1936– 1938 and a collapse during World War II.16 In the end, the top decile’s share of national income, which was more than 45 percent in 1914, fell to less than 30 percent in 1944– 1945.

If we consider the entire period 1914– 1945, the two declines are perfectly consistent: the share of the upper decile decreased by nearly 18 points, accord- ing to my estimates, and the upper centile by nearly 14 points.17 In other words, “the 1 percent” by itself accounts for roughly three- quarters of the decrease in in e qual ity between 1914 and 1945, while “the 9 percent” explains roughly one- quarter. Th is is hardly surprising in view of the extreme concentration of capi- tal in the hands of “the 1 percent,” who in addition oft en held riskier assets.

By contrast, the diff erences observed during this period are at fi rst sight more surprising: Why did the share of the upper decile rise sharply aft er the crash of 1929 and continue at least until 1935, while the share of the top centile fell, especially between 1929 and 1932?

In fact, when we look at the data more closely, year by year, each of these variations has a perfectly good explanation. It is enlightening to revisit the

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chaotic interwar period, when social tensions ran very high. To understand what happened, we must recognize that “the 9 percent” and “the 1 percent” lived on very diff erent income streams. Most of the income of “the 1 percent” came in the form of income from capital, especially interest and dividends paid by the fi rms whose stocks and bonds made up the assets of this group. Th at is why the top centile’s share plummeted during the Depression, as the economy collapsed, profi ts fell, and fi rm aft er fi rm went bankrupt.

By contrast, “the 9 percent” included many managers, who were the great benefi ciaries of the Depression, at least when compared with other social groups. Th ey suff ered much less from unemployment than the employees who worked under them. In par tic u lar, they never experienced the extremely high rates of partial or total unemployment endured by industrial workers. Th ey were also much less aff ected by the decline in company profi ts than those who stood above them in the income hierarchy. Within “the 9 percent,” midlevel civil servants and teachers fared particularly well. Th ey had only recently been the benefi ciaries of civil ser vice raises granted in the period 1927– 1931. (Recall that government workers, particularly those at the top of the pay scale, had suff ered greatly during World War I and had been hit hard by the infl ation of the early 1920s.) Th ese midlevel employees were immune, too, from the risk of unemployment, so that the public sector’s wage bill remained constant in nomi- nal terms until 1933 (and decreased only slightly in 1934– 1935, when Prime Minister Pierre Laval sought to cut civil ser vice pay). Meanwhile, private sec- tor wages decreased by more than 50 percent between 1929 and 1935. Th e se- vere defl ation France suff ered in this period (prices fell by 25 percent between 1929 and 1935, as both trade and production collapsed) played a key role in the pro cess: individuals lucky enough to hold on to their jobs and their nominal compensation— typically civil servants— enjoyed increased purchasing power in the midst of the Depression as falling prices raised their real wages. Fur- thermore, such capital income as “the 9 percent” enjoyed— typically in the form of rents, which were extremely rigid in nominal terms— also increased on account of the defl ation, so that the real value of this income stream rose signifi cantly, while the dividends paid to “the 1 percent” evaporated.

For all these reasons, the share of national income going to “the 9 percent” increased quite signifi cantly in France between 1929 and 1935, much more than the share of “the 1 percent” decreased, so that the share of the upper decile as a whole increased by more than 5 percent of national income (see Figures

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8.1 and 8.2). Th e pro cess was completely turned around, however, when the Pop u lar Front came to power: workers’ wages increased sharply as a result of the Matignon Accords, and the franc was devalued in September 1936, result- ing in infl ation and a decrease of the shares of both “the 9 percent” and the top decile in 1936– 1938.18

Th e foregoing discussion demonstrates the usefulness of breaking income down by centiles and income source. If we had tried to analyze the interwar dynamic by using a synthetic index such as the Gini coeffi cient, it would have been impossible to understand what was going on. We would not have been able to distinguish between income from labor and income from capital or between short- term and long- term changes. In the French case, what makes the period 1914– 1945 so complex is the fact that although the general trend is fairly clear (a sharp drop in the share of national income going to the top de- cile, induced by a collapse of the top centile’s share), many smaller counter- movements were superimposed on this overall pattern in the 1920s and 1930s. We fi nd similar complexity in other countries in the interwar period, with characteristic features associated with the history of each par tic u lar country. For example, defl ation ended in the United States in 1933, when President Roo se velt came to power, so that the reversal that occurred in France in 1936 came earlier in America, in 1933. In every country the history of in e qual ity is political— and chaotic.

