Inequality: Not really about CEO's.

A lot of attention has been paid recently to the role of increasing payments to top executives (CEO's usually) in generating inequality. Public media is full of claims that CEO's are being paid "too much", particularly in the US. The Economic Policy Institute informs us that CEO's compensation in the 1960s was around 20 times that of average worker compensation, but grew to 60 by 1990 and is now almost 300. But is this happening at the within-firm level (i.e. the gap between CEO and workers in the same firm is increasing) or at the between-firm level (i.e. the gap in average payment - including CEOs - between firms is increasing)?

I would suggest that most of the public media proposes that it is within-firm inequality what is driving inequality. Even Piketty (2013, p.315) suggests that the "primary reason for increased income inequality in recent decades is the rise of the supermanager." Nevertheless, the most recent (and serious) evidence goes in the opposite direction. Working research from people in Minnesota, Stanford and the Social Security Administration has merged tax data for employees and firms in the US between 1982 and 2012 (note this covers most of the increase suggested in the first paragraph). They basically find that within-firm inequality has remained mostly flat over the past three decades. 

A first look at the data is provided by splitting the population of workers in groups according to their own income. Then, for each group they calculate the mean individual income (blue), the mean of average wages at their firms (red) and the difference between the two (green). Figure 1 shows that income of individuals at the top of the distribution has grown a lot more than those at the bottom since 1982. This upward line indicates that inequality has increased. However, the fact that the Individuals (blue) line is mirrored by the Firms (red) one suggests that most of the increase in these individuals' incomes has also happened to lower paid individuals in their firm. The average income in firms of top paid individuals has increased at a similar speed than the earnings of the top paid individuals. Hence, within-inequality (or CEO's excessive payments) may not be the main driver of inequality.

Figure 1: Decomposing income growth (1982 - 2012).

Their results extend to when they focus on individuals at the top 1%. More interestingly, the result is not explained by increasing dispersion between industries (e.g. Health vs Car industry). Even within sectors, most of the rising inequality is explained by firms' dispersion. You may be thinking now about geographical differences, like California having grown more than Alaska? Well, no, that does not seem to be driving their results.

All in all, as the authors summarize it, highest-paid individuals now work at higher-paying firms, but are not higher paid relative to those firms. What explains this findings? Two ideas come to mind. First, firms may now be more specialized, leading to higher concentration of skills which could lead to bigger differences in the average workers characteristics. Secondly, growing firm productivity differentials may be generating increased differences in wages (which could generate even more sorting). However, patience is needed to find out as their research is still going...