Th e Clash of Temporalities Broadly speaking, it is important when studying the dynamics of the income and wealth distributions to distinguish among several diff erent time scales. In this book I am primarily interested in long- term evolutions, fundamental trends that in many cases cannot be appreciated on time scales of less than thirty to forty years or even longer, as shown, for example, by the structural increase in the capital/income ratio in Eu rope since World War II, a pro cess that has been going on for nearly seventy years now yet would have been diffi cult to detect just ten or twenty years ago owing to the superimposition of various other developments (as well as the absence of usable data). But this focus on the long period must not be allowed to obscure the fact that shorter- term trends also exist. To be sure, these are oft en counterbalanced in the end, but for the people who live through them they oft en appear, quite legitimately, to be the most

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signifi cant realities of the age. Indeed, how could it be otherwise, when these “short- term” movements can continue for ten to fi ft een years or even longer, which is quite long when mea sured on the scale of a human lifetime.

Th e history of in e qual ity in France and elsewhere is replete with these short- and medium- term movements— and not just in the particularly chaotic interwar years. Let me briefl y recount the major episodes in the case of France. During both world wars, the wage hierarchy was compressed, but in the aft er- math of each war, wage inequalities reasserted themselves (in the 1920s and then again in the late 1940s and on into the 1950s and 1960s). Th ese were movements of considerable magnitude: the share of total wages going to the top 10 percent decreased by about 5 points during each confl ict but recovered aft erward by the same amount (see Figure 8.1).19 Wage spreads were reduced in the public as well as the private sector. In each war the scenario was the same: in war time, economic activity decreases, infl ation increases, and real wages and purchasing power begin to fall. Wages at the bottom of the wage scale generally rise, however, and are somewhat more generously protected from infl ation than those at the top. Th is can induce signifi cant changes in the wage distribution if infl ation is high. Why are low and medium wages better indexed to infl ation than higher wages? Because workers share certain per- ceptions of social justice and norms of fairness, an eff ort is made to prevent the purchasing power of the least well- off from dropping too sharply, while their better- off comrades are asked to postpone their demands until the war is over. Th is phenomenon clearly played a role in setting wage scales in the pub- lic sector, and it was probably the same, at least to a certain extent, in the pri- vate sector. Th e fact that large numbers of young and relatively unskilled workers were mobilized for ser vice (or held in prisoner- of- war camps) may also have improved the relative position of low- and medium- wage workers on the labor market.

In any case, the compression of wage in e qual ity was reversed in both post- war periods, and it is therefore tempting to forget that it ever occurred. Nev- ertheless, for workers who lived through these periods, the changes in the wage distribution made a deep impression. In par tic u lar, the issue of restoring the wage hierarchy in both the public and private sectors was one of the most important po liti cal, social, and economic issues of the postwar years.

Turning now to the history of in e qual ity in France between 1945 and 2010, we fi nd three distinct phases: income in e qual ity rose sharply between 1945

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and 1967 (with the share going to the top decile increasing from less than 30 to 36 or 37 percent). It then decreased considerably between 1968 and 1983 (with the share of the top decile dropping back to 30 percent). Finally, in e- qual ity increased steadily aft er 1983, so that the top decile’s share climbed to about 33 percent in the period 2000– 2010 (see Figure 8.1). We fi nd roughly similar changes of wage in e qual ity at the level of the top centile (see Figures 8.3 and 8.3). Once again, these various increases and decreases more or less bal- ance out, so it is tempting to ignore them and concentrate on the relative sta- bility over the long run, 1945– 2010. Indeed, if one were interested solely in very long- term evolutions, the outstanding change in France during the twen- tieth century would be the signifi cant compression of wage in e qual ity be- tween 1914 and 1945, followed by relative stability aft erward. Each way of looking at the matter is legitimate and important in its own right, and to my mind it is essential to keep all of these diff erent time scales in mind: the long term is important, but so are the short and the medium term. I touched on this point previously in my examination of the evolution of the capital/income ratio and the capital- labor split in Part Two (see in par tic u lar Chapter 6).

It is interesting to note that the capital- labor split tends to move in the same direction as in e qual ity in income from labor, so that the two reinforce each other in the short to medium term but not necessarily in the long run. For example, each of the two world wars saw a decrease in capital’s share of national income (and of the capital/income ratio) as well as a compression of wage in e qual ity. Generally speaking, in e qual ity tends to evolve “procyclically” (that is, it moves in the same direction as the economic cycle, in contrast to “countercyclical” changes). In economic booms, the share of profi ts in na- tional income tends to increase, and pay at the top end of the scale (including incentives and bonuses) oft en increases more than wages toward the bottom and middle. Conversely, during economic slowdowns or recessions (of which war can be seen as an extreme form), various noneconomic factors, especially po liti cal ones, ensure that these movements do not depend solely on the eco- nomic cycle.

Th e substantial increase in French in e qual ity between 1945 and 1967 was the result of sharp increases in both capital’s share of national income and wage in e qual ity in a context of rapid economic growth. Th e po liti cal climate undoubtedly played a role: the country was entirely focused on reconstruc- tion, and decreasing in e qual ity was not a priority, especially since it was com-

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mon knowledge that in e qual ity had decreased enormously during the war. In the 1950s and 1960s, managers, engineers, and other skilled personnel saw their pay increase more rapidly than the pay of workers at the bottom and middle of the wage hierarchy, and at fi rst no one seemed to care. A national minimum wage was created in 1950 but was seldom increased thereaft er and fell farther and farther behind the average wage.

Th ings changed suddenly in 1968. Th e events of May 1968 had roots in student grievances and cultural and social issues that had little to do with the question of wages (although many people had tired of the inegalitarian pro- ductivist growth model of the 1950s and 1960s, and this no doubt played a role in the crisis). But the most immediate po liti cal result of the movement was its eff ect on wages: to end the crisis, Charles de Gaulle’s government signed the Grenelle Accords, which provided, among other things, for a 20 percent increase in the minimum wage. In 1970, the minimum wage was offi cially (if partially) indexed to the mean wage, and governments from 1968 to 1983 felt obliged to “boost” the minimum signifi cantly almost every year in a seething social and po liti cal climate. Th e purchasing power of the minimum wage ac- cordingly increased by more than 130 percent between 1968 and 1983, while the mean wage increased by only about 50 percent, resulting in a very signifi - cant compression of wage inequalities. Th e break with the previous period was sharp and substantial: the purchasing power of the minimum wage had increased barely 25 percent between 1950 and 1968, while the average wage had more than doubled.20 Driven by the sharp rise of low wages, the total wage bill rose markedly more rapidly than output between 1968 and 1983, and this explains the sharp decrease in capital’s share of national income that I pointed out in Part Two, as well as the very substantial compression of in- come in e qual ity.

Th ese movements reversed in 1982– 1983. Th e new Socialist government elected in May 1981 surely would have preferred to continue the earlier trend, but it was not a simple matter to arrange for the minimum wage to increase twice as fast as the average wage (especially when the average wage itself was increasing faster than output). In 1982– 1983, therefore, the government de- cided to “turn toward austerity”: wages were frozen, and the policy of annual boosts to the minimum wage was defi nitively abandoned. Th e results were soon apparent: the share of profi ts in national income skyrocketed during the remainder of the 1980s, while wage inequalities once again increased, and

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income inequalities even more so (see Figures 8.1 and 8.2). Th e break was as sharp as that of 1968, but in the other direction.

Th e Increase of In e qual ity in France since the 1980s How should we characterize the phase of increasing in e qual ity that began in France in 1982– 1983? It is tempting to see it in a long- run perspective as a mi- crophenomenon, a simple reversal of the previous trend, especially since by 1990 or so the share of profi ts in national income had returned to the level achieved on the eve of May 1968.21 Th is would be a mistake, however, for sev- eral reasons. First, as I showed in Part Two, the profi t share in 1966– 1967 was historically high, a consequence of the restoration of capital’s share that began at the end of World War II. If we include, as we should, rent as well as profi t in income from capital, we fi nd that capital’s share of national income actu- ally continued to grow in the 1990s and 2000s. A correct understanding of this long- run phenomenon requires that it be placed in the context of the long- term evolution of the capital/income ratio, which by 2010 had returned to virtually the same level it had achieved in France on the eve of World War I. It is impossible to fully appreciate the implications of this restoration of the prosperity of capital simply by looking at the evolution of the upper decile’s share of income, in part because income from capital is understated, so that we tend to slightly underestimate the increase in top incomes, and in part because the real issue is the renewed importance of inherited wealth, a long- term pro cess that has only begun to reveal its true eff ects and can be correctly analyzed only by directly studying the changing role and importance of in- herited wealth as such.

But that is not all. A stunning new phenomenon emerged in France in the 1990s: the very top salaries, and especially the pay packages awarded to the top executives of the largest companies and fi nancial fi rms, reached astonish- ing heights— somewhat less astonishing in France, for the time being, than in the United States, but still, it would be wrong to neglect this new develop- ment. Th e share of wages going to the top centile, which was less than 6 per- cent in the 1980s and 1990s, began to increase in the late 1990s and reached 7.5– 8 percent of the total by the early 2010s. Th us there was an increase of nearly 30 percent in a little over a de cade, which is far from negligible. If we move even higher up the salary and bonus scale to look at the top 0.1 or 0.01

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percent, we fi nd even greater increases, with hikes in purchasing power greater than 50 percent in ten years.22 In a context of very low growth and virtual stagnation of purchasing power for the vast majority of workers, raises of this magnitude for top earners have not failed to attract attention. Furthermore, the phenomenon was radically new, and in order to interpret it correctly, we must view it in international perspective.

A More Complex Case: Th e Transformation of In e qual ity in the United States

Indeed, let me turn now to the US case, which stands out precisely because it was there that a subclass of “supermanagers” fi rst emerged over the past sev- eral de cades. I have done everything possible to ensure that the data series for the United States are as comparable as possible with the French series. In par- tic u lar, Figures 8.5 and 8.6 represent the same data for the United States as Figures 8.1 and 8.2 for France: the goal is to compare, in the fi rst fi gure of each pair, the evolution of the shares of income going to the top decile and top

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Figure 8.5. Income in e qual ity in the United States, 1910– 2010 Th e top decile income share rose from less than 35 percent of total income in the 1970s to almost 50 percent in the 2000s– 2010s. Sources and series: see piketty.pse.ens.fr/capital21c.

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centile of the wage hierarchy and to compare, in the second fi gure, the wage hierarchies themselves. I should add that the United States fi rst instituted a federal income tax in 1913, concluding a long battle with the Supreme Court.23 Th e data derived from US income tax returns are on the whole quite compa- rable to the French data, though somewhat less detailed. In par tic u lar, total income can be gleaned from US statements from 1913 on, but we do not have separate information on income from labor until 1927, so the series dealing with the wage distribution in the United States before 1927 are somewhat less reliable.24

When we compare the French and US trajectories, a number of similari- ties stand out, but so do certain important diff erences. I shall begin by exam- ining the overall evolution of the share of income going to the top decile (Figure 8.6). Th e most striking fact is that the United States has become no- ticeably more inegalitarian than France (and Eu rope as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period. What makes the US case complex is that the end of the pro cess did not simply mark a return to the sit-

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Top 1% (annual incomes above $352,000 in 2010) Top 5%–1% (annual incomes between $150,000 and $352,000 in 2010) Top 10%–5% (annual incomes between $108,000 and $150,000 in 2010)

Figure 8.6. Decomposition of the top decile, United States, 1910– 2010 Th e rise of the top decile income share since the 1970s is mostly due to the top percentile. Sources and series: see piketty.pse.ens.fr/capital21c.

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uation that had existed at the beginning: US in e qual ity in 2010 is quantita- tively as extreme as in old Eu rope in the fi rst de cade of the twentieth century, but the structure of that in e qual ity is rather clearly diff erent.

I will proceed systematically. First, Eu ro pe an income in e qual ity was sig- nifi cantly greater than US income in e qual ity at the turn of the twentieth century. In 1900– 1910, according to the data at our disposal, the top decile of the income hierarchy received a little more than 40 percent of total national income in the United States, compared with 45– 50 percent in France (and very likely somewhat more in Britain). Th is refl ects two diff erences. First, the capital/income ratio was higher in Eu rope, and so was capital’s share of na- tional income. Second, in e qual ity of own ership of capital was somewhat less extreme in the New World. Clearly, this does not mean that American soci- ety in 1900– 1910 embodied the mythical ideal of an egalitarian society of pio- neers. In fact, American society was already highly inegalitarian, much more than Eu rope today, for example. One has only to reread Henry James or note that the dreadful Hockney who sailed in luxury on Titanic in 1912 existed in real life and not just in the imagination of James Cameron to convince one- self that a society of rentiers existed not only in Paris and London but also in turn- of- the- century Boston, New York, and Philadelphia. Nevertheless, capi- tal (and therefore the income derived from it) was distributed somewhat less unequally in the United States than in France or Britain. Concretely, US rent- iers were fewer in number and not as rich (compared to the average US stan- dard of living) as their Eu ro pe an counterparts. I will need to explain why this was so.

Income in e qual ity increased quite sharply in the United States during the 1920s, however, peaking on the eve of the 1929 crash with more than 50 per- cent of national income going to the top decile— a level slightly higher than in Eu rope at the same time, as a result of the substantial shocks to which Eu- ro pe an capital had already been subjected since 1914. Nevertheless, US in e- qual ity was not the same as Eu ro pe an in e qual ity: note the already crucial importance of capital gains in top US incomes during the heady stock market ascent of the 1920s (see Figure 8.5).

During the Great Depression, which hit the United States particularly hard, and again during World War II, when the nation was fully mobilized behind the war eff ort (and the eff ort to end the economic crisis), income in e qual ity was substantially compressed, a compression comparable in some

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respects to what we observe in Eu rope in the same period. Indeed, as we saw in Part Two, the shocks to US capital were far from negligible: although there was no physical destruction due to war, the Great Depression was a major shock and was followed by substantial tax shocks imposed by the federal gov- ernment in the 1930s and 1940s. If we look at the period 1910– 1950 as a whole, however, we fi nd that the compression of in e qual ity was noticeably smaller in the United States than in France (and, more generally, Eu rope). To sum up: in e qual ity in the United States started from a lower peak on the eve of World War I but at its low point aft er World War II stood above in e qual ity in Eu- rope. Eu rope in 1914– 1945 witnessed the suicide of rentier society, but noth- ing of the sort occurred in the United States.

Th e Explosion of US In e qual ity aft er 1980 In e qual ity reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income, or roughly the same level as in France today. Th is is what Paul Krug- man nostalgically refers to as “the America we love”— the America of his childhood.25 In the 1960s, the period of the TV series Mad Men and General de Gaulle, the United States was in fact a more egalitarian society than France (where the upper decile’s share had increased dramatically to well above 35 percent), at least for those US citizens whose skin was white.

Since 1980, however, income in e qual ity has exploded in the United States. Th e upper decile’s share increased from 30– 35 percent of national income in the 1970s to 45– 50 percent in the 2000s— an increase of 15 points of national income (see Figure 8.5). Th e shape of the curve is rather impressively steep, and it is natural to wonder how long such a rapid increase can continue: if change continues at the same pace, for example, the upper decile will be raking in 60 percent of national income by 2030.

It is worth taking a moment to clarify several points about this evolution. First, recall that the series represented in Figure 8.5, like all the series in the WTID, take account only of income declared in tax returns and in par tic u lar do not correct for any possible understatement of capital income for legal or extralegal reasons. Given the widening gap between the total capital income (especially dividends and interest) included in US national accounts and the amount declared in income tax returns, and given, too, the rapid development

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of tax havens (fl ows to which are, in all likelihood, mostly not even included in national accounts), it is likely that Figure 8.5 underestimates the amount by which the upper decile’s share actually increased. By comparing various avail- able sources, it is possible to estimate that the upper decile’s share slightly ex- ceeded 50 percent of US national income on the eve of the fi nancial crisis of 2008 and then again in the early 2010s.26

Note, moreover, that stock market euphoria and capital gains can account for only part of the structural increase in the top decile’s share over the past thirty or forty years. To be sure, capital gains in the United States reached unpre ce dented heights during the Internet bubble in 2000 and again in 2007: in both cases, capital gains alone accounted for about fi ve additional points of national income for the upper decile, which is an enormous amount. Th e pre- vious record, set in 1928 on the eve of the 1929 stock market crash, was roughly 3 points of national income. But such levels cannot be sustained for very long, as the large annual variations evident in Figure 8.5 show. Th e incessant short- term fl uctuations of the stock market add considerable volatility to the evolu- tion of the upper decile’s share (and certainly contribute to the volatility of the US economy as a whole) but do not contribute much to the structural in- crease of in e qual ity. If we simply ignore capital gains (which is not a satisfac- tory method either, given the importance of this type of remuneration in the United States), we still fi nd almost as great an increase in the top decile’s share, which rose from around 32 percent in the 1970s to more than 46 per- cent in 2010, or fourteen points of national income (see Figure 8.5). Capital gains oscillated around one or two points of additional national income for the top decile in the 1970s and around two to three points between 2000 and 2010 (excluding exceptionally good and bad years). Th e structural increase is therefore on the order of one point: this is not nothing, but then again it is not much compared with the fourteen- point increase of the top decile’s share exclusive of capital gains.27

Looking at evolutions without capital gains also allows us to identify the structural character of the increase of in e qual ity in the United States more clearly. In fact, from the late 1970s to 2010, the increase in the upper decile’s share (exclusive of capital gains) appears to have been relatively steady and constant: it passed 35 percent in the 1980s, then 40 percent in the 1990s, and fi nally 45 percent in the 2000s (see Figure 8.5).28 Much more striking is the fact that the level attained in 2010 (with more than 46 percent of national

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income, exclusive of capital gains, going to the top decile) is already signifi - cantly higher than the level attained in 2007, on the eve of the fi nancial crisis. Early data for 2011– 2012 suggest that the increase is still continuing.

Th is is a crucial point: the facts show quite clearly that the fi nancial crisis as such cannot be counted on to put an end to the structural increase of in e- qual ity in the United States. To be sure, in the immediate aft ermath of a stock market crash, in e qual ity always grows more slowly, just as it always grows more rapidly in a boom. Th e years 2008– 2009, following the collapse of Lehman Brothers, like the years 2001– 2002, aft er the bursting of the fi rst Internet bubble, were not great times for taking profi ts on the stock market. Indeed, capital gains plummeted in those years. But these short- term move- ments did not alter the long- run trend, which is governed by other forces whose logic I must now try to clarify.

To proceed further, it will be useful to break the top decile of the income hierarchy down into three groups: the richest 1 percent, the next 4 percent, and the bottom 5 percent (see Figure 8.6). Th e bulk of the growth of in e qual- ity came from “the 1 percent,” whose share of national income rose from 9 percent in the 1970s to about 20 percent in 2000– 2010 (with substantial year- to- year variation due to capital gains)— an increase of 11 points. To be sure, “the 5 percent” (whose annual income ranged from $108,000 to $150,000 per house hold in 2010) as well as “the 4 percent” (whose income ranged from $150,000 to $352,000) also experienced substantial increases: the share of the former in US national income rose from 11 to 12 percent (or one point), and that of the latter rose from 13 to 16 percent (three points).29 By defi nition, that means that since 1980, these social groups have experienced income growth substantially higher than the average growth of the US economy, which is not negligible.

Among the members of these upper income groups are US academic econ- omists, many of whom believe that the economy of the United States is work- ing fairly well and, in par tic u lar, that it rewards talent and merit accurately and precisely. Th is is a very comprehensible human reaction.30 But the truth is that the social groups above them did even better: of the 15 additional points of national income going to the top decile, around 11 points, or nearly three- quarters of the total, went to “the 1 percent” (those making more than $352,000 a year in 2010), of which roughly half went to “the 0.1 percent” (those making more than $1.5 million a year).31

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Did the Increase of In e qual ity Cause the Financial Crisis? As I have just shown, the fi nancial crisis as such seems not to have had an im- pact on the structural increase of in e qual ity. What about the reverse causal- ity? Is it possible that the increase of in e qual ity in the United States helped to trigger the fi nancial crisis of 2008? Given the fact that the share of the upper decile in US national income peaked twice in the past century, once in 1928 (on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 2008), the question is diffi cult to avoid.

In my view, there is absolutely no doubt that the increase of in e qual ity in the United States contributed to the nation’s fi nancial instability. Th e reason is simple: one consequence of increasing in e qual ity was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest house holds would take on debt, es- pecially since unscrupulous banks and fi nancial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well- to- do, off ered credit on increasingly generous terms.32

In support of this thesis, it is important to note the considerable transfer of US national income— on the order of 15 points— from the poorest 90 per- cent to the richest 10 percent since 1980. Specifi cally, if we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we fi nd that the richest 10 percent appropriated three- quarters of the growth. Th e richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year.33 Th ese fi gures are incontestable, and they are striking: what ever one thinks about the fundamental legitimacy of income in e qual ity, the numbers deserve close scru- tiny.34 It is hard to imagine an economy and society that can continue func- tioning indefi nitely with such extreme divergence between social groups.

Quite obviously, if the increase in in e qual ity had been accompanied by exceptionally strong growth of the US economy, things would look quite dif- ferent. Unfortunately, this was not the case: the economy grew rather more slowly than in previous de cades, so that the increase in in e qual ity led to vir- tual stagnation of low and medium incomes.

Note, too, that this internal transfer between social groups (on the order of fi ft een points of US national income) is nearly four times larger than the

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impressive trade defi cit the United States ran in the 2000s (on the order of four points of national income). Th e comparison is interesting because the enormous trade defi cit, which has its counterpart in Chinese, Japa nese, and German trade surpluses, has oft en been described as one of the key contribu- tors to the “global imbalances” that destabilized the US and global fi nancial system in the years leading up to the crisis of 2008. Th at is quite possible, but it is important to be aware of the fact that the United States’ internal imbal- ances are four times larger than its global imbalances. Th is suggests that the place to look for the solutions of certain problems may be more within the United States than in China or other countries.

Th at said, it would be altogether too much to claim that the increase of in- e qual ity in the United States was the sole or even primary cause of the fi nan- cial crisis of 2008 or, more generally, of the chronic instability of the global fi nancial system. To my mind, a potentially more important cause of instabil- ity is the structural increase of the capital/income ratio (especially in Eu rope), coupled with an enormous increase in aggregate international asset positions.35

Th e Rise of Supersalaries Let me return now to the causes of rising in e qual ity in the United States. Th e increase was largely the result of an unpre ce dented increase in wage in e qual- ity and in par tic u lar the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large fi rms (see Figures 8.7 and 8.8).

Broadly speaking, wage in e qual ity in the United States changed in major ways over the past century: the wage hierarchy expanded in the 1920s, was rela- tively stable in the 1930s, and then experienced severe compression during World War II. Th e phase of “severe compression” has been abundantly studied. An important role was played by the National War Labor Board, the govern- ment agency that had to approve all wage increases in the United States from 1941 to 1945 and generally approved raises only for the lowest paid workers. In par tic u lar, managers’ salaries were systematically frozen in nominal terms and even at the end of the war were raised only moderately.36 During the 1950s, wage in e qual ity in the United States stabilized at a relatively low level, lower than in France, for example: the share of income going to the upper decile was about 25 percent, and the share of the upper centile was 5 or 6 percent. Th en,

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from the mid- 1970s on, the top 10 percent and, even more, the top 1 percent began to claim a share of labor income that grew more rapidly than the average wage. All told, the upper decile’s share rose from 25 to 35 percent, and this in- crease of ten points explains approximately two- thirds of the increase in the upper decile’s share of total national income (see Figures 8.7 and 8.8).

Several points call for additional comment. First, this unpre ce dented in- crease in wage in e qual ity does not appear to have been compensated by in- creased wage mobility over the course of a person’s career.37 Th is is a signifi - cant point, in that greater mobility is oft en mentioned as a reason to believe that increasing in e qual ity is not that important. In fact, if each individual were to enjoy a very high income for part of his or her life (for example, if each individual spent a year in the upper centile of the income hierarchy), then an increase in the level characterized as “very high pay” would not necessarily imply that in e qual ity with respect to labor— measured over a lifetime— had truly increased. Th e familiar mobility argument is powerful, so powerful that it is oft en impossible to verify. But in the US case, government data allow us to mea sure the evolution of wage in e qual ity with mobility taken into account: we can compute average wages at the individual level over long periods of time

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Figure 8.7. High incomes and high wages in the United States, 1910– 2010 Th e rise of income in e qual ity since the 1970s is largely due to the rise of wage in e qual ity. Sources and series: see piketty.pse.ens.fr/capital21c.

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(ten, twenty, or thirty years). And what we fi nd is that the increase in wage in e qual ity is identical in all cases, no matter what reference period we choose.38 In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of large US fi rms, any more than professors at the University of Chicago or middle managers from Cali- fornia do. One may have felt this intuitively, but it is always better to mea sure systematically wherever possible.

Cohabitation in the Upper Centile Furthermore, the fact that the unpre ce dented increase of wage in e qual ity ex- plains most of the increase in US income in e qual ity does not mean that in- come from capital played no role. It is important to dispel the notion that capital income has vanished from the summit of the US social hierarchy.

In fact, a very substantial and growing in e qual ity of capital income since 1980 accounts for about one- third of the increase in income in e qual ity in the United States— a far from negligible amount. Indeed, in the United States, as

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Figure 8.8. Th e transformation of the top 1 percent in the United States Th e rise in the top 1 percent highest incomes since the 1970s is largely due to the rise in the top 1 percent highest wages. Sources and series: see piketty.pse.ens.fr/capital21c.

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in France and Eu rope, today as in the past, income from capital always be- comes more important as one climbs the rungs of the income hierarchy. Tem- poral and spatial diff erences are diff erences of degree: though large, the gen- eral principle remains. As Edward Wolff and Ajit Zacharias have pointed out, the upper centile always consists of several diff erent social groups, some with very high incomes from capital and others with very high incomes from labor; the latter do not supplant the former.39

In the US case, as in France but to an even greater degree, the diff erence today is that one has to climb much further up the income hierarchy before income from capital takes the upper hand. In 1929, income from capital (es- sentially dividends and capital gains) was the primary resource for the top 1 percent of the income hierarchy (see Figure 8.9). In 2007, one has to climb to the 0.1 percent level before this is true (see Figure 8.10). Again, I should make it clear that this has to do with the inclusion of capital gains in income from capital: without capital gains, salaries would be the main source of income up to the 0.01 percent level of the income hierarchy.40

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Figure 8.9. Th e composition of top incomes in the United States in 1929 Labor income becomes less and less important as one moves up within the top income decile. Sources and series: see piketty.pse.ens.fr/capital21c.

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Th e fi nal and perhaps most important point in need of clarifi cation is that the increase in very high incomes and very high salaries primarily refl ects the advent of “supermanagers,” that is, top executives of large fi rms who have managed to obtain extremely high, historically unpre ce dented compensation packages for their labor. If we look only at the fi ve highest paid executives in each company listed on the stock exchange (which are generally the only com- pensation packages that must be made public in annual corporate reports), we come to the paradoxical conclusion that there are not enough top corporate managers to explain the increase in very high US incomes, and it therefore becomes diffi cult to explain the evolutions we observe in incomes stated on federal income tax returns.41 But the fact is that in many large US fi rms, there are far more than fi ve executives whose pay places them in the top 1 percent (above $352,000 in 2010) or even the top 0.1 percent (above $1.5 million).

Recent research, based on matching declared income on tax returns with corporate compensation rec ords, allows me to state that the vast majority (60 to 70 percent, depending on what defi nitions one chooses) of the top 0.1 per- cent of the income hierarchy in 2000– 2010 consists of top managers. By com-

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Figure 8.10. Th e composition of top incomes in the United States, 2007 Capital income becomes dominant at the level of top 0.1 percent in 2007, as opposed to the top 1 percent in 1929. Sources and series: see piketty.pse.ens.fr/capital21c.

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parison, athletes, actors, and artists of all kinds make up less than 5 percent of this group.42 In this sense, the new US in e qual ity has much more to do with the advent of “supermanagers” than with that of “superstars.”43

It is also interesting to note that the fi nancial professions (including both managers of banks and other fi nancial institutions and traders operating on the fi nancial markets) are about twice as common in the very high income groups as in the economy overall (roughly 20 percent of top 0.1 percent, whereas fi nance accounts for less than 10 percent of GDP). Nevertheless, 80 percent of the top income groups are not in fi nance, and the increase in the proportion of high- earning Americans is explained primarily by the skyrock- eting pay packages of top managers of large fi rms in the nonfi nancial as well as fi nancial sectors.

Finally, note that in accordance with US tax laws as well as economic logic, I have included in wages all bonuses and other incentives paid to top managers, as well as the value of any stock options (a form of remuneration that has played an important role in the increase of wage in e qual ity depicted in Figures 8.9 and 8.10).44 Th e very high volatility of incentives, bonuses, and option prices explains why top incomes fl uctuated so much in the period 2000– 2010.

